Rating Action Overview
- In fiscal 2023, the passenger traffic at Christchurch International Airport Ltd. (CIAL) improved to about 82% of pre-pandemic levels. We expect domestic traffic to reach pre-pandemic levels in 2025, and international traffic in 2026.
- However, inflationary cost pressures and capital expenditure (capex) will likely keep the ratio of funds from operations (FFO) to debt at 14%-16% over the next two to three years, compared with 14.9% for the year ended June 30, 2023 (fiscal 2023).
- On Sept. 28, 2023, S&P Global Ratings affirmed its 'A-' long-term and 'A-2' short-term issuer credit ratings on CIAL. We also affirmed the issue rating on the company's outstanding debt.
- We continue to see a moderately high likelihood of extraordinary support from Christchurch City Council for CIAL. The long-term issuer credit rating is therefore two notches higher than the 'BBB' stand-alone credit profile (SACP).
- The stable ratings outlook reflects our view that CIAL's operating expenditure (opex), capex, and dividend payments will be in line with our expectations over the next two to three years.
Rating Action Rationale
Slow improvement likely in CIAL's EBITDA over the next two to three years, driven by strong recovery in traffic but tempered by higher costs. Domestic traffic, which accounts for about 75% of CIAL's total, is currently at 90%-95% of pre-pandemic levels, while international traffic is at about 75%. Further growth could be tepid as still-high inflationary pressures weigh on passengers' discretionary spending.
The rise in passenger traffic will translate into increased revenue, especially from the higher-margin international retail segment. An increase in operating costs--due to inflation as well as higher variable costs in line with increased passenger traffic--will offset some of the benefits. We forecast EBITDA will rise to NZ$130 million-NZ$150 million over the next two to three years, from about NZ$125 million pre-pandemic. Any cost efficiencies achieved would represent an upside to our forecast.
CIAL's FFO-to-debt ratio to remain at 14%-16% over the next two to three years. In addition to the rise in operating costs, we forecast a modest increase in CIAL's interest costs compared with historic levels because the company has sizable debt maturities over the next six to 18 months. Cash interest cost was about NZ$29 million in fiscal 2023 and we forecast it will settle at NZ$31.5 million over the next few years.
CIAL's capex is unlikely to vary materially from our expectation of NZ$60 million-NZ$70 million per year. The capex would be for ongoing refurbishments as well as for some property development. The company's capex for fiscal 2023 was higher, at about NZ$74 million, due to several property-related projects that will contribute to revenue from fiscal 2024.
Upside to CIAL's credit profile could materialize from better traffic recovery than we expect and cost controls. Additionally, we believe management will remain prudent with shareholder distributions to support the current rating. We forecast annual dividends of NZ$30 million-NZ$45 million over the next two to three years after measured distributions during fiscal 2020-fiscal 2022. These factors could strengthen the stand-alone credit profile in the next year or two.
CIAL's liquidity remains adequate. The next debt maturity is about NZ$100 million due in May 2024.
Outlook
The stable outlook reflects our expectation that CIAL's ratio of FFO to debt will remain at 14%-16% over the next two to three years as international passenger traffic recovers to pre-pandemic levels and domestic passenger traffic continues its incremental growth. Our view is predicated on CIAL being disciplined on discretionary opex, capex, as well as dividend payouts.
Our rating on CIAL incorporates a moderately high likelihood of extraordinary support from the company's 75% shareholder, Christchurch City Holdings Ltd. (CCHL; AA/Stable/A-1+). We expect CIAL to remain a strategic asset for the city council.
Downside scenario
We would lower the rating on CIAL if the SACP were to fall by one notch (i.e. to 'bbb-') all else being equal. This could happen if the company's ratio of FFO to debt were to fall materially below 9%, likely from opex, capex, or dividends being materially higher than our forecasts. Although less likely, this could also occur if the recovery in passenger traffic falters significantly, either due to macroeconomic conditions or health and safety concerns, without commensurate management countermeasures to support the rating.
A lower rating on CIAL would also follow any downward rating action on CCHL or a weakening of our assessment of the likelihood of extraordinary support from the council. Currently we consider both these scenarios to be unlikely.
Upside scenario
An improvement in CIAL's SACP could occur if the company's ratio of FFO to debt were to improve to at least 15% consistently.
However, we view an upward rating movement to be highly unlikely because this would require a substantial improvement in the company's business, such that its SACP moves up by two or more notches. Nevertheless, such upward momentum could occur if the company's FFO to debt were to improve to about 25%, and management and shareholders demonstrated a commitment to maintaining such a profile.
Company Description
CIAL owns and operates Christchurch International Airport in New Zealand's South Island. Christchurch City Council (through its wholly owned subsidiary CCHL) owns 75% of the issued capital of the company, with the remainder owned by the New Zealand government. The shareholders do not guarantee CIAL's financial performance or debt obligations.
About 5.7 million passengers passed through Christchurch airport in fiscal 2023. Of these, about 81% were domestic and 19% international passengers. With recovering traffic, the composition is gradually returning to historic levels of around 75% domestic and 25% international.
Our view of a moderately high likelihood of extraordinary government support is based on our assessment of CIAL's important role and strong link with Christchurch City Council.
Ratings Score Snapshot
| Issuer Credit Rating | A-/Stable/A-2 |
|---|---|
| Business risk: | Strong |
| Country risk | Low |
| Industry risk | Low |
| Competitive position | Strong |
| Financial risk: | Intermediate |
| Cash flow/leverage | Intermediate |
| Anchor | bbb+ |
| Modifiers: | |
| Diversification/Portfolio effect | Neutral (no impact) |
| Capital structure | Neutral (no impact) |
| Financial policy | Neutral (no impact) |
| Liquidity | Adequate (no impact) |
| Management and governance | Fair (no impact) |
| Comparable rating analysis | Negative (-1 notch) |
| Stand-alone credit profile: | bbb |
| Related government rating | AA |
| Likelihood of government support | Moderately high (+2 notch to SACP) |
Related Criteria
- General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
- General Criteria: Group Rating Methodology, July 1, 2019
- Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
- Criteria | Corporates | General: Reflecting Subordination Risk In Corporate Issue Ratings, March 28, 2018
- General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017
- General Criteria: Rating Government-Related Entities: Methodology And Assumptions, March 25, 2015
- Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
- General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
- General Criteria: Methodology: Industry Risk, Nov. 19, 2013
- Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
- General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012
- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
- General Criteria: Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010
Ratings List
| Ratings Affirmed | |
|---|---|
|
Christchurch International Airport Ltd. |
|
| Issuer Credit Rating | A-/Stable/A-2 |
|
Christchurch International Airport Ltd. |
|
| Senior Unsecured | A- |
| Commercial Paper | A-2 |
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| Primary Credit Analyst: | Harshvardhan Sathe, Melbourne + 61 (3) 96312118; Harshvardhan.Sathe@spglobal.com |
| Secondary Contact: | Parvathy Iyer, Melbourne + 61 3 9631 2034; parvathy.iyer@spglobal.com |
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