Moody’s: MAHB could face greater expansion risk under new concession, tariff-based framework

by NG MIN SHEN/ pic by TMR File

MALAYSIA Airports Holdings Bhd (MAHB) is not directly exposed to expansion-related risks, as the government is primarily responsible for developing new airport capacity.

This, however, could change if MAHB is given greater responsibility under the new concession and tariff-based framework.

Moody’s Investors Service said the airport operator’s exposure to expansion risks could escalate over the next 12 months, given the potential changes to its responsibilities to develop new airport capacity under a new concession agreement, as well as a new tariff-setting framework that will determine its capacity to fund future expansion.

MAHB, rated A3 stable by Moody’s, operates 39 airports in Malaysia under two concession agreements executed in 2009.

An extension of the agreements was announced in April this year, although final terms and conditions are still being negotiated.

“A key consideration in the negotiation is a potential increase in MAHB’s role in future expansion, in which case MAHB would face similar expansion risk and the associated funding requirements as its rated Asia-Pacific peers.

“Although such a change would increase MAHB’s exposure to expansion-related risks, such an arrangement would give MAHB more control over the planning and timing of expansion, which would support the airport group’s ability to maintain its quality of service and competitiveness with other hub airports in the region,” Moody’s said in a note yesterday.

While the pressure on the group’s existing infrastructure is not acute, additional investment will likely be required over the next three to five years, as several of its domestic airports were already operating at above or close to capacity as at the end of 2018.

“Improving efficiency and service quality are crucial to the Kuala Lumpur International Airport’s (KLIA) ability to compete as a hub airport for international traffic originating in the region,” the credit rating firm said.

MAHB has proposed a capital spending programme of around RM5 billion for its local operations in the first control period between 2020 and 2022, as part of its regulatory submission for the new tariff setting framework.

The proposed amount is broadly in line with the RM5 billion proposed by the regulator, and is significantly higher than the RM200 million to RM300 million spent annually between 2014 and 2017.

Using a hypothetical funding ratio of 70%, Moody’s said the group will require additional debt of around RM3.5 billion — higher than the group’s net debt of RM2.3 billion as at the end of 2018.

While the operator’s financial leverage is “well-positioned” for its rating as at the end of 2018, its ability to fund future expansion projects and preserve its financial metrics will hinge on the new tariff-setting framework being developed by the Malaysian Aviation Commission (Mavcom).

Based on Mavcom’s consultation paper published in June, a new building block-based framework — if implemented as is — will likely keep MAHB’s aeronautical revenue from its Malaysian operations close to or above the prevailing level.

Implementation of the new framework should also positively impact the group’s ability to grow revenue to meet expansion funding requirements, as it provides a clearer link between revenue and capital investment than the current arrangement under which tariffs are set without a published methodology.

“MAHB’s exposure to its upcoming expansion programme will ultimately depend on the outcome of the concession agreement, and whether the new building block-framework as presented in the consultation paper will be adopted to set MAHB’s aeronautical revenue.

“Our base case scenario assumes that the new concession agreement and tariff framework will not have a material adverse impact on MAHB’s credit profile, given the company’s strategic role in the country’s aviation market,” Moody’s said.