Research: Rating Action: Moody’s affirms Birmingham Airport (Finance)’s Baa3 ratings; changes outlook to stable from negative

London, November 23, 2022 — Moody’s Investors Service (Moody’s) has today affirmed the Baa3 backed senior unsecured ratings of Birmingham Airport (Finance) Plc (BAF), a finance company owned by Birmingham Airport Holdings Limited (BAH) (together the “Birmingham airport group”). The outlook has been changed to stable from negative.

RATINGS RATIONALE

Today’s rating action reflects Moody’s expectation that the continued recovery in traffic will allow the Birmingham airport group to improve operating and financial performance with metrics commensurate with the current Baa3 ratings, namely a funds from operations (FFO)/debt ratio of at least 8%. It further considers the group’s commitment to pace its capital spending in the context of the actual and expected traffic performance.

Following the severe reduction in passenger volumes during 2020-21, traffic at Birmingham airport started to rebound this year, recovering to around 75% of the 2019 level in the first ten months of 2022. This performance was achieved despite travel restrictions in the early months of the year and operational challenges, including staff shortages this summer, that impacted the aviation industry. Traffic performance improved materially during the year, with passenger volumes reaching 88% of pre-pandemic levels in October alone, which reflects a strong pent-up travel demand and an increase in airline capacity once travel restrictions were lifted. Moody’s expects traffic recovery to be uneven and subject to a greater-than-historical seasonality next year, but, absent travel restrictions, the airport’s passenger volumes in 2023 will likely exceed this year’s performance, which coupled with higher airport charges and a more efficient cost base will drive an improvement in the Birmingham airport group’s earnings.

Moody’s cautions, however, that there remain uncertainties around the traffic recovery profile, given the weakening macroeconomic environment, cost of living pressures and the current geopolitical environment and knock-on effects on the European economy. Availability of staff across the aviation industry is a further risk factor. In addition, Birmingham airport is exposed to competition in its catchment area and is dependent on the ability of its key airlines to drive passenger growth against a backdrop of a more difficult operating environment. The group’s plans include an increase in investments, including those related to regulatory requirements, but some of the spending is not committed and is dependent on the traffic recovery path. Moody’s believes that management will pace its capital spending depending on the evolution of the actual and expected passenger volumes. These are important factors underpinning the current ratings, given the group’s current highly-leveraged profile, rising interest rate environment, cost price inflation and significant reliance on the outbound traffic, which is sensitive to local economic conditions.

Overall, the Baa3 rating of the notes issued by BAF is underpinned by (1) Birmingham airport’s position in the centre of England, supported by strong transport links and a relatively affluent and sizeable population in its catchment area; (2) the airport’s fairly competitive aviation charges; (3) the supportive nature of its owners and financing structure; and (4) good liquidity. The group’s credit quality is, however, constrained by (1) the level of core catchment traffic that is captured by rival airports, as well as the existence of transmodal competition; (2) the renewal risk associated with the airport’s contracts with airlines; (3) the material contribution of the non-aviation earnings; and (4) the high financial leverage.

LIQUIDITY AND DEBT COVENANTS

As of end-March 2022, the group’s liquidity was supported by GBP54.5 million of cash on balance sheet, while the revolving credit facility of GBP25 million, which is due in March 2024, was fully drawn. Moody’s understands, however, that given strong cash flow generation, the company has now repaid in full the revolving credit facility. In addition, the group has access to GBP65 million as a liquidity facility provided by its shareholders that is available for drawing until March 2023. The group’s next debt maturity is the GBP30 million private placement loan notes due in December 2023.

The group’s debt documentation includes two financial covenants – net debt/EBITDA of 7.5x and interest cover ratio of 1.4x as events of default. The company has received covenant waivers twice since the start of the pandemic. Management expects to be compliant with its covenants, including when these are next tested for the period to 31 December 2022.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Although not considered likely given weak macroeconomic prospects, BAF’s ratings could be upgraded in the scenario of a stronger-than-expected traffic recovery and a favourable operating environment, such that (1) the group’s FFO/debt were to improve to at least 11% on a sustainable basis, (2) the company exhibited significant headroom against its financial covenants; and (3) the group maintained solid liquidity.

BAF’s ratings could be downgraded if (1) the company were to exhibit a financial profile consistently below the levels considered commensurate with the current rating, namely FFO/debt of at least 8%; (2) there was a risk of covenant breaches without adequate mitigating measures in place; or (3) there were concerns about the company’s liquidity.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Privately Managed Airports and Related Issuers published in September 2017 and available at https://ratings.moodys.com/api/rmc-documents/63380. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

COMPANY PROFILE

Birmingham Airport (Finance) Plc (BAF) is a finance company owned by Birmingham Airport Holdings Limited (BAH), and part of the Birmingham Airport group of companies. The Birmingham airport group is ultimately 49% owned by seven local authorities in the West Midlands (the largest of which is the Birmingham City Council, which holds 18.68%). A further 48.25% of shares — which are controlled by AGIL — is owned by private investors, led by the Ontario Teachers’ Pension Plan, while the remaining 2.75% is held by an Employee Share Trust.

REGULATORY DISCLOSURES

For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.

Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

Joanna Fic
Senior Vice President
Infrastructure Finance Group
Moody’s Investors Service Ltd.
One Canada Square
Canary Wharf
London, E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Kevin Maddick
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody’s Investors Service Ltd.
One Canada Square
Canary Wharf
London, E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454