Fitch Revises Outlook on PT Angkasa Pura I (Persero) to Negative; Affirms at 'AA+(idn)'

(Fitch Ratings - Jakarta - 07 Jul 2020)--Fitch Ratings has revised the Outlook on PT Angkasa Pura I (Persero)'s (AP I) National Long-Term Rating to Negative from Stable, and affirmed the rating at 'AA+(idn)'.

'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 Negative Outlook on AP I's rating reflects pressure from ongoing uncertainty over the timing and duration of the airport passenger traffic shock as a result of the coronavirus pandemic, and Fitch's expectation of elevated leverage in the medium term and a significant debt-funded capex plan. Any further deterioration in AP I's Standalone Credit Profile (SCP) could have an impact on AP I's rating as assessed under our Government-Related Entities (GRE) Rating Criteria.

The rating affirmation reflects the strong linkage of AP I to the Indonesian sovereign (BBB/Stable) and the propensity for government support when required. It also reflects our expectation that the company's traffic recovery will benefit from its diversified portfolio, strong domestic traffic and resilient origination and destination (O&D) traffic.

The company's deleveraging will rely on the traffic growth of AP I's five major airports. Government containment measures hurt AP I's passenger traffic in 1Q20 and 2Q20. A significant decrease occurred in May 2020 with only 77,342 passenger movements, following government policy to close commercial flights because of the large-scale social restriction programme. June 2020 traffic showed a significant increase to a company-estimated 648,567 passengers, or 8.39x higher than May 2020, as the containment policy was loosened. Fitch expects that AP I will benefit from domestically driven traffic, which we believe has a faster recovery than tourism-driven Denpasar airport.

AP I's National Long-Term Rating is one notch below the rating of its parent, the Indonesian sovereign, in line with Fitch's GRE Rating Criteria. This takes into consideration the strength of the linkages between AP I and the government, as well as the government's incentive to provide support to AP I.

AP I's SCP of 'aa-(idn)' reflects the geographically diversified portfolio of airports, large O&D traffic based on strong volume growth historically, and minimal competition. The SCP also factors in moderate flexibility in regulated aeronautical tariffs, extensive expansionary capex plan and the corporate-like debt structure. Fitch's rating case forecasts five-year average net debt/EBITDA at 9.6x, following traffic recovery to pre-pandemic level in 2022 with CAGR of 2.2% between 2019 and 2024, offset by capex deferment in 2020-2021.

The outbreak of coronavirus and related government containment measures worldwide create an uncertain global environment for the airports sector. AP I's performance data, through the most recently available issuer data, may not have indicated material impairment, but material changes in revenue and cost profile are occurring across the airports sector and will continue to evolve as economic activity and government restrictions respond to the ongoing situation. Fitch's ratings are forward-looking in nature, and Fitch will monitor developments in the sector as a result of the virus outbreak as it relates to severity and duration, and incorporate revised base- and rating-case qualitative and quantitative inputs based on expectations for future performance and assessment of key risks.

GRE Assessment

Strength of Linkages: Fitch sees 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 its investment plans and capex decisions. We also assess the support record and expectations of state support for AP I as 'Strong', even though there is no record of the government providing tangible support, as AP I has a sound financial profile. However, we expect the company to receive government support, if needed, due to its important role in the country's economic development.

State's Incentive to Support: Fitch sees 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 a 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.

KEY RATING DRIVERS

Resilient O&D Traffic, Strong Local Market-Revenue Risk (Volume): Midrange

AP I's 14 airports serve diverse regions in central and eastern Indonesia with an aggregated enplanement base of over 40 million. The passenger movement in 2019 was 81.5 million of primarily (95%) O&D passengers and largely (73%) domestic passengers. Furthermore, AP I has a well-balanced business and leisure traffic mix with limited competition. The diverse carrier mix, with revenue from the largest carrier representing 16% of revenue, protects the airports from concentrated airline counterparty risk. Still, traffic has declined significantly because of government measures to limit the spread of the coronavirus. Traffic dropped by about 8% in 1Q20, and AP I has estimated it fell by about 92% in 2Q20, compared with quarterly traffic last year. Passenger traffic increased to 648,567 in June (AP I estimate) from 77,342 in May, after the government eased the containment measures. We expect to see a gradual traffic recovery despite the uncertainty, as the AP I portfolio is benefiting from its largely domestically driven passenger traffic.

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

The tariffs for aero services are highly regulated by the Ministry of Transportation (MoT). The pricing regime allows aero tariff hikes with a cap every two years but subject to the MoT's approval, which creates uncertainty. This risk is mitigated by AP I's proven record of raising tariffs in the past. The framework does not allow cost recovery to offset loss of volume, which is a weakness. AP I has more flexibility to set the tariffs for non-aero services, of which the revenue accounted for 44% of total revenue. AP I has been increasing non-aero revenue - 33% in 2013 - and aims at more than 50% in the long term.

Significant Capex but Experienced Management - Infrastructure Development/Renewal Risk: Midrange

AP I's five-year capital plan remains significant at IDR50.1 trillion and is mainly to expand three capacity-constrained airports, including investment in new facilities. The current concession framework allows AP I to adjust tariffs to recover the expenditure in consultation with the MoT. The massive funding needs create challenges for the company in realising the expansion, despite the well-defined capex plan. However, we believe management's extensive experience in delivering the investment in airports and its established access to external funding mitigates the risk. Still, we expect some capex deferment because of the pandemic, and the majority is expansionary capex which has some flexibility.

