Publish in Perspectives - Wednesday, May 23, 2018
Mexico City Airport currently transports over 44 million passengers per year. Here an Air China plane arriving at the airport. (Photo: AICM)
What investors want to know about the planned Mexico City airport.
BY ASTRA CASTILLO
Mexico City Airport constitutes an essential facility as the gateway to the city and the country. It is a hub for most Mexican airlines and currently transports over 44 million passengers per year. From 2000 to 2017, passenger volume increased 4.5 percent annually, well beyond national GDP average growth of 2.0 percent for the same period. Although the current airport has been expanded and refurbished several times to accommodate the increasing demand, it has now reached its maximum capacity and cannot be further expanded because of space limitations at the current site.
The plan for building a new airport in Mexico City had been public since 2001, but it was not until September 2014 that President Pena Nieto formally announced its construction. Ever since then, the project has been harshly criticized for its location on a former lakebed prone to flooding and to sinking, allegations of corruption with respect to how contracts were awarded and the large amount of public resources needed to finance such an ambitious project. More recently, Andres Manuel Lopez Obrador, frontrunner candidate in Mexico’s July 2018 presidential election, has threatened to cancel its construction should he be elected.
What Is Fitch’s View on the Risks Related to the New Airport’s Location on the Land That Used to Be a Part of Lake Texcoco?
When evaluating a project, Fitch considers all potential risks, such as those posed by the chosen location of Mexico City’s new airport. The agency regards a favorable analysis performed by reputable and independent experts as a reasonable way of being comfortable with those hazards. Fitch analyzes the source and reliability of the experts’ opinions, as well as the reasoning and facts supporting them. Factors such as experience in the jurisdiction, familiarity with the asset and formal qualifications are relevant.
Fitch finds comfort in the fact that the airport design and construction has involved a number of reputable technical experts, such as Parsons as project manager, Foster + Partners as master architect, Netherlands Airport Consulting Company as master civil engineer and Landrum and Brown as master plan designer. Several Mexican universities and governmental entities have participated in the project’s development and have supervised the quality of the work being performed.
Given the undeniable need to expand the current airport’s capacity and the operational requirements of the airport to be constructed, the current Texcoco location was considered the best option. More specifically, analysis conducted by the federal government’s long-term aeronautical advisor, The Mitre Corporation, concluded that out of all nearby alternatives, Texcoco was the only one that was operationally advantageous and maintained sufficient distance from the existing airport (5 km) and metropolitan area. Mitre is a U.S. nonprofit organization with over 60 years of experience in different spheres, including aerospace systems and aviation solutions.
Could the Santa Lucia Air Force Base Be Used to Complement the Operation of the Current Airport Instead of Building a New Facility?
Fitch has carefully reviewed Mitre’s analysis with regard to the option of expanding the airport capacity by splitting domestic and international operations between the existing facility and the Santa Lucia military base. According to the technical advisor, this option is not viable due to significant overlap in airspace used to conduct traffic to and from both airports, which would impact airspace capacity and operations. Mitre concluded a multiple-airport system in Mexico City would be economically unfeasible and even counterproductive, as it would create a highly inefficient operation that would result in a severely congested and complicated airport and airspace system likely to result in delays and operational problems. It would also create a considerable amount of inconvenience for connecting passengers and potential cost in providing viable travel options between the airports.
How Would Project Investors Be Affected by a Delay in the Construction of the New Airport?
The airport remains exposed to completion risk, with approximately half of the works yet to be finished. From a ratings perspective, a delay-related negative rating action could be triggered only if such delay is considerable. Under a construction delay scenario, the agency considers the ability of the airport to service its rated debt would not be affected in the near-to-medium term, given the following:
• The airport usage fee (TUA, its Spanish acronym), which constitutes the source of payment of the rated bonds, that is currently generated by the operations of the existing facility is enough to cover the debt service obligations of the US$6.0 billion notes, resulting in a sustained high, but manageable, medium-term leverage around 13x. As these are bullet instruments, mandatory debt service only comprises accrued interest and is considered manageable.
The fact that current debt is all bullet and the closest maturities are scheduled for 2026 and 2028 (in an amount of US$2.0 billion total), in conjunction with a concession that does not expire until 2065, provides the concessionaire with enough time to refinance its debt should it need to do so.
• The project retains the flexibility to take advantage of the capacity to generate additional cash flows. The main one would be to increase tariffs to levels comparable with those of similar airports around the region. Relative to these, Mexico City Airport charges lower tariffs to airlines and passengers, which suggests there is some room for future price increases.
Fitch believes delays in completion of the new airport are possible, as recently awarded infrastructure contracts have expected delivery dates that are very close to or even beyond the expected commercial operation date (COD) of October 2020. The need for additional resources derived either from construction delays or from potential cost overruns would likely be financed by a combination of debt and government grants.
Would the Rating Be Downgraded If the Project Enters into Additional Debt?
It is Fitch’s view that the project has the capacity to support additional debt at the current ‘BBB+’ rating level. However, adverse developments that could result in a negative rating action include the following:
• Downgrade of the Mexican sovereign rating
• Significant traffic underperformance with respect to Fitch base case expectations, without a timely and offsetting action from the concessionaire to increase TUA revenues
• Stabilized leverage (net debt/cash flow available for debt service [CFADS]) materially above 10x post-completion
• Considerable delay in the start of operations and/or material cost overruns of the new airport facility that threatens the adequacy of the TUA to cover operating and debt service costs with acceptable margins
The concessionaire has the ability to raise debt outside of the TUA trust, and airport management has not ruled out that possibility. Fitch considers the airport’s public nature is a meaningful mitigant to this risk, as there are strong incentives to size additional debt to make it commensurate with available revenues in order to maintain the project’s financial stability. Positively, the airport maintains material flexibility to adjust tariffs, which would be expected to balance the impact of further leverage, if needed.
