Aéroports de la Côte d'Azur's Baa2 issuer rating affirmed with negative outlook
Madrid, November 18, 2020 -- Moody's Investors Service (Moody's) has today downgraded to
Ba1 from Baa3 the senior secured ratings of Azzurra Aeroporti S.p.A.
(Azzurra). Concurrently, Moody's has assigned a new
Ba1 corporate family rating (CFR) and Ba2-PD probability of default
rating to Azzurra. Moody's also affirmed the Baa2 issuer rating
of Aéroports de la Côte d'Azur (ACA). The outlook
on the ratings remains negative.
RATINGS RATIONALE
Today's rating action reflects a persistently difficult operating environment
for Azzurra group, as evidenced by the deterioration in passenger
demand recovery since the end of the summer period, and Moody's
expectation that the severity of the coronavirus outbreak will lead to
a slower than previously anticipated traffic recovery. The rating
action also reflects the uncertainty around the evolution of ACA's
tariffs in the context of a lower than expected tariff increase approved
by the Transport Regulatory Authority (ART) and effective in November
this year. The ART approved a 3% increase in tariffs applicable
for the next 12 months, and tariff increases thereafter are expected
to be moderate. This is particularly notable in the context of
the 33% cut in tariffs in 2019. These dynamics will continue
to have a significant detrimental impact on Azzurra group's cash flow
in the light of subdued traffic volumes. Whilst the company is
implementing measures to reduce operating costs and investments,
Moody's expects key credit metrics to exhibit a more prolonged weakness,
with the consolidated funds from operations (FFO)/debt ratio remaining
below the levels commensurate with the previous Baa3 rating over the next
three years.
Nevertheless, the affirmation of ACA's Baa2 ratings reflects its
stronger underlying financial profile with a limited amount of debt at
the ACA level, ACA's closer proximity to the group's
cash flows compared to Azzurra, and Moody's expectation that
ACA's shareholders will continue to maintain a prudent financial
policy and target the strengthening of the business over the long term.
The coronavirus pandemic, the weakened global economic outlook,
low oil prices and asset price declines are sustaining a severe and extensive
credit shock across many sectors, regions and markets. The
combined credit effects of these developments are unprecedented.
The airport sector is one of the sectors most significantly affected by
the shock given its exposure to travel restrictions and sensitivity to
consumer demand and sentiment. Today's action reflects the impact
on Azzurra group of the breadth and severity of the shock, and the
broad deterioration in credit quality it has triggered. Moody's
regards the coronavirus outbreak as a social risk under its ESG framework,
given the substantial implications for public health and safety.
The traffic at Nice airport have been severely impacted by the pandemic
and the introduction of travel restrictions. While flight activity
resumed for the peak summer season in July and August, recovery
in traffic reversed after quarantine requirements and restrictive measures
were implemented on an uncoordinated basis across Europe. Given
the second wave of the coronavirus pandemic and the latest government
decision to reintroduce a national lockdown in France, and similar
measures implemented in several European countries, Moody's estimates
that the decline in Nice airport traffic will be around 70% this
year. While Moody's expects passenger volumes to increase in 2021,
the timing and profile of any recovery is highly uncertain because (1)
travel restrictions in some form may continue even if the spread of the
virus seems contained in some areas; (2) there is evidence of a lack
of international coordination over travel restrictions and quarantine
measures; and (3) the deteriorating global economic outlook would
likely slow the recovery in traffic and consumer spending, even
if travel restrictions are eased.
In addition, ACA's regulatory framework has proven to be less predictable
and transparent than expected. In June 2020, ACA submitted
to the ART a proposal to increase tariffs by 12% on average,
for the period 1 November 2020 to 31 October 2021, but such increase
was rejected because it was not considered moderate in the context of
the current situation. In August, the company revised its
initial proposal and obtained a tariff increase of 3% on average,
which was deemed moderate by ART but was significantly lower than previously
anticipated. The principle of moderation embedded in the regulatory
framework is not clearly defined and it is subject to different interpretation
depending on the circumstances. With tariff increases in the range
of 3%-5%, and absent any other compensatory
measures, ACA is unlikely to be able to restore its profitability
to levels pre-coronavirus crisis over the next five years.