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

AP I is a typical corporate borrower, using unsecured debts with limited credit protections except for maintenance of the current ratio, and coverage and leverage ratios. Its debt comprises corporate bonds and bank loans. Bank loans account for 85% of total debt and are mainly amortised over the loan period. The refinancing risk arising from the bullet payment of bonds is mitigated by the company's available credit line, well-spread maturities and demonstrated access to capital markets. The company has no exposure to foreign currency risk as all of its debt is borrowed in local currency. The majority of debt carries floating interest rates and is unhedged, which we believe is a weakness constraining our assessment.

Financial Profile

Fitch forecasts AP I's leverage - measured by net debt/EBITDA - will peak in 2020 due to the pandemic shock. The Fitch base-case scenario and rating case forecast net leverage of 11.8x and 15.2x, respectively, in 2020, followed by a significant drop to 5.4x and 7.5x in 2021 and then increasing slightly on post-pandemic capex deferment. Average leverage between 2021 and 2024 will be 6.1x and 8.2x under Fitch's base-case and rating case, respectively. The base-case scenario forecasts a five-year average of 7.2x, while the rating case has a five-year average of 9.6x.

PEER GROUP

AP I's closest domestic peers on the National Rating scale are PT Pengembang Pelabuhan Indonesia (PPI, AAA(idn)/Stable, SCP: aa+(idn)), PT Tower Bersama Infrastructure Tbk (TBI, AA-(idn)/Stable) and PT Sri Rejeki Isman Tbk (Sritex, A+(idn)/Stable).

PPI business profile is higher than that of AP I. PPI has fixed long-term contractual income and expenses limiting it from operational risk. PPI also has lower leverage and steady profitability, despite its small operation. This justifies AP I's SCP being two notches below that of PPI.

TBI's rating benefits from long-term lease agreements that provide visibility and stability to its cash flow. TBI has low counterparty risk; revenue contribution from Indonesian telco operators with investment-grade international ratings was at 83% in 2018. In addition, TBI mitigates currency risk by fully hedging its US dollar exposure. TBI has smaller operating, higher profitability and lower leverage than API. However, AP I benefits from its long-term operational record, near monopoly characteristic, market-leading position, long-term airport concessions and regulated tariff increments. The airport sector is highly regulated; hence it limits competition and entry barriers. Therefore, Fitch believes that AP I warrants a similar rating with that of TBI.

Sritex is in a top-three position in textile and garment manufacturing in Indonesia. Sritex has a larger operation than API but lower profitability. It is exposed to raw material price volatility, but can pass through cost fluctuations to customers. API has higher leverage than Sritex with a higher margin, strong market position and highly regulated sector. Hence, Fitch believes API warrants a one notch higher rating than Sritex.

RATING SENSITIVITIES

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

- Strengthening of linkages with the state

- A sustainably projected net debt/EBITDA leverage to below 8.5x, could return the Outlook to Stable.

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

- Weakening of linkages with the state

- An increase in projected net debt/EBITDA leverage to greater than 8.5x for a sustain period in the Fitch rating case.

- Further credit erosion of major air carriers or payment delinquencies to the finance of the airports.

- Deterioration in airport liquidity level for a sustained period

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit [https://www.fitchratings.com/site/re/10111579].

CREDIT UPDATE

Total passenger traffic in AP I's 13 airports declined by 15.6% to 81.5 million in 2019. The number encompassed 59.1 million domestic passengers, 17.9 million international passengers and 4.5 million transit passengers. Domestic traffic decreased by 20.7%, affected by an airfare tariff increase in 2019. The highest traffic was seen in I Gusti Ngurah Rai Airport in Bali, which served 24.2 million arriving and departing passengers, up 1.7% from a year earlier.

AP I's revenue rose 1.3% to IDR8.6 trillion in 2019, while net profit decreased by 28% to IDR1.5 trillion. Capex disbursement was less than planned due to some efficiency and project acceleration. Debt increased by IDR11.0 trillion to finance an increase of capex by IDR9.6 trillion. As a result, leverage was 3.7x by end-2019, an increase from 1.5x a year earlier.

FINANCIAL ANALYSIS

Fitch's basecase scenario assumes a traffic decline of 37% in 2020, driven mainly by a significant drop in - and a slow recovery of - international traffic. Traffic will rebound to pre-pandemic level in 2021 and increase subsequently in line with GDP. We apply haircuts on aeronautical revenue per passenger, non-aeronautical revenue per passenger and rental growth. We assume a decrease in traffic demand will also affect non-aero revenue, including a delay in non-aero expansionary projects. We assume 49% variable operating expense with growth in line with inflation. We also assume some capex deferment in 2020-2021 to 2023 onwards. Under our base case, leverage peaks at 11.8x in 2020, then drops to 5.4x in 2021, with a projected average leverage ratio of 7.2x in 2020-2024 and 6.1x in 2021-2024.

The rating case takes a more conservative stance and incorporates a number of stresses, including the extended lockdown on the traffic assumption. We assume a traffic decline of 41% in 2020, a recovery to pre-pandemic in 2022 and then an increase in line with GDP. We also take a conservative assumption on non-aeronautical revenue per passenger and rental income with 2.8% and 2.7%, respectively, CAGR 2019-2024. Under the Fitch rating case, leverage peaks at 15.2x in 2020, then drops to 7.5x in 2021, with a projected average leverage ratio of 9.6x in 2020-2024 and 8.2x in 2021-2024. (ends)