The Fitch Ratings agency has downgraded the long-term issuer default rating (IDR) of Domodedovo airport (IATA: DME) to ‘BB’ from ‘BB+’. The agency has also downgraded DME Airport Designated Activity Company’s 2021-due US$350 million loan participation notes and the 2023-due US$300 million loan participation notes to ‘BB’ from ‘BB+’. The outlooks are negative.
In an accompanying note, Fitch explains that the downgrading is the result of “expected severe volume shock in 2020 driven by significant restrictions on mobility, together with the weakening macroeconomic environment in Russia, including rouble depreciation and low oil prices.” However, the agency adds: “DME has sufficient liquidity to meet short-term needs” in the coming 12 to 18 months, as well as “some financial flexibility to partially offset the expected revenue shortfall.”
The overall negative outlook is attributed mainly to a combination of the “on-going uncertainty around the duration and severity of the current Coronavirus crisis”, the policy response of the government – and the subsequent weakening of airline financial positions, including potential bankruptcies, which could hamper volume recovery. It is also taking into account the “increasing re-financing risk given the approaching bullet maturity of US$350 million in 2021.”
Russia’s second largest airport’s traffic is projected to decline by around 20 per cent year-on-year in 2020 due to changes in passenger behaviour relating both to business commuting and leisure travel, along with the travel bans introduced by the Russian and the European governments. “Plunging traffic numbers and significant stress for airlines” is an inevitable consequence of these measures, it says. Direct foreign traffic represented around 45 per cent of Domodedovo’s volume in 2019, Fitch notes. Although, as of March 30, domestic air travel has not been restricted, in the event of a possible full lock-down of travel in Moscow, air travel volume “is likely to be slashed even more severely,” the agency notes.
Analysts also point to the prospect of secondary shocks brought about by the rouble depreciation of around 30 per cent between January and March 2020, and the increasing potential for airline insolvencies. “These macro-economic conditions may hamper traffic recovery and prolong volume shock after the virus is contained. The depreciation also increases DME’s mostly USD-denominated debt in rouble terms, adding pressure to the credit profile,” the note explains.
In the longer-term perspective, Fitch does not expect DME’s 2021 traffic to reach 2019’s levels, also due to “difficult macroeconomic conditions, alongside additional risks relating to potential airline bankruptcies and stiff competition from two other airports in the Moscow aviation hub.”
Comparing Domodedovo with arch rival Sheremetyevo airport (IATA: SVO), it notes that air traffic is likely to recover much faster at Sheremetyevo, as the bulk of its business is generated by the majority state-owned national carrier Aeroflot (BB/Negative). “As evidenced by the previous rouble currency crisis of 2014, when DME-resident airlines Transaero and Vim-Avia went bankrupt, the lost traffic and slots were mostly snapped up by Aeroflot to the benefit of SVO,” the agency observes.
Despite the unexpected 2020 turmoil, DME nevertheless has sufficient liquidity to cover the next 12-18 months, Fitch believes. As of the beginning of March, the hub airport had seven billion roubles (around US$90 million) in unrestricted cash reserves and some EUR80 million in committed credit lines with only minor EUR-denominated debt maturities in 2020. However, in 2021, DME has a US$350 million Eurobond maturity obligation, which management is expecting to partly cover by the placement of rouble bonds. “Turmoil on financial markets makes it challenging at present to make significant placements, but we believe that DME still has sufficient time to refinance its 2021 bullet maturity in advance,” the Fitch assessment concludes.
Russian Aviation Insider
Powered by Air Transport Observer, Russia & CIS’ premier information provider on commercial aviation with a 20-year legacy, Russian Aviation Insider provides you with timely and reliable business news, insights and analysis on commercial aviation all around CIS.
Sign up for our free Newsletter and never miss:
Get relevant data from reliable industry sources!