At the same time, Moody's has also assigned a provisional (P)Ba1 rating to DIAL's proposed USD senior secured bond.
DIAL will apply the proceeds of the bond issuance to fully refinance an existing foreign currency bank term loan facility.
The bond will represent a senior secured obligation and will be secured by first-priority security interests in substantially all tangible and intangible assets which DIAL is permitted -- under its concession arrangements -- to encumber.
Moody's has reviewed draft documents for the proposed bond as well as a proposed draft inter-creditor agreement. The assigned ratings assume that there will be no material variation from the drafts reviewed and that all agreements will be legally valid, binding and enforceable.
Ratings Rationale
Moody's has used its Joint Default Analysis approach for Government Related Issuers in assessing DIAL's rating, because the company is more than 20% government-owned through the Airports Authority of India (AAI), a government agency.
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DIAL's Ba1 rating combines: (1) the company's baseline credit assessment (BCA) of ba1; and (2) the low likelihood of support that Moody's believes the Government of India (Baa3/P-3 stable) will provide to DIAL in the event that extraordinary financial support is required. This assumption of support results in the absence of uplift to the company's BCA.
"The (P) Ba1 corporate family rating primarily reflects DIAL's strong market position as the international gateway to India's landlocked capital, a region of around 17 million people", says Arnon Musiker, a Moody's Vice President and Senior Credit Officer.
"We expect the airport to benefit from increased travel demand in the country as income grows, particularly because an increasing proportion of the airport's revenues - being non-aeronautical revenues -- will be driven by rising passenger volumes", adds Musiker.
The airport's core aeronautical revenue stream is regulated on a price cap basis and, as such, is not exposed to the risk of fluctuations in passenger volumes, a source of fundamental rating support.
While the regulatory framework for the sector was only established around three years ago, and therefore lacks a track record, the regulator has to date shown a supportive stance towards the sector.
This supportive regulatory environment should act as a buffer against unanticipated weakness in unregulated non-aeronautical revenues.
The company's business plan assumes a material increase in non-aeronautical revenues, which comprise both passenger-driven revenues -- such as duty free, retail and cargo handling services -- and commercial property developments. The rating factors in a lower level of visibility in relation to the commercial property developments, particularly because the concession arrangements restrict the type of permissible developments.
Over the longer term, the revenue from these non-aeronautical sources will become increasingly important in the evolution of DIAL's credit profile, as well as for the partial funding of its planned capacity expansions. Although such expansions will occur beyond the rating horizon, the associated execution and funding risk will become increasingly important to the rating over time.
The AAI has the right to terminate the concession if DIAL fails to meet its operating performance targets for a sustained period. However, we believe that DIAL's solid operating track record, combined with the security trustee's rights to remedy and a cure period regime in the tripartite agreement, render the risk of early termination as remote.
The rating also factors in the effectiveness of the ring fence between DIAL and its shareholders under the transaction documents which insulates DIAL's credit profile from that of its shareholders.
The primary rating constraint is the company's high financial leverage -- as measured by funds from operations to gross adjusted debt -- which we expect to be in high single-digit range over the next 12 to 24 months.
The stable outlook reflects Moody's view that DIAL has sufficient financial flexibility at its rating level to withstand a moderate deterioration in the operating environment, and the supportive nature of the regulatory regime.
Upward rating movement is possible if the forthcoming regulatory reset is consistent with our base-case assumption and the company grows its non-aeronautical revenue streams. Factors we would look for include funds from operations /gross adjusted debt above 8%-9% and a debt service coverage ratio of above 2x, both on a sustained basis.
The ratings could be lowered if funds from operations/gross adjusted debt falls below 6.5%- 7.0% and/or the DSCR declines below 1.3x on a sustained basis. Factors that could give rise to a downgrade include adverse regulatory outcomes, and failure to grow non-aeronautical revenues or deteriorating operating performance. Financial stress at the shareholder level, leading to DIAL's lenders attempting to trigger an event of default, will likely lead to a downgrade.
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