Fitch Ratings - Criteria for Airports

Financing is a important part of airport development. Bond Ratings by companies (e.g.Fitch Ratings) determine the ability to sell the bonds and the interest rates among other things. I came across this in an Airport Business Article that talked about the Fitch Ratings' Criteria for Airports. (click here)

The following is an extract from the 24 page Fitch Ratings Article "Criteria for Airport". It requires a registration (that is free) to access. Please register with them to read the full article.

" This criteria report provides an overview of Fitch Ratings’ analytical approach to evaluate debt issued by airports across the globe and should be read in conjunction with the agency’s report, “Rating Criteria for Infrastructure and Project Finance”, published on 16 August 2010 at www.fitchresearch.com. The rating levels discussed in this report relate to Fitch’s international credit rating scale and reflect standalone creditworthiness without considering external credit enhancement or government support.

The criteria apply both to standalone airports and multi-airport systems in full operation with an active commercial service and an operational history. They also apply to multiple forms of ownership, governance, and legal status, whether in the form of a listed company, private corporation, special-purpose project company, or public law entity. The criteria also cover specific rating drivers for new airport construction or those airport-related facilities that have substantial construction and completion risks. In such cases, the rating rationale may be influenced more by completion-related factors.

For standalone project financings within an airport (i.e. non-recourse terminals, fuel facilities, rental car centers, and cargo facilities), the ownership framework, structural protections, and completion risk will be more relevant rating considerations than is the case for financings secured by a broad pledge of airport revenue. The corporate rating of key counterparties and corporate tenants, as well as the legal or economic ability to substitute defaulting or departing tenants, will also play a central role in analyzing such financings.

Two critical concepts are developed throughout the criteria: 1) the resilience of demand; and 2) airport flexibility to offset historical volatility associated with the airline industry. Each individual airport will have varying degrees of resilience and flexibility. The stronger credits tend to be the large gateway and hub airports as they demonstrate less volatile demand and more flexibility in recovering costs from airline counterparties and maintaining stable net revenues. Regional airports and secondary hubs are generally more volatile and have less financial flexibility. Fitch’s ratings reflect a combination of relative volatility and flexibility that is strengthened or weakened by degrees of financial risk, structural protections, and leverage."

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There is also a cross reference to another 24 page report "Rating Criteria for Infrastructure and Project Finance" by Fitch Ratings. The following is an extract. Please register with them to read the full article.

" Fitch Ratings’ rating approach to infrastructure and project finance debt instruments is used where repayment is dependent upon cash flows from the construction, operation and in some cases handover of a standalone project (which may encompass several project assets in different locations). Additionally, for these criteria to apply, the assets and operation of the project would be within a project vehicle or achieve an equivalent segregation of project cash flows such as a separate enterprise fund within a governmental entity; in either case referred to as a single‐purpose project (SPP) in this report. Such projects typically arise in the power, transportation, telecommunications, oil and gas, industrial, mining and social infrastructure sectors.

Fitch’s analysis firstly addresses the potential of the project to generate a stable cash flow based on its legal framework and fundamental economics together with any political or macroeconomic risks. The agency then considers the financial structure to form an opinion on the capacity of those cash flows to service the rated debt instruments in accordance with their terms. Some risk factors in this report may not always be applicable depending upon the nature of the project or debt instrument.

Fitch’s global infrastructure and project finance ratings under these criteria are assigned to individual debt instruments and are therefore issue ratings. They take account of timeliness of payment, reflecting the instrument’s terms, and do not incorporate recovery prospects given a default.

When analysing the project, a Fitch analyst will consider factors such as project rationale, the sponsor and legal structure, completion risk, technology risk, operating and maintenance risk plus risks to project gross revenue from volume, price or availability. Sovereign, political and industry risks are also considered here together with future capital expenditure and information quality. Risk allocation is a key feature of project finance and Fitch will assess its impact on the SPP, as appropriate for each risk factor, which in most cases will include a minimum level of creditworthiness consistent with the significance of the allocated risk."