London, November 22, Moody’s Investors Service (Moody’s) has today affirmed the Baa2 senior secured ratings and the (P)Baa2 senior secured rating on the medium-term note programme of Gatwick Funding Limited (Gatwick Funding), a finance company owned by Ivy Holdco Limited (together the “Gatwick airport group” or the “ring-fenced group”). The outlook has been changed to stable from negative.
Moody’s has also affirmed the Ba3 rating of the senior secured notes issued by Gatwick Airport Finance plc (GAF), a holding company for the Gatwick airport group. The outlook has been changed to stable from negative.
— GATWICK FUNDING LIMITED —
Today’s rating action reflects Moody’s expectation that the continued recovery in traffic will allow the Gatwick airport group to improve operating and financial performance with metrics commensurate with the current Baa2 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 and reduce leverage to the levels comfortably below the lock-up triggers included in Gatwick Funding’s debt documentation.
Following the severe reduction in passenger volumes during , traffic at Gatwick airport started to rebound this year, recovering to around 70% of the 2019 level in the first ten months of 2022. This performance was weaker than the average for Moody’s rated European airports, which reflects, among other things, travel restrictions in the early months of the year and operational challenges, including staff shortages this summer, that impacted the aviation industry. Still, traffic performance improved materially during the year, with passenger volumes reaching 85% 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 Gatwick 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, Gatwick airport is exposed to competition in the London area system and is dependent on the ability of its key airlines to drive passenger growth against a backdrop of a more difficult operating environment. While the Gatwick airport group’s plans include an increase in investments, 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 and cost price inflation.
Overall, the Baa2 rating of the senior secured notes issued by Gatwick Funding is underpinned by (1) the group’s ownership of London Gatwick airport, the UK’s second largest airport and a key airport within the London airport system; (2) a high proportion of origin and destination passengers across a diversified carrier base; (3) a system of economic regulation, which provides more freedom of manoeuvre to negotiate multiannual deals that are tailored to the different needs of different airlines, whilst retaining the protective features of the Civil Aviation Act 2012; and (4) the supportive features embedded in the financial structure that offer protections to creditors. These positive factors are tempered by (1) a degree of competition in the London area system; (2) the renewal risk associated with the airport’s contracts with airlines; and (3) the high financial leverage.
— GATWICK AIRPORT FINANCE PLC–
The change in the outlook to stable on GAF and the affirmation of its Ba3 senior secured rating reflects Moody’s expectation that (1) the Gatwick airport group will reduce its leverage and achieve financial ratios commensurate with its current ratings, and (2) the ring-fenced group will build material financial capacity and will be able to upstream dividends to GAF no later than in 2024.
In addition to the considerations for Gatwick Funding, the Ba3 rating of GAF reflects (1) the group’s higher leverage because of GBP450 million of additional debt at the GAF level; (2) the terms of Gatwick Funding’s financing structure, including lock-up provisions; (3) the deeply subordinated nature of creditors at the holding company; (4) the terms of GAF’s financing structure and a pre-funded debt service reserve account to October 2024; and (5) disciplined financial policies and the strong credit quality of GAF’s major shareholder – Vinci S.A. (A3 stable), which fully consolidates the group it its accounts.
LIQUIDITY AND DEBT COVENANTS
As of end-June 2022, the ring-fenced group’s liquidity was supported by GBP342 million of cash on balance sheet and no availability under the revolving credit facilities of GBP300 million, which are due in June 2025. Moody’s understands, however, that given strong cash flow generation, the company has now repaid a large part of its revolving credit facilities. In addition, the company has access to an undrawn standby liquidity facility of GBP150 million with a final maturity in June 2027. The group’s next debt maturity is the GBP300 million bond, which has a scheduled maturity in January 2024.
The group’s debt documentation includes two financial covenants – senior RAR (Regulatory Asset Ratio) of 0.85x and senior ICR (Interest Cover Ratio) of 1.1x 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. The expected headroom against the covenants reflects amendments to the calculation of the group’s EBITDA, which will apply until June 2024.
As of end-June 2022, GAF, as a holding company, had GBP53.4 million of cash. The company’s only obligations are related to interest payments of around GBP20 million a year and the company’s senior secured notes have a final maturity in April 2026.
GAF’s senior secured notes include an event of default covenant of Group RAR of 0.95x. Management expects to be compliant with this covenant when it is next tested for the period to 30 June 2024. Since the calculation differs from that at the ring-fenced group, traffic recovery and an improvement in cash flows in the next months will be particularly important factors driving a reduction in leverage to the levels consistent with this ratio.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Although not considered likely given weak macroeconomic prospects, Gatwick Funding’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 10% on a sustainable basis; (2) the company exhibited significant headroom against its financial covenants; and (3) the group maintained solid liquidity.
The ratings of Gatwick Funding could be downgraded if (1) it appeared likely that the group’s credit metrics will not recover to the levels commensurate with the current ratings, 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.
Although not considered likely given weak macroeconomic prospects, GAF’s rating could be upgraded if (1) there was a material improvement in the group’s financial profile; (2) there were no concerns about the ring-fenced group’s ability to upstream dividends providing a strong coverage of debt service requirements at GAF; and (3) the company had a solid liquidity.
GAF’s 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 FFO/debt of at least 8%; (2) there were concerns about the ring-fenced group’s ability to build enough flexibility to accommodate dividend distributions to GAF starting from 2024, and these were not offset by adequate mitigating measures such as shareholder support; (3) there was a risk of covenant breaches without adequate mitigating measures in place; or (4) there were concerns about the company’s liquidity.
The principal methodology used in these ratings was Privately Managed Airports and Related Issuers published in September 2017 and available at /api/rmc-documents/63380. Alternatively, please see the Rating Methodologies page on for a copy of this methodology.
Gatwick Funding Limited is a finance company owned by Ivy Holdco Limited, the security parent of the Ivy Holdco Limited group. It is fully owned by Gatwick Airport Finance plc.
Gatwick Airport Finance plc is a holding company of Ivy Holdco Limited. 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.
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 /rating-definitions.
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