Fitch Downgrades Angkasa Pura I's Rating to 'AA-(idn)'; Outlook Stable

(Fitch Ratings - Singapore/Jakarta - 28 Jun 2022)--Fitch Rating Indonesia has downgraded Indonesian state-owned airport operator PT Angkasa Pura I (Persero)'s (AP I) National Long-Term Rating to 'AA-(idn)' from 'AA(idn)'. The Outlook is Stable.

'AA-(idn)' National Ratings denote expectations of a very low level of default risk relative to other issuers or obligations in the same country or monetary union. The default risk inherent differs only slightly from that of the country's highest rated issuers or obligations.

RATING RATIONALE

The downgrade reflects the downward revision in AP I's Standalone Credit Profile (SCP) to 'a(idn)' from 'a+(idn)' and the consequent reassessment under our Government-Related Entities Rating Criteria.

The SCP assessment reflects the deterioration in AP I's financial profile with a three-year (2023-2025) average leverage estimate of 13.0x under the Fitch rating case. The weaker financial profile is due to a recovery in airport passenger traffic that is slower than our expectations, which has put pressure on AP I's short-term liquidity position.

KEY RATING DRIVERS

Strength of Linkages: Fitch regards AP I's status, ownership and control by the sovereign as 'Strong'. The state fully owns the company and appoints its commissioners and board. It also controls the company's investment plans and capex decisions. We also assess the state support record as 'Strong', as we expect the company to receive government support, if needed, due to its important role in the country's economic development. The government has relaxed its dividend distribution requirements and AP I was able to raise larger bond to refinance its bond maturing in 2021.

State's Incentive to Support: Fitch assesses the socio-political implications of a default by AP I as 'Moderate'. A default would damage the government's reputation, but we do not believe it would cause severe disruption to Indonesia's air traffic activity, as airport infrastructure would remain intact and be operated by other entities. Our assessment of the financial implications of a default is 'Strong', as the company is regarded as one of Indonesia's key state-owned entities and a default would hamper investor confidence in the sovereign and other state-owned entities.

Pandemic Affecting Demand; Fundamentally Robust Market - Revenue Risk (Volume): High Midrange

Fitch has revised our assessment of volume risk to 'High Midrange' from 'Midrange' following the publication of our new Transportation Infrastructure Rating Criteria, which assesses volume risk on a five-point scale. AP I's 15 airports serve diverse regions in central and eastern Indonesia with mainly origin-and-destination traffic, a business and leisure traffic mix, and limited competition. The Covid-19 pandemic has led to an unprecedented impact on passenger traffic. API's portfolio is driven by domestic passenger traffic, which we expect to recover faster than internationally driven airports.

Regulated Aero Tariff, Rising Non-Aero Revenue - Revenue Risk (Price): Midrange

The tariffs for aero services are highly regulated by the Ministry of Transportation. The pricing regime allows aero tariff hikes with a cap every two years subject to the authority's approval, which gives rise to uncertainty. The risk is partially mitigated by AP I's record of having raised tariffs. The framework does not allow cost recovery to offset loss of volume, which is considered a weakness. AP I has more flexibility to set the tariffs for non-aero services.

Minimum Capex, Experienced Management - Infrastructure Development/Renewal Risk: Midrange

AP I's future capex plan has been reduced to IDR7.9 trillion, which will be mainly for operations and maintenance during 2022-2025, with a small amount for the completion of the expansion of Makassar airport. We believe management has extensive experience in maintaining and delivering on its airport investments.

Some Bullet, Variable-Rate Debt - Debt Structure: Midrange

AP I is a typical corporate borrower, utilising unsecured debt with limited credit protections except for the maintenance of current, coverage and leverage ratios. Its debt comprises corporate bonds and bank loans. Bank loans account for more than 85% of total debt and are mainly amortising over the loan period. All of its debt is in local currency, which means it has no exposure to foreign-currency risk.

Most of the debt has floating interest rates but is unhedged, which subjects it to interest rate exposure and is considered a weakness, constraining our assessment. The company raised IDR1.6 trillion in 2021 to refinance a maturing IDR890 billion bond and increase its liquidity.

PEER GROUP

AP I's closest domestic peers on the National Rating Scale are PT Geo Dipa Energi (Persero) (GDE, AA-(idn)/Stable, SCP: a-(idn)) and PT Sumber Alfaria Trijaya Tbk (Alfamart, AA(idn)/Stable).

GDE's credit profile is underpinned by its long operational history and long-term power purchase agreements with strong counterparties that offer revenue visibility and stable margins, counterbalanced by a small operational scale and Fitch's expectation of a deterioration in its financial profile from a substantial expansion plan. However, GDE's geothermal operations have inherent supply and technological risks, which justify AP I's SCP being one notch higher than that of GDE, in our view.

Alfamart is rated three notches above AP I's SCP due to its larger operating scale, robust business profile, the resiliency of its minimarts relative to other modern-retail formats and better liquidity profile. This is despite lower profitability than AP I, which benefits from its long-term concessionary business, supported by flexible regular tariff adjustments. However, AP I's rating is also weighed down by the pandemic's significant impact on the airport industry and near-term liquidity pressure.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

- Weakening of linkages with the Indonesian government

- Downgrade of sovereign rating (BBB/Stable)

- Further deterioration in financial flexibility, especially its near-term liquidity

Factors that could, individually or collectively, lead to positive rating action/upgrade:

- Strengthening of linkages with the government

- Upgrade of sovereign rating (BBB/Stable)

- Improvement in financial flexibility, including near-term liquidity

CREDIT UPDATE

The company's passenger traffic declined to 28.5 million in 2021 from 32.7 million in 2020. However, we expect passenger traffic to rebound significantly from 2023 after the government relaxed travel restrictions in 2022.

AP I reported a 10.76% decline in total revenue to IDR3.3 trillion in 2021 as aero revenue fell. Operating expense was largely stable. This led to a wider negative EBITDA of IDR770 billion in 2021 from IDR413 billion in 2020.

The IDR1.6 trillion bond issued in 2021 to refinance the IDR890 million maturing bond and shore up liquidity comprised four tranches with different tenors.

FINANCIAL ANALYSIS

The FRC assumes traffic will recover to the pre-pandemic level by end-2025. In addition, we assume a flat non-aero yield in nominal terms until 2025, while we assume an inflation increment for aero yield and rental revenue, reflecting the lower passenger numbers and uncertainty around consumer behaviour.

We expect moderate increases in operating expenditure (opex) from a much lower level as cost-cutting measures have been broadly applied in response to the pandemic. Opex will remain below 2019 levels until 2024. We assume capex of around IDR2.3 trillion in 2022 before it declines to around IDR1.5 trillion in 2023 for operational and maintenance purposes, according to management's guidance. We also do not incorporate any equity injection by the government. We expect net leverage to remain high in the short term before dropping to 10.1x in 2025.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS

The rating is linked to Indonesia's rating. (ends)