Under Fitch’s rating case, which assumes sensitizations in forecasted volume and budgeted operational expenses, leverage expressed as debt/CFADS peaks at 13x in 2018, as the total US$6.0 billion rated debt has been placed while operations are still constrained by the capacity limitations of the existing airport. Leverage is expected to decrease to close to 10x once the new airport reaches its COD and traffic ramps up, at a comfortable level according to Fitch’s criteria guidance for airports with stronger assessments of volume and price risks
If Mexico’s Sovereign Rating Moves Up or Down, Would Such Movement Automatically Trigger a Change in the Project Rating?
If the sovereign credit quality experiences a positive rating action, an upgrade in the airport rating would be unlikely given the relatively early stage of the construction and the execution risk related to the new facility. Upon completion, an upgrade would only be possible to the extent project fundamentals, in terms of operational and financial performance, warrant it, according to applicable Fitch criteria.
However, should the country’s sovereign rating be downgraded, a negative rating action on the airport would be a likely outcome given the strong project’s links with the Mexican federal government via the grantor, Secretaria de Comunicaciones y Transportes, and the concessionaires, Aeropuerto Internacional de la Ciudad de Mexico, S.A. de C.V. (AICM) and Grupo Aeroportuario de la Ciudad de Mexico, S.A. de C.V. (GACM). The Mexican federal government as concession grantor and ultimate sponsor is still expected to make relevant equity contributions to finance the construction of the new facility. Increased fiscal restrictions could limit the government’s capacity to contribute the funds considered in the project’s financing plan and may result in delays in the start of operations of the new airport and the achievement of incremental revenue, or in the need for the project to incur in additional leverage to cover the shortfalls. Also, a sovereign downgrade could reflect the agency’s concerns with respect to the country’s diminished growth prospects that could ultimately hinder the project’s ability to generate cash flow
Could the Capital Raised Through Fibra E Dilute the Participation of the Mexican Government in the Project and Potentially Reduce Its Interest in Supporting It?
Fitch believes the recent sale of a special series of shares of GACM (concessionaire of the new airport) and a nominal equity interest in AICM (concessionaire of the existing airport) through the Fibra E instrument does not diminish the involvement of Mexico’s government in the project, for the following reasons:
• The existing airport is an essential and strategic project that entails significant economic and social profitability for the country; its strategic importance should grow even further when the new airport starts operating. Consequently, it is reasonable to think the government would have considerable incentive to continue to be involved in decisions related to the airport and its ability to adequately deliver its services to end-users.
• Since its inception, the plan for financing the construction of the new facility was considered a combination of public and private resources in order to allow the project to generate the funds to finance itself as much as possible, and at the same time, to minimize the impact on the country’s public finances. In fact, the Mexican government has consistently stated its interest in maintaining the project as national patrimony and its expectation of eventually benefitting from strong and growing surplus cash flow to recover its investment.
• Under its current structure as a majority state-owned entity, at all times during the term of the new airport concession title, GACM will remain an entity of the federal government. The government therefore indirectly controls all decision-making. Failure to comply with this condition is a cause for immediate annulment of the concession.
• The portion of GACM-AICM shares that was sold was only 20 percent, thus the Mexican government remains the majority shareholder.
• The sale is temporary in nature, given that the shares will be fully redeemed once investors achieve a target return of 10 percent in inflation-adjusted terms.
How Would Project Investors Be Affected by a Cancellation of the Construction of the New Airport?
A potential cancellation of the project would have negative consequences for operation and service levels at the airport. And, depending on the actions of the government, which is responsible for initiating the project and then cancelling it, cancellation may be largely neutral or negative to lenders.
Fitch believes ongoing asset investment ensures the attractiveness of an airport to both passengers and airlines. So in the long term, if the new airport is not built, airlines will likely have few incentives for making additional investments to reinforce their position in the existing facility, given their competitiveness and growth potential would be hindered. Moreover, passengers could also be to some extent discouraged to use the airport, given the continued poor service being offered.
However, the agency believes bondholders are reasonably protected against such a negative scenario by the following mitigants:
• In the short-to-medium term, the mitigants discussed for the construction delay scenario would apply: The TUA generated by the existing facility is enough to cover the debt service obligations of the US$6 billion notes; these notes have bullet payment, and the long concession term provides for ample space to refinance them; and the airport has relevant upsides to eventually increase its revenue generation without depending upon additional traffic.
• So far, the project has received US$8.9 billion in the form of debt (US$6.0 billion notes) and equity (US$1.25 billion contributed by the Mexican government plus US$1.6 billion from Fibra E investors), which represents two-thirds of the total estimated project cost of US$13.3 billion. Only around US$2.0 billion was used as of the end of 2017, so the project accounts still have a substantial amount of cash, which, in case of a cancellation, could be used to make a partial or full prepayment of the outstanding debt, depending on how much is still available at that time.
The concessionaire’s representatives have calculated the costs resulting from a project cancellation at US$6.5 billion, which corresponds to roughly a half of the investment amount. In Fitch’s view, this cost is so high that a cancellation would make no economic sense.
• Now that the Mexican government is not the only shareholder of the concessionaire and a portion of shares are indirectly owned by private investors (some of them being Mexican pension funds), there are strong disincentives to decisions that could go against these shareholders’ interests.
• Lastly, lenders are aware that this was a strategic investment of the Mexican federal government. A political decision to change course at the expense of lenders will be viewed very negatively by the market.
Astra Castillo is Senior Director at Fitch Ratings' Latam Infrastructure and Project Finance Group.
Excerpted from Fitch Ratings new report “What Investors Want to Know: Mexico City Airport.” Republished with permission from Fitch.