OREANDA-NEWS. Fitch Ratings Indonesia has assigned PT Angkasa Pura II (Persero) (AP II) a National Long-Term Rating of 'AAA(idn)'. The Outlook is Stable. At the same time, Fitch has assigned AP II a National senior unsecured rating and a rating on its proposed IDR2trn bonds of 'AAA(idn)'.

The proposed bonds are rated at the same level as AP II's National senior unsecured rating of 'AAA(idn)' as the bonds constitute senior unsecured obligations of the company. AP II will use the proceeds of the bond issue to fund capital expenditure.

The ratings are based on AP II's standalone credit profile. The company has a robust business profile, which is underpinned by its operation of Jakarta's Soekarno-Hatta International Airport (SHIA); limited competition; resilient volumes; and low customer concentration risks. It also benefits from a higher approved tariff for 2016, which will drive aeronautical revenue growth, and planned expansion to meet increased air travel demand in Indonesia. The ratings also incorporate higher forecast debt-funded capex over the next five years.

'AAA' National Ratings denote the highest rating assigned by Fitch on its national rating scale for that country. This rating is assigned to issuers or obligations with the lowest expectation of default risk relative to all other issuers or obligations in the same country.

KEY RATING DRIVERS

Robust Business Profile: The SHIA is the main international gateway to Indonesia. The airport accounts for 64% of AP II's passenger traffic and 35% off Indonesia's. The airport's large share of passenger traffic in the country provides a buffer against economic downturns and competition. The airport accounts for 44% of AP II's total capacity and generates around 74% of its revenue. SHIA remains vital for AP II's profitability; especially as some of its smaller airports are currently not profitable.

Resilient Passenger Traffic Volumes: Nearly all of the passengers that AP II handles originate from or are bound for its airports. These kinds of passenger traffic tend to be more stable than transit volumes. Passenger traffic in AP II's airports rose by CAGR of 4% in the past five years to reach 84 million passengers in 2015. Of this, 82% were on domestic flights, with the more resilient business trips accounting for a bigger share than leisure activities. AP II's passenger volumes only marginally declined during the slower domestic and global economic growth in 2008, 2014 and 2015. AP II will benefit from a recovery in Indonesia's GDP growth; Fitch expects the Indonesian economy to expand 5.3% in 2016 and 5.5% in 2017.

Regulated Revenue, Higher Tariff: Aeronautical revenue accounted for about 57% of AP II's 2015 total revenue. Aeronautical revenue is derived from flight-related fees that passengers and airlines pay to the company. AP II's tariffs are established in consultation with Indonesia's Ministry of Transportation. The tariffs reflect the cost of providing the services and the quality of services rendered, and the process of tariff setting includes input and feedback from passengers and customers. This process gives AP II limited flexibility to increase tariffs and its aeronautical revenue, although Fitch expects aeronautical revenue will be higher in 2016 following approval of higher airport charges for seven of its airports. This was the first major airport tariff increase since 2009.

Increasing Non-Aeronautical Revenue: AP II's non-aeronautical revenue, which rose to 40% of total revenue in 2015 from 25% in 2012, mostly consists of concessions and rents from its airports. The company does not need approval from the Ministry of Transport for its rents and directly negotiates with tenants, which could support overall revenue during economic downturns. A larger share of non-aeronautical revenue will provide greater stability to AP II's cash flows.

Low Customer Concentration Risk: AP II has a diversified airline customer portfolio. Its largest airline customer, Garuda Indonesia, accounts for less than 10% of its total aeronautical revenue while the top 10 airline customers have a combined 24% share of its total aeronautical revenue. Fitch believes that this reduces risks to AP II should an airline reduce its capacity. AP II also benefits from a diversified tenant profile across its non-aeronautical business, with the top 10 tenants accounting for around 25% of this revenue.

Significant Capex for Major Expansion: AP II plans capex of IDR31trn through 2020, mostly for a major expansion of the SHIA, which is operating above capacity. AP II's plan includes the expansion of the airport's terminal 3, including a new runway, and the renovations of terminals 1 and 2. AP II expects to increase the airport's capacity to 62 million passengers by 2018 from 22 million now.

Financial Leverage to Rise: Fitch expects AP II's leverage, as measured by FFO- adjusted net leverage, to deteriorate to 5.2x in 2017, above the 5.0x level at which Fitch would consider negative rating action. Leverage will rise from 1.2x in 2015 due to the substantial capex plan. However, leverage is likely to improve to within current guidelines due to additional earnings from the expanded airport. Fitch expects the company's financial risk profile to remain largely commensurate with its rating.

Strong Government Support: Fitch believes that a two-notch uplift from AP II's standalone rating is warranted due to the company's strong linkages with the state, as assessed under Fitch's Parent Subsidiary Linkage methodology. However, the uplift will be provided by Fitch only if the standalone rating drops below 'AAA(idn)', which is the highest level on the National Rating scale.

The expansion at the SHIA supports the government's drive for infrastructure projects and economic growth. The government has also provided the company tangible support, including an equity injection of IDR2trn to acquire land for the new runway at the SHIA.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Major tariff hikes in 2016 and 2019
- Passenger traffic growth of 3% a year through 2019
- Capex of IDR12.2trn in 2016, IDR9.2trn in 2017 and IDR3.5trn in 2018
- Dividend payout ratio of 20%; but no airport concession charge

RATING SENSITIVITIES

Positive: Developments that may, individually or collectively, lead to positive rating action include:
- No positive rating action is possible, as the company's rating is already at the highest level on the National Rating scale

Negative: Developments that may, individually or collectively, lead to negative rating action include:
- A sustained weakening of AP II's FFO-adjusted net leverage above 5.0x and FFO fixed-charge coverage below 2.0x and significant cost overruns and delays in the new projects, weaker-than-expected performance, or substantial increase in capital expenditure will lead to downgrade of its standalone rating. However, up to two notches of uplift will be provided to its ratings, provided the linkages between the company and the state remain intact.