Aeroports de Paris Downgraded To 'A' On Traffic Drop Amid COVID-19; Outlook Negative

  • The airports sector in Europe is facing an unprecedented decline in air traffic as Europe has become the epicenter of the COVID-19 pandemic.
  • We expect a sharp reduction in France-based Aeroports de Paris' (ADP's) revenue and cash flow, causing it to report much weaker credit metrics in 2020 relative to its 2019 results and our previous expectations.
  • Our current base case is a 25% decrease in passenger traffic for 2020, and we expect ADP to take several actions to reduce the impact of this decline, including cost and capital expenditure (capex) savings and dividend reduction. However, we believe these initiatives will be insufficient to offset the effect of the reduced demand on the company's credit metrics.
  • Therefore, we are lowering by one notch our long-term issuer and issue credit ratings on ADP to 'A' from 'A+'.
  • The negative outlook indicates that we could lower the ratings further if the pandemic proves more severe and long lasting than we currently expect, placing further pressure on ADP's credit metrics, notably S&P Global Ratings-adjusted funds from operations (FFO) to debt below 10%.
LONDON (S&P Global Ratings) March 25, 2020—S&P Global Ratings today took the rating actions listed above.
We expect ADP's credit metrics to weaken sharply in 2020, relative to our prior expectations, due to the effects of the coronavirus pandemic.
Based on our forecast of 25% lower passenger traffic in 2020, and a rebound of air traffic in the 24 months following containment of the outbreak, we now expect that S&P Global Ratings-adjusted FFO to debt could significantly decline toward 13% in 2020, compared with about 20.5% in 2019 and our previous 2020 forecast of 19.0%-20.0%. We expect ADP's EBITDA to decline to the same extent as traffic, despite the high proportion of fixed costs inherent for an airport. While we expect ADP to proactively manage costs and reduce capex and dividends, we believe the present situation will consume the company's rating headroom. ADP's credit metrics were already under strain following the recently announced debt-funded acquisition of the Indian airport operator GMR Airports, and the uncertainties arising from the ongoing negotiations for the new regulatory period.
Liquidity remains adequate, despite our expectations of lower cash flow generation over the next 12 months.
One of the company's credit strengths in the current environment is its liquidity position. We continue to see to see the group's liquidity as adequate despite our expectations for lower cash generation over the next 12 months, which lead us to expect that sources of liquidity will be more than 1.2x over this period. As of Dec. 31, 2019, ADP had €3.2 billion-€3.4 billion of sources, which includes about €2 billion of cash, €1 billion to €1.2 billion of FFO, and €200 million compensation payment from the Turkish government. This should be sufficient for the company to cover its €879 million of short-term maturities, €550 million of maintenance capex and dividends, and €1.36 billion to pay down the acquisition of India-based GMR Airports. We have not included any potential sources of additional liquidity, such as new funding to finance this acquisition. We acknowledge ADP's flexibility to defer further planned capex, and reduce or even suspend shareholder remuneration if necessary. ADP benefits from strong relationships with banks and a good standing in capital markets. We believe this would allow ADP to easily access funding if necessary, albeit at a higher cost of debt.
The negative outlook reflects ADP's weaker-than-expected credit metrics following the coronavirus outbreak, and the pandemic's negative impact on air travel. It indicates that there is a one-in-three chance we could further lower the ratings if the company is unable to sustain its credit metrics commensurate with its ratings, notably adjusted FFO to debt above 10% on a sustainable basis.
We could lower the ratings should the pandemic prove more severe and long lasting than we currently expect, leading adjusted weighted average FFO to debt to decline below 10% over fiscals 2021 and 2022. This also could happen if the recessionary macroeconomic backdrop is harsher or more prolonged than expected, thereby affecting overall mobility.

We could revise the outlook to stable if passenger traffic recovers in late 2020 into 2021, resulting in FFO to debt sustainably above 10% over the next 18-24 months.
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