The Tribune

• Airport wants debt service change deal

• As COVID causes 70-80% revenue fall

• And credit rating is slashed to 'BB-'

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Nassau Airport Development Company (NAD) is asking its bondholders to waive critical debt servicing conditions following its credit rating downgrade, its chairman confirmed yesterday.

Walter Wells told Tribune Business that the Lynden Pindling International Airport (LPIA) operator has been locked in negotiations since June 2020 with investors who hold the biggest share of its near-$370m US dollar debt once it became clear COVID-19 would prevent it from meeting key ratios.

He revealed that NAD is seeking their agreement to waive the "1.3 to 1.0" debt service coverage ratio that it agreed to maintain in persuading investors to part with their money to finance LPIA's $409.5m redevelopment, after the near-total tourism shutdown and plunge in aviation traffic saw the company's revenues drop 70-80 percent.

Mr Wells also revealed that Fitch, the rating agency that assesses NAD's creditworthiness and ability to repay its debt, has "recently downgraded" the company from BBB-’ to 'BB-'.

Asked how confident he was about NAD's ability to avoid a debt default, given the uncertainties surrounding the timing and strength of any tourism and associated aviation rebound, Mr Wells replied: "I don't know if my crystal ball is better than yours."

He conceded that everything depends on COVID-19 and "how successful we are in getting tourism back into the country", given that NAD's revenue and debt servicing model is built on the various fees charged to passengers who pass through its terminal and consume its services.

The Central Bank highlighted the steep fall-off in LPIA passenger activity even when tourism briefly re-opened in July, with just 8,933 outbound departures that month compared to 171,320 the previous year - a drop of 94.8 percent. For the first seven months of 2020, total departures fell by 63.7 percent.

Still, Mr Wells voiced optimism that negotiations with NAD's major debt holders on the waiver will successfully conclude within the next three to four weeks, arguing that "it's in everyone's interests to work together during this time" and that LPIA was no different from multiple other airports locked in similar COVID-19 related discussions with their financiers.

While any NAD default will not trigger similar fall-out for the Government, given that the airport's debt was structured to keep it off the Crown's books with no guarantee provided, the situation is especially concerning given that it involves the so-called "gateway to The Bahamas" and arguably the country's most vital infrastructure asset.

It also highlights how major Bahamian private and public sector entities have been hit by COVID-19 in ways that are only now being exposed, and how they are having to negotiate forbearance with their lenders/investors to secure their very survival.

"NAD has been very proactive in this since the beginning of June," Mr Wells told Tribune Business. "We wrote to all our senior debt holders and said to them that given the level of cash flow and uncertainty around our ability to meet the debt service ratio, we're seeking a waiver. We're still in talks that have not been resolved yet, so I can't get into details as I'm not sure where we'll end up."

Tribune Business sources revealed that NAD's senior bond holders, mainly eight to ten US insurance companies, pension funds and other institutions that hold the majority of the US dollar debt, held a conference call late last week to discuss their negotiating options and how they should deal with the under-pressure airport operator.

This newspaper was informed that, given the uncertainties over the timing and extent of any Bahamian tourism rebound, a number of the bondholders were starting to become nervous and starting to "push back" on the idea that concessions should be sought from NAD in agreeing to the debt service ratio waiver.

A "1.3 to 1.0" debt service coverage ratio means that NAD must possess at all times revenues/cash that are 1.3 times' what it must pay on its debt. It is a condition designed to give investors/lenders extra confidence and security that they will be repaid the principal owed as it creates reserves, or a safety margin, that the airport operator must maintain to meet its obligations.

Several sources, speaking on condition of anonymity, said the bondholders had agreed to the debt service ratio dropping to "1.2 to 1.0" during the 2020 second quarter, but now NAD was seeking a further reduction to "one to one" - something that would eliminate all security margins or reserve buffers.

However, Mr Wells denied this, saying the debt service ratio remains at "1.3 to 1.0" and no benchmark for its reduction has been set as this remains to be negotiated. "That's not accurate. That hasn't happened," he said of the purported earlier reduction.

"We're still in discussions around not having to adhere to the 1.3 to 1.0 debt service ratio. No threshold has been put on it. Our intention is the debt service ratio will not be met, but we will continue to service the debt. A lot depends on when the airport fully re-opens, but that issue is beyond our control."

While NAD has yet to default on its debt repayment obligations, the drying up of its revenue streams has been enough to alarm Fitch. "Our rating has already been impacted," Mr Wells told Tribune Business. "It was recently downgraded from 'BBB-' to 'BB-'."

Fitch was monitoring NAD and its financial status on a monthly basis, he added, attributing much of the rationale for the downgrade to a 'high risk' default status on what is happening in the wider economy as well as the Government's rising $9bn national debt.

NAD's annual report for the year to end-June 2019, the last one available, shows that it had just over $500m in long-term debt on its balance sheet at that point. The US dollar component accounted for around $368m, with the remaining $131.5m denominated in Bahamian dollars.

Mr Wells, pointing out that interest payments on the Bahamian dollar debt were "at our discretion", said NAD had exercised its option not to make these payments to the likes of the National Insurance Board (NIB) and other investors until its cash flow returned. No payments have been made since June 30, and the NAD chief said they were only likely to resume "towards the end of next year" at the earliest.

"It truly depends on how COVID-19 evolves and how successful we are in getting tourism back into the country," Mr Wells responded, when asked about the risk of NAD defaulting. "We're no different from any airport in the world with revenues being off.

"The beauty of LPIA is we're an essential service. Whether we return next month or next year, we'll be back in full force. The great thing is that as soon as there's an upturn in the economy, there's an upturn in the airport. We're the gateway to The Bahamas really."

Voicing optimism that the bondholder talks will result in a successful outcome, Mr Wells added that it was in no one's interest for NAD to be placed into a breach or default. "We're not going anywhere," he said. "It is a government-owned operation, and the Government of The Bahamas has a very good reputation locally and internationally in terms of meeting its commitments.

"It's in everyone's interests to work together during these times. We cannot be the only entity talking to them [the lenders] about these things given what is going on globally."

Asked when talks would likely conclude, Mr Wells replied: "I would certainly anticipate it would be within the next three to four weeks because these talks have been going on since June. We certainly hope we are getting down to the short strokes. We anticipated it would be resolved some time ago.

"LPIA has a sterling reputation for being an extremely well-run operation. This is more than a glitch; it's a pandemic that no one could have anticipated. It will get resolved. The situation is being well-managed, and at the end of the day it is being supported by the Government of The Bahamas. It may require negotiation, and we will have to be nimble on our feet, but it is being well managed."

One source close to the bondholders, speaking on condition of anonymity, said the situation would be "a bit more problematic" if tourism and aviation failed to rebound by the end of December. They added: "It's an uncomfortable situation for the Government with NAD potentially defaulting. The Government needs credibility, and everyone is worried about its ability to fund its own liabilities.

Dionisio D'Aguilar, minister of tourism and aviation, declined to comment on the NAD situation and referred Tribune Business to Mr Wells. "That's at a very sensitive stage now," he said. "I know what I know. The conversations are ongoing.

"You have a $500m debt and no customers, so something's got to give. The debt was being served by user fees. I don't think it's any shocking news."

NAD's operating partner is the Canadian-headquartered Vantage Airport Group. It recorded its first-ever annual profit at $7.755m in the year to end-June 2019.