TEXT-S&P revises Adelaide Airport otlk to neg; rtgs affirmed

The suspension of domestic airline Tiger Airways and, to a lesser extent, the

industrial dispute at Qantas Airways Ltd., have significantly affected AAL's

passenger growth in fiscal 2012. However, we believe the two events will not

have a long-term impact on passenger growth at the airport. We note that the

potential Qantas/Emirates Airlines alliance and muted takeover of Tiger by

Virgin Australia could have some impact on domestic and international

passenger growth. But we have not factored any potential impact in our current

forecasts at this stage.

Under our forecasts, we expect AAL's weaker financial metrics to continue over

the next 2-3 years in the absence of material deferral of capital expenditure

or distributions. This expectation incorporates the following key assumptions:

-- Annual passenger growth rate of 4%-6%; and

-- Capital expenditure to be mainly debt-financed.

However, we believe a significant proportion of forecast capital expenditure

is discretionary at this stage, with a significant level of property

investment earmarked, although no material leases have been signed up yet.

Further, substantial terminal enhancement projects are regarded as

discretionary and would not be undertaken until the company has reached an

agreement with the airlines regarding future tariffs. Should discretionary

capital expenditure be deferred, this would restore metrics to more than 8%

and 2.0x for funds from operations (FFO)-to-debt and FFO-to-interest cover

respectively, by end of fiscal 2014.

As such, critical to AAL's credit quality will be its willingness to defer the

aspirational projects or distributions to support its financial metrics, in

our view. Management has represented its commitment to returning financial

metrics to around the levels that the company has typically operated

at--FFO-to-debt at above 2.2x and FFO-to-interest of about 9%-to-10%--by

deferring major capital expenditure, and if necessary, postponing dividends.

However, we believe a clear track record demonstrating this willingness will

be critical in our future assessment of the company, given the weaker

financial profile projected over the next 2-3 years.

The ratings on AAL reflect our opinion of the company's "strong" business risk

profile, underpinned by AAL's natural monopoly in South Australia

(AA/Stable/A-1+) as the major domestic airport and the only international

airport in the state. About half of AAL's total revenue comprises aeronautical

charges, of which approximately 90% is from domestic passenger traffic. We

believe that the high proportion of visiting friends and relatives (VFR)

travel segment helps to limit AAL's downside risk to traffic volumes during

periodic shocks to the aviation industry. Somewhat offsetting these strengths

are the airport's small catchment area and the weakness in the company's

financial risk profile at the current rating level.

Liquidity

We view AAL's liquidity as "adequate". Our liquidity assessment is based on

the following factors and assumptions:

-- The company's liquidity sources (including cash, FFO, and credit

facility availability) over the next 12 months will exceed its uses by about

1.4x.

-- AAL has a A$120 million bank debt facility (A$93 million drawn as at

Sept. 30, 2012) maturing in December 2013, which we expect will be refinanced

ahead of maturity.

-- From our observations, the company has good relationships with its

banks, and has a sound standing in the credit markets.

-- AAL will not commit to large capital-expenditure projects without

securing funding first.

We expect the company to operate comfortably above its debt covenant levels

of: interest cover ratio (as defined in the debt documents) to track at

2.2x-2.4x, against the 1.1x default covenant level; and senior debt to total

tangible asset to be about 60%-65%, against the 75% covenant level.

Outlook

The negative outlook reflects our view that AAL's financial metrics are

expected to remain weak over the current year and we believe the company would

need to defer discretionary capital expenditure or distributions to support

its financial profile.

The ratings could be lowered by one notch if passenger growth is below our

expectation and the company does not proactively manage its credit profile to

historical levels. Such a downgrade could occur if we expected FFO-to-debt and

FFO-to-interest cover to remain less than 8% and 2.0x respectively, beyond

fiscal 2013.

The outlook may be revised to stable in the next 12 months if fiscal 2013

financial metrics were in line or better than our expectation of FFO-to-debt

and FFO-to-interest cover of about 7.5% and 2.0x respectively, and we have

confidence that the company will proactively manage its capital-expenditure

program and, if necessary, temper distributions to support its financial risk

profile. This, in our view, would be demonstrated by an expectation of the

company maintaining an adequate buffer above our minimum expected FFO-to-debt

and FFO-to-interest cover of 8% and 2.0x respectively, for the outlook to

return to stable.

Related Criteria And Research

2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List

Ratings Affirmed

New Terminal Financing Co. Pty Ltd.

Senior Secured BBB

Ratings Affirmed; CreditWatch/Outlook Action

To From

Adelaide Airport Ltd.

Corporate Credit Rating BBB/Negative/-- BBB/Stable/--

Source: http://news.yahoo.com/text-p-revises-adelaide-airport-otlk-neg-rtgs-074348039--finance.html

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