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Rating Action:

Moody's places Hyderabad Airport's rating on review for possible downgrade

25 Mar 2020

Singapore, March 25, 2020 -- Moody's Investors Service has today placed GMR Hyderabad International Airport Limited's (HIAL) Ba1 corporate family rating (CFR) on review for possible downgrade.

The outlook has been changed to rating under review from negative.

The rating action reflects the worsening coronavirus outbreak and the increasingly stringent travel restrictions imposed both in India and globally, including ongoing measures introduced by the Government of India (Baa2 negative).

HIAL is the concessionaire for the Rajiv Gandhi Hyderabad International Airport (RGIA) in Hyderabad under a long term concession agreement with the Ministry of Civil Aviation.

RATINGS RATIONALE

"The rating action reflects our expectation of a sharp decline in passenger and aircraft traffic at Hyderabad Airport in the coming months and the uncertainty over the timing and extent of a recovery, which coincides with increased debt issuance as the airport enters the peak stage of its INR55 billion expansion project," says Spencer Ng, a Moody's Vice President and Senior Analyst.

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The airport sector has been one of the sectors most significantly affected by the shock given its sensitivity to consumer demand and sentiment.

More specifically, the weaknesses in HIAL's credit profile, including its exposure to falling passenger traffic have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions, and HIAL remains vulnerable to the outbreak continuing to spread.

Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact on HIAL of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.

All of HIAL's aeronautical revenues and a large portion of its non-aeronautical revenues are closely linked to the airport's passenger traffic volumes and aircraft movements. As such, the expected traffic decline will lead to a sharp reduction in the airport's revenue and cash flow over the course of fiscal 2021 (ending 31 March).

Whilst the current environment is unpredictable, Moody's expects a recovery in airport traffic to commence in the second half of the year. Nevertheless, Moody's expects that the airport's traffic levels for the next two to three years will be lower as a result of the coronavirus.

"Although HIAL was well-positioned financially prior to the outbreak, its financial metrics will materially weaken under our base case scenario after the implementation of a proposed 50% tariff cut in the next fiscal year. Coupled with the reduced operating cash flow as a result of the outbreak, we expect HIAL's funds from operations (FFO) to debt to fall below the minimum tolerance level set for its Ba1 rating over the next 12 months," adds Ng.

The vast majority of the expansion works are being carried out under two key contracts with a fixed construction term and prices with experienced and reputable contractors. Whilst such a structure reduces the risk of costs overrunning or potential delays, it also limits the airport's ability to scale down the project to preserve its financial profile in response to a downturn and could expose the airport to counterparty risk should the contractors' credit quality materially deteriorate.

That said, HIAL does have sufficient liquidity on hand, which mainly comprises cash and investment in short term securities, that should allow it to continue funding its expansion through to the end of calendar 2020. Moody's expects HIAL to incur incremental debt to complete its INR55 billion airport expansion and other development projects - such as the Hyderabad metro extension - over the next two to three years.

HIAL's medium-term financial profile could benefit from a positive tariff decision in the next control period, on the back of (1) a material growth in its regulated asset base after the inclusion of capital expenditure incurred for the airport expansion, and (2) a true-up of revenue lost due to lower-than-expected traffic caused by the coronavirus outbreak. However, tariff decisions and implementation have frequently been delayed in the past, and which -- if repeated -- would affect the timeliness of any tariff increase. HIAL's next control period is scheduled to start in April 2021.

Whilst not factored into Moody's base case scenario, HIAL's financial profile could further improve if there is a favorable outcome from its ongoing appeal against the regulated tariffs set in previous control periods.

The rating review will consider (1) the airport's financial profile over the next two to three years taking into account the evolving situation with the outbreak, (2) the outcome of the tariff appeal process and timing of the upcoming tariff determination, (3) the airport's liquidity position over the next 12 to 18 months, (4) any increase in the airport's exposure to counterparty risk from key airlines as a result of the outbreak and (5) HIAL's countermeasures should the construction contractor experience distress.

HIAL's Ba1 CFR continues to reflect the airport's established market position in its catchment area, its predominantly domestic origin and destination passenger mix, which could lessen - but not leave it immune to - the challenges introduced by the coronavirus outbreak and support a gradual recovery of traffic once the situation stabilizes.

Given that the rating is placed on review for downgrade, Moody's currently does not envision any upward rating pressure. The rating could be confirmed if there is clear evidence that the impact from the outbreak is easing and the airport is able to maintain appropriate financial metrics for its Ba1 rating. Such an improvement would most likely require a favorable outcome from the pending tariff appeal and the upcoming tariff determination process.

On the other hand, Moody's could downgrade HIAL's Ba1 rating if the traffic decline in the coming months exceeds Moody's base case assumptions, or if there is any evidence of liquidity stress, which could manifest from a worsening counterparty exposure.

Additionally, Moody's could downgrade HIAL's rating if there is further evidence that the company's FFO/debt will fall below 8% on a consistent basis during the expansion project.

Moody's could also downgrade the rating if there are material missteps in the implementation of the expansion project.

The principal methodology used in this rating was Privately Managed Airports and Related Issuers published in September 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

GMR Hyderabad International Airport Limited has a long-term concession to operate the Rajiv Gandhi International Airport in Hyderabad under a public-private partnership model. The airport is one of the leading airports in India by passenger traffic.

The company started commercial operations on 23 March 2008.

The airport has a current design capacity of 12 million passengers per annum. Equity in the company is held by GMR Airports (63%), Malaysia Airports Holdings Berhad (11%, A3 negative), the Government of India (Baa2 negative) through the Airports Authority of India (13%), and the Government of Telangana (13%). GMR Airports is a subsidiary of GMR Infrastructure Ltd.

REGULATORY DISCLOSURES

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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Spencer Ng
Vice President - Senior Analyst
Project & Infrastructure Finance
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Terry Fanous
MD-Public Proj & Infstr Fin
Project & Infrastructure Finance
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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