Gatwick Airport Finance plc — Moody’s assigns Ba3 rating to Gatwick Airport Finance’s senior secured notes, negative outlook

Rating Action: Moody’s assigns Ba3 rating to Gatwick Airport Finance’s senior secured notes, negative outlookGlobal Credit Research – 29 Mar 2021London, 29 March 2021 — Moody’s Investors Service (Moody’s) has today assigned a Ba3 rating to the proposed senior secured notes to be issued by Gatwick Airport Finance plc (Gatwick Airport Finance), a holding company for the Gatwick airport group (the ring-fenced group). The issuer outlook is negative.RATINGS RATIONALEThe Ba3 rating on the senior secured notes is underpinned by (1) the competitive position of London Gatwick airport, as the UK’s second largest airport and a key airport within the London airport system; (2) the airport’s high proportion of origin and destination passengers across a diversified carrier base; (3) an expectation of strong cash flow generation once traffic starts to recover, supported by management actions to cut costs; (4) the terms of the financing structure and a fully-funded debt service reserve account; and (5) the strong credit quality and disciplined financial policies of Gatwick Airport Finance’s shareholders.The rating is, however, constrained (1) by the high level of debt at the operating company and on a consolidated basis; (2) uncertainty around the traffic recovery at London Gatwick airport and cash flow generation, given the impact of travel restrictions and the coronavirus pandemic on air travel; (3) an expectation that the ring-fenced group will not be able to upstream dividends until at least 2023, given the terms of the financing structure and lock-up provisions; and (4) the deeply subordinated nature of creditors at the holding company.The senior secured notes will be secured by first-priority charges over all of the share capital of Gatwick Airport Finance held by Ivy Super Topco Limited, and first-priority charges over substantially all the tangible and intangible assets of Gatwick Airport Finance. The notes will have a call option from 2023. Their terms include a financial covenant of a Senior RAR of 0.95x, which will be tested starting from 30 June 2024. The lenders will benefit from a multi-year fully-funded Debt Service Reserve Account (DSRA) at the time of the issuance.The majority of the proceeds from the senior secured notes will be downstreamed to the ring-fenced group to support the Gatwick airport group’s liquidity and financial profile, and reducing debt leverage in the ring-fenced group. The remaining amount will be held by Gatwick Airport Finance to cover the company’s debt service obligations.Gatwick airport has been severely impacted by the pandemic and the introduction of travel restrictions, as reflected in a traffic decline of 78% in 2020. While Moody’s currently expects passenger volumes to gradually increase in 2021, the timing and profile of any recovery is highly uncertain in the context of the continued travel restrictions and lack of visibility over the containment of the virus spread. The medium-term traffic recovery is also uncertain. Nevertheless, Moody’s currently expects that the group will be able to deleverage by 2023 on the back of an increase in passenger volumes and management actions to cut operating costs and investment.Governance considerations are material to the rating. Given risks around the pace of recovery in the group’s financial profile, the Ba3 rating on the senior secured notes positively factors in the commitment of Gatwick Airport Finance’s ultimate shareholders to preserve Gatwick Airport Finance and the ring-fenced group’s financial viability. Both Vinci S.A. (A3 stable), as a majority shareholder, and Global Infrastructure Partners (GIP) have major interests in the airport industry and consider Gatwick airport a long-term investment. Moody’s further notes that debt raised at Gatwick Airport Finance could be repaid early subject to the Gatwick airport group’s ability to distribute dividends and comply with the terms of the financing structure for the ring-fenced group.RATIONALE FOR NEGATIVE OUTLOOKThe negative outlook reflects Gatwick Airport Finance’s risk exposure — through its ownership of the Gatwick airport group — to the credit risks associated with the consequences of the coronavirus outbreak and the significant uncertainties around traffic recovery prospects.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGGiven the negative outlook, upward rating pressure is unlikely in the near term. However, the outlook could change to stable, if (1) there was more certainty around the recovery in the financial performance of the Gatwick airport group; (2) there were no concerns about further covenant breaches at the ring-fenced group; and (3) Gatwick Airport Finance’s liquidity remained strong.The rating could be downgraded, if (1) it appeared likely that the ring-fenced group’s credit metrics would not restore to the levels commensurate with the current rating, namely funds from operations (FFO)/debt of at least 8% by 2023; (2) there were concerns about the ring-fenced group’s ability to build enough flexibility to accommodate dividend distributions to Gatwick Airport Finance over the medium term; or (3) there was a risk of covenant breaches at the ring-fenced group without adequate mitigating measures in place.The principal methodology used in this rating was Privately Managed Airports and Related Issuers published in September 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1092224. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Gatwick Airport Finance plc is a holding company of Ivy Holdco Limited, which is the security parent for the Gatwick airport group. The company is owned 50.01% by Vinci S.A. (A3 stable), while the remainder of the ownership is managed by Global Infrastructure Partners (GIP) on behalf of several investors.REGULATORY DISCLOSURESFor further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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