Rating Airports

Airport

Credit ratings play an important role for airports and their operators, since in most cases the capital requirements for airports can only be met when bonds are issued. Ratings are used to assess airport liabilities both when issuing bonds and when trading bonds.

The rating system applies both to independent airports and to companies with several airports, which are usually in full operation with an active commercial service. It is important to have a sufficiently long company history that allows conclusions to be drawn about the management.

The airport criteria apply to both issuers and certain borrowings with a broad revenue pledge, for example, if the entire operating income of the airport company serves as collateral. Debts that can be repaid from limited sources of income such as rental contracts and independent project debts for fuel supply, rental car and cargo handling facilities are also subject to credit ratings.

Both new ratings and the monitoring of existing ratings are special cases of ratings for debts from infrastructure and project financing. Risks and limitations of the methodology, which are common to all infrastructure and project financing debts not discussed here, are therefore considered separately.

Qualitative guidelines were developed for the rating of airports, which are relevant for the assessment of project risks. The relative impact of qualitative and quantitative factors varies between companies, as there can be large differences between airports, not only in terms of technology, but also economically.

While airport analysis includes taking into account risks common to all infrastructure and project finance debt, earnings risk, as a general guideline, has the most direct impact on airport ratings. According to the “weakest link theory”, the weakest link can result in its stronger analytical weight.

The most important assessment factors for airports are the earnings risk and the volume: This takes into account the role of the airport as well as the socio-economic and demographic basis of the surrounding region and, if applicable, the exposure to competing alternatives, the breadth and variety of products and services offered by airlines at the airport influence.

In order to analyze the sales risk, passenger and freight volumes and prices and price developments are examined. The generation of revenue or cash flow is taken into account in accordance with the legal framework of the airport, including the provisions of the contractual or regulatory framework, which forms the basis for the cost recovery in the revenue generation from airlines and passengers.

The rating questions the development and renewal of the infrastructure: quality, planning, management and financing of the development and renewal of the infrastructure are taken into account.

From a purely financial perspective, the debt structure is recorded, the composition of financial instruments, security, additional leverage tests, distribution limits and financial triggers. The financial profile reflects the assessment of the financial and operating metrics on a historical and forecast basis, including sensitivity analysis, and the composition of the financial instruments, examined by additional leverage tests, distribution limits and financial triggers.

Across the entire airport portfolio in the world, ratings generally range from the lower end of the “AA” category to the “BB” category. In countries with a high country risk, the country rating may set an upper limit. The entire rating range is broad, but the vast majority fall into the investment grade categories “A” or “BBB”. In most countries, the operation of airports cannot simply be stopped without fear of consequences for the country rating. The ratings for states and airports are therefore to a certain extent interdependent.

Airports generally have a higher leverage than typical business units and deal with business partners with low credit ratings from “investment grade” to “speculation”. As is so often the case with infrastructure investments, their business is typically geographically concentrated and may be subject to jurisdictional issues or legal issues that may limit or support the underlying loan.

Because of these risks, it is unlikely that an airport can ever be rated in the highest rating categories. The current corona crisis has made it particularly clear for airports how a virus can practically change the sales outlook overnight.

However, there are several reasons why most airports worldwide remain financially sound and despite these risks have ratings in the “investment grade” categories. In general, competition is more restricted because the capital-intensive nature of airports in connection with the regulatory hurdles of a public supply industry creates strong entry barriers.

These entry barriers include the cost of land acquisition and airspace needs, significant environmental barriers and the resistance of the population affected by land acquisition and noise. In addition, airports generally operate on a cost recovery model that can help keep cash flow relatively stable. While the aerospace industry continues to go through profitable and unprofitable cycles, airports have a strong repayment history, so the rating assumes that this will continue.