Overall, The current Ba1 ratings of Azzurra reflect (1) the strong
business profile of Nice airport as an important gateway to Côte
d'Azur, with limited competition; (2) the high proportion of
origin and destination passengers with no meaningful exposure to weak
airlines; (3) a significant proportion of leisure traffic and short-haul
flights, predominantly domestic and from other European countries;
(4) an expectation of a reduction in the group's leverage to the levels
commensurate with the current rating over the next three years; and
(5) a significant presence of minority shareholders at ACA, which
creates cash leakages. The senior secured rating of Azzurra further
takes account of the features of the debt documentation, which limit
Azzurra's ability to upstream cash to its shareholders subject to
leverage tests, providing for some de-linkage from the credit
quality of Atlantia S.p.A. (Ba2 developing),
a majority shareholder of Azzurra.
The current Baa2 issuer rating of ACA is constrained by the overall credit
quality of the Azzurra group, given absence of specific creditor
protection features that would fully isolate ACA from the wider group.
A CFR is an opinion on the expected loss associated with the debt obligations
of a group of companies assuming that it had one single class of debt
and is a single consolidated legal entity. The CFR assigned to
Azzurra consolidates the legal and financial obligations of the group
and reflects the structural features of Azzurra's debt structure.
Azzurra's probability of default rating of Ba2-PD is one
notch below the CFR, reflecting a low family-wide loss given
default, in line with Moody's standard assumptions for infrastructure
and utility companies.
LIQUIDITY AND DEBT COVENANTS
As of the end of September 2020, the group's liquidity was
supported by €91 million of cash and €10 million of undrawn
credit facilities, which expire in the March 2021, at ACA
level; and €9 million of cash at the Azzurra level. In
addition, as required under the terms of the new Notes, Azzurra
maintains a letter of credit from an investment grade counterparty equal
to the next six-month's worth of interest payment. Given
that the group does not have any significant debt maturities until 2024,
Moody's considers its liquidity position as adequate to cover all
cash requirements until at least December 2021.
ACA's debt documentation includes a set of financial covenants.
Given the reduction in earnings, Moody's estimates that there is
a high probability that the company will breach its leverage financial
ratio covenant over the next 18 months. In this regard, ACA
has already received approvals to waive its financial covenants until
December 2021 from one its lenders and Moody's expects the company to
receive final approval from the remaining lenders in the coming weeks.
Azzurra's debt documentation includes a step-down net debt/EBITDA
financial covenant with an initial testing date of December 2023,
which provides flexibility to the group to improve its financial profile
in the short-term. While Moody's does not expect a breach
in Azzurra's financial covenant, there is a high probability
that the company will trigger lock-up levels until at least 2024.
RATIONALE FOR NEGATIVE OUTLOOK
The negative outlook reflects the continued downside risks to Azzurra
and ACA's credit profile linked to the consequences of the coronavirus
outbreak and the significant uncertainties around traffic recovery prospects.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Given the current negative outlook, upward rating pressure is unlikely
in the near future. The outlook of ACA and Azzurra could be stabilised
if (1) there is clarity around the pace of traffic recovery; (2)
it is likely that the group would be able to maintain a financial profile
commensurate with the current rating, namely FFO/debt of at least
8%; (3) and the company's liquidity was solid.
Azzurra's and ACA's ratings could be downgraded if (1) it is likely
that the group's credit metrics would not rebound to the levels commensurate
with the current rating over the medium term; (2) ACA is not able
to obtain yearly tariff increases in order to restore its profitability
over the medium term; (3) there was a risk of covenant breaches without
adequate mitigating measures in place; or (4) the group's liquidity
profile deteriorates.
The principal methodology used in these ratings was Privately Managed
Airports and Related Issuers published in September 2017 and available
at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1092224.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Azzurra Aeroporti S.p.A. is the holding company of
Aéroports de la Côte d'Azur, whose main assets are
Nice and Cannes Mandelieu airports operated under a concession expiring
on 31 December 2044 and Saint Tropez airport (held freehold). Azzurra
is owned by a consortium comprising the Italian infrastructure group Atlantia
S.p.A. (52.7%), Aeroporti di
Roma S.p.A. (7.8%), EDF Invest
(19.4%) and the Principality of Monaco (20.1%).
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Erica Gauto Flesch
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Andrew Blease
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
