S&P downgrades DIAL's rating to 'B-' over heightened liquidity risk

Rating agency Standard and Poor’s (S&P) on Thursday downgraded the long term issuer rating for Delhi International Airport Ltd (DIAL) from “B+” to “B-” due to heightened liquidity risk.

The rating agency said it no longer considers the receipt of commercial property development (CPD) cash flows due to material delays. The company is considering a few options to preserve cash in the absence of CPD money. The options include lease financing.

S&P has kept the ratings on CreditWatch where they were first placed with negative implications on March 20, 2020. The CreditWatch reflects the view that DIAL's capital structure could become increasingly unstable without CPD income. This would heighten refinancing risks for the company's bonds due in February 2022, it added.

“We lowered the ratings on DIAL due to uncertainty in the company's receipt of CPD income and deposits from Bharti Realty Ltd,” S&P said in a statement.

DIAL's high dependence on CPD income results in higher volatility in cash flow than it would expect for a regulated airport asset.

CPD income has now been delayed for more than one year and there is no clarity on the timeline for resolution. DIAL could face increased liquidity risks given its high dependence on CPD cash flows to support interest obligations and capital expenditure (capex) amid continuing regulatory uncertainty.

DIAL’s funds from operations (FFO) cash interest coverage will be below 1.0x over the next 12 months.

The company's high cash balance would likely be depleted at a faster pace given that its large committed expansion plans were highly dependent on the receipt of CPD funds. This, combined with significantly weaker passenger traffic due to Covid-19 travel restrictions and large interest servicing costs, would put pressure on DIAL's ability to service its interest obligations over our projection horizon.

S&P said, “We do not view DIAL's capital structure as unsustainable, even though its interest servicing ratio is below 1.0x. We understand the company is considering a few options that could preserve cash in the absence of CPD money”. These include obtaining lease financing for up to Rs 2,000 crore of its capex for mobile equipment, which could offer significant cash flow relief.

Further, DIAL will be able to service interest during construction through debt, as part of its capex facilities. The company's cash balance of Rs 2,950 crore (as of Sept 30, 2020) will be sufficient to meet its capital spending over the 12 months to Sept 30, 2021. The debt maturities over this period are minimal, the agency added.