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GMR Hyderabad Airport's Tender Offer Will Cut Funding Costs

Feb 22, 2023, 12:51 pm

Hyderabad International Airport Ltd.'s proposed offer to buy back debt will strengthen its capital structure and reduce financing costs. We believe the proposed partial tender offer for up to US$100 million in outstanding debt is an opportunistic exchange because the Indian airport operator (GHIAL; BB-/Stable/--) is managing its debt maturities well ahead of the final maturity of its notes.

The transaction is a continuation of a tender offer that concluded in December 2022. GHIAL successfully repurchased US$139 million of the outstanding debt--US$126 million toward US$300 million 5.375% senior notes due 2024 and the remainder for US$300 million 4.75% senior notes due 2026. Funding was done through a 10-year domestic loan with a lower interest cost of 8.8%.

We expect the airport operator to fund the proposed tender offer with similar financing terms and cost. The tender price will be set at a premium to the notes' current market price. In our assessment, the company is not at risk of a conventional default in the next 12 months, even if investors do not accept the tender offer.

In our view, the proposed transaction is a proactive liability management exercise that will reduce GHIAL's financing costs and lengthen its debt maturity profile. As part of the transaction, the buyback offer for the 2024 notes would be given higher preference than the 2026 notes to extend the company's maturity profile.

Based on our assessment, passenger traffic rebound is likely to be a key driver of GHIAL's cash flow, supporting a recovery in its financial performance. Total passenger traffic at Hyderabad airport in the first nine months of fiscal 2023 (year ending March 31, 2023) was close to 15.4 million, with domestic traffic rebounding to 93% of that in the same period in 2019 and international traffic recovering strongly to 83%. We estimate total traffic at the airport will increase to about 21 million passengers in fiscal 2023 and 23.5 million in fiscal 2024, from 12.4 million passengers in fiscal 2022.

We expect the bulk of the company's terminal expansion (about 90%) to be completed by the end of March 2023, with the remainder to be finished by August 2023. Lower spending requirements thereafter will also support an improvement in financial ratios.

The stable rating outlook on GHIAL reflects our view that the company's ratio of operational cash flow to debt will improve to more than 5% on a sustained basis following the recovery in passenger traffic volumes.

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