Fitch Ratings: Fitch Downgrades Angkasa Pura I's Rating to 'AA(idn)'; Outlook Negative

(Fitch Ratings - Jakarta/Singapore - 01 Jul 2021)--  Fitch Rating 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 Negative.

'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 'aa-(idn)' and consequent reassessment under our Government-Related Entities (GRE) Rating Criteria. AP I's National Long-Term Rating is now assessed at two notches below the rating of its parent, the Indonesian sovereign (BBB/Stable).

The SCP assessment reflects the deterioration in AP I's financial profile with a five-year average leverage estimate of 15x under the Fitch rating case. The weakened financial profile is a result of a decline in profitability from the traffic restrictions caused by the coronavirus pandemic and Fitch's expectation of a slower recovery in airport passenger traffic. There is pressure on AP I's liquidity position due to the maturity of its near-term debt, including IDR890 billion in bonds due November 2021. However, AP I's available committed bank facilities of IDR750 billion and management's refinancing plans support the current credit assessment.

The Negative Outlook on AP I's rating reflects pressure from the uncertainty over the timing and duration of the airport passenger-traffic shock as a result of the pandemic, including the risks of additional waves of infection and the subsequent impact on AP I's financial profile.

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 API has received additional liquidity from state-owned banks during the pandemic.

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 could 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 Strong Local Market - Revenue Risk (Volume): Midrange

AP I's 15 airports serve diverse regions in central and eastern Indonesia with mainly origin-and-destination traffic along with a well-balanced business and leisure traffic mix and limited competition. The pandemic has led to an unprecedented impact on passenger traffic. We expect a robust recovery in traffic, despite the inherent uncertainty, as API's portfolio is driven by domestic passenger traffic, which we believe will have a faster recovery 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. Meanwhile, AP I has more flexibility to set the tariffs for non-aero services.

Moderate Capex; Experienced Management - Infrastructure Development/Renewal Risk: Midrange

AP I's five-year capex plan has been reduced significantly to IDR11.9 trillion from last year's five-year budget of IDR50.1 trillion, which will be mainly allocated for the completion of an existing expansion project in 2021 and operations and maintenance in 2022-2025. We believe management's extensive experience in delivering on its airport investments and established access to external funding partially offset the risk of the higher investments planned in 2021.

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 88% 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.

PEER GROUP

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

Alfamart is rated one notch above API's SCP due to its larger operating scale, robust business profile and the resiliency of its minimarts relative to other modern-retail formats. This is despite lower profitability than API, 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.

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 two notches higher than that of GDE, in our view.

GEMS's rating is based on the consolidated profile of its parent, Singapore-based Golden Energy and Resources Limited (GEAR), as GEMS is the sole operating subsidiary accounting for most of the group's consolidated EBITDA with moderate linkages to the parent. GEMS benefits from a competitive cost position, long reserve life and strong financial profile. API has a smaller operational scale than GEMS and higher leverage amid the pandemic, but its profitability is supported by its tariff adjustments and long-term concession agreement with no exposure to commodity price volatility. Hence, we believe API warrants an SCP that is one-notch higher than GEMS's rating.

RATING SENSITIVITIES

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

- Strengthening of linkages with the government of Indonesia

- Clearer visibility of the evolution of the operating environment and medium-term traffic path leading to a quicker-than-expected recovery could result in the Outlook being revised to Stable.

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

- Deterioration in the government's perceived ability or willingness to provide support to AP I, which may be reflected in a downgrade of Indonesia's sovereign rating or weaker linkages between AP I and the government.

- Slower-than-expected deleveraging due to, for example, lower passenger volume as a result of more severe Covid-19-related travel restrictions, or the ongoing economic downturn leading to a sustained increase of the leverage metric to above 14x.

- Further weakening in liquidity that undermines AP I's ability to refinance upcoming debt maturities or service its debt.

CREDIT UPDATE

Air travel was suspended during the nationwide lockdown between April and May 2020. Domestic flight travel resumed in June 2020 following a partial relaxation of social restrictions. Currently, only repatriation flights and selected international travel approved by the government are operating for international travel. Passenger traffic started to pick up from May 2020 to 40% of the pre-pandemic level in 4Q20. Passenger traffic decreased to about 30% of the pre-pandemic level as of 1Q21, affected by the partial social restrictions in February and May 2021.

Cargo traffic has recovered to above the pre-pandemic level, rising by 4% and 13% in 3Q20 and 4Q20, respectively, from a year earlier.

AP I's revenue across all business segments fell sharply due to the restrictions. Total revenue fell by 58% to IDR3.6 trillion in 2020 from IDR8.6 trillion in 2019, as aero and non-aero revenue fell by about 65% and 50%, respectively.

Operating expense fell by 20% to IDR3.8 trillion from IDR4.8 trillion. AP I reduced its cost by about 13%-33% on direct expense, employees, general and administrative expense, maintenance and rental.

EBITDA was a negative IDR226 billion in 2020 against EBITDA of IDR3.9 trillion in 2019.

FINANCIAL ANALYSIS

Fitch's rating case (FRC) assumes traffic will fall by around 55% in 2021 and 32% in 2022, respectively, from 2019 before gradually recovering by 2024. 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 as well as uncertainty around consumer behaviour and measures related to the coronavirus over the coming years.

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 IDR4.3 trillion in 2021 before reducing to around IDR2.8 trillion in 2022 for operational and maintenance purposes, according to management's guidance. We also do not incorporate the planned equity injection by the government as there is uncertainty over the timing of the funding.

Leverage will remain high under our FRC at around 31.1x in 2021 following its lower profitability and debt-funded capex plan, before progressively easing to 8.5x in 2025. (ends)