Minister ‘shocked’ at NAD outlook cut

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A Cabinet minister is “a little shocked” that a top rating agency slashed its Nassau Airport Development Company (NAD) outlook to “negative” despite the premier gateway enjoying a “record” 2019.

Dionisio D’Aguilar, pictured, minister of tourism and aviation, told Tribune Business he “completely disagrees” with Fitch Ratings’ decision to remove the previously “stable” outlook it had on the Lynden Pindling International Airport (LPIA) operator because of the blow that Hurricane Dorian has inflicted on the government’s finances.

He argued that servicing NAD’s nine-figure debt, taken on to finance the airport’s redevelopment, depended on tourist numbers and the volume of passengers passing through The Bahamas’ main airport gateway - not the government’s financial health.

And, with arrivals figures surging ahead of 2018 comparatives prior to Dorian, Mr D’Aguilar said NAD had made its first-ever annual profit for the financial year that closed on June 30, 2019.

“We completely disagree with it,” the minister blasted. “We had a record year in terms of arrivals. NAD has gone from making a net loss to a net profit for the first time in the financial year that ended in June 2019.

“It was a little shocking given how well NAD is doing. It seems to go against the grain with making a profit, reduced interest costs and revenues being up. We feel, notwithstanding Abaco and Grand Bahama, tourism has been very resilient in maintaining arrivals numbers.

“We disagree with it, but it is what it is. I guess the sovereign has a greater impact on the debt,” Mr D’Aguilar continued. “If you perceive there to be a deterioration in the quality of the sovereign debt, how does that really impact NAD when it is based on tourist arrivals?

“Deterioration in the sovereign debt has very little to do with tourist traffic and arrivals through the airport. The vast majority of tourist traffic through the airport are tourist arrivals. I don’t see the correlation. NAD services its debt by the throughput of traffic through the airport.”

Fitch’s decision to change its outlook on NAD from “stable” to “negative” will likely have little impact on NAD and its debt servicing costs in the short-term, with the airport operator avoiding any change to its rating which remains at an investment grade ‘BBB-’.

However, the “negative” outlook signals to the global capital markets that an actual rating downgrade may come in the near to medium-term, possibly within the next 12 to 18 months, and especially if The Bahamas’ sovereign creditworthiness were to deteriorate further due to the strain placed on the Government’s finances by Hurricane Dorian rebuilding costs.

It also raises questions as to whether Bahamas Power & Light’s (BPL) upcoming $650m bond refinancing will be impacted by similar rating agency concerns over the country’s creditworthiness, as that issuance, too, is seeking a rating from the likes of Fitch, Moody’s and Standard & Poor’s (S&P).

Should the rating agencies harbour such reservations, the interest BPL will have to pay investors will be higher, which in turn means that the National Utility Investment Bond fee paid by all its consumers - households and businesses - will be higher, too.

Mr D’Aguilar, meanwhile, acknowledged that NAD had endured such action by Fitch before. He recalled how NAD’s actual credit rating lost its investment grade status in 2017 when it was downgraded as a consequence of S&P cutting The Bahamas’ sovereign rating to so-called “junk” status.

NAD had to double its debt reserve fund from $19 million to $38 million as a result of that downgrade. The debt financing for LPIA’s $409.5 million redevelopment requires that NAD maintain “a restricted debt service reserve account” with Citibank in New York, which contains a balance equal to six months’ worth of principal and interest due on the senior notes (bonds).

This facility is designed to give NAD’s lenders extra security, and comfort, that the airport manager will continue to make debt payments as they come due - especially since the funds cannot be used for anything else.

Meanwhile, Fitch’s justification for the new “negative” outlook appears to be based on concerns that The Bahamas’ weak fiscal position may result in the imposition of capita controls to prevent an exodus of US dollars - a development that would impact interest and principal payments for holders of NAD’s foreign currency notes.

However, this ignores the fact that The Bahamas’ foreign exchange reserves currently stand at a healthy $1.5bn. “The outlook revision reflects concerns with respect to the weakening credit quality of The Bahamian sovereign, particularly the risk of imposing controls on the transfer of foreign currency for the US dollar denominated notes,” Fitch said.

“In the last three years the archipelago has been hit by two major hurricanes that have deteriorated the fiscal position of the sovereign, leading to an increase of the debt burden. The negative outlook also reflects the lack of fiscal buffers that could contain the fiscal impact in case of a severe weather event.”

Fitch added that developments leading to a positive rating action would include the strengthening of The Bahamas’ credit profile; a sustainable increase in NAD’s passenger traffic; and the company’s net senior debt to EBITDA (earnings before interest, tax, depreciation and amortization) coming below 4.0 in a sustained basis.

“The ratings reflect the airport’s traffic stability with low peak-to-trough variations, despite its limited traffic base, and its exposure to some competition from alternative modes of transportation and/or other similar touristic destinations in the Caribbean,” Fitch said.

“The ratings are also supported by a strong rate setting framework and minimal capital expenditure needs to accommodate traffic growth. Current leverage ratios under the rating case are viewed as adequate for the rating level according to applicable criteria.”