Indian infrastructure group, GMR, plans to spin off its domestic airports business – which includes equity investments in Delhi and Hyderabad airports – into a separate standalone entity. Currently, GMR Indian airport business is rolled together with its investments in power and roads into the Bombay-listed GMR Infrastructure Limited.

Sidharath Kapur, CFO-airports at GMR Group, says that GMR is hoping to raise around $400 milllion from private equity by the end of the first quarter 2010 to take its airports business private to "grow and consolidate the business". The group is reportedly in talks with 3i's Indian infrastructure fund and the Macquarie-SBI fund. The ultimate aim is to re-list the business, and its future plans may also include subsuming GMR International's stake in the Istanbul Sabiha Gockcen airport into the new entity.

A combined domestic and international airports business should provide synergies and flexibility, in terms of raising debt at the holdco level, to enable GMR to aggressively pursue its expansion into other airport projects across India and internationally.

GMR airport earnings have suffered from the global downturn in passenger traffic coupled with higher debt margins on its non-recourse rupee debt, so the group will benefit from escaping the short-termist approach of the listed markets.

Delhi Airport has been fairly resilient to passenger traffic downturn, with traffic reaching a plateau in 2007 at 23.3 million passengers and 23.2 million in 2008. It is now India's busiest airport, overtaking Mumbai. GMR owns 50.1% of the project company DIAL, alongside Fraport (10%), Malaysia Airports (10%), IDF (10%), and Airport Authority of India (26%). DIAL pays 45.99% of the revenue to AAI.

DIAL was able to increase its airport charges by 10% in February on the back of its investment in the airport, but analysts are concerned about rising fixed costs, despite on-schedule development of the 30 million-passengers-a-year T3 terminal which is due to be opened in March 2010.

Hyderabad Airport has been particularly badly hit because Hyderabad is a second-tier IT and outsourcing hub. The numbers domestic business travellers fell as the IT sector was hit hard by the global downturn which resulted in fewer domestic business travellers.

The project company, GHIAL, is owned by GMR (63%), Malaysia Airport (11%), AAI (13%) and the government of Andhra Pradesh (13%). GHIAL has applied to the new Airports Economic Regulatory Authority (AERA) for an increase in the per passenger user development fees. The project company is looking for an increase from Rs300 to Rs450 for domestic passengers and an increase from Rs1000 to Rs2800. The project is currently operating at a net loss, although still cash positive, after a fall in passenger numbers.

If the tariffs are not granted before July 2010 or there is not a pick up in passenger numbers, the project company has a contingency to defer capital repayments on its debt if the airport continues to run below passenger forecasts. The project company is currently operating with a cash flow of 1.2x debt service – below the base case DSCR of 1.25x – with 90% of its project debt disbursed.

The airport's financial model was predicated on an ADSCR of 1.5x and the airport has generated cashflows as high as 1.85x. According to P Sripathy, CEO of GHIAL, the dip in traffic means that breakeven for the project has been delayed by six years to 2020.

Financial close for the initial 17-year Rs17.6 billion ($400 million) project closed in August 2005, with an additional $162 million in debt raised in March 2009 as the masterplan was increased from 7 million to 12 million passengers per year. The additional debt amortises along the same repayment schedule and features a $125 million loan from Abu Dhabi Commercial Bank (ADCB).

The ADCB loan has a fixed all-in borrower cost of 7.675% over its tenor. The Indian bank facilities have a floating margin of 1.5% under the prime lending rate (PLR). At initial financial close this averaged out at a borrower cost of around 7.5%, however it leapt up after the banks exercised their reset option after three years on 1 September 2008 to push debt margins to around 10.5%. The base case financial model used interest rates of 11%, providing some headroom, but falling traffic numbers have impacted revenue.

In 2008, passenger numbers fell from 6.8 million in 2007 to 6.5 million. In the financial year to April 2009 passenger numbers were 7 million, 10% lower than the base case projection of 7.78 million. Fortunately, international travellers (which are worth around three times more than domestic passengers) and cargo movements have been largely unaffected by the downturn and have continued to grow year by year.

The first capital repayment on the bank debt is due 2 July 2010, with a gradual ramp up in payment – in July the first 4% is due. The project company has yet to definitively decide whether to ask banks to defer payments for a year and push the tenor to 18 years and is hoping for a bounce in traffic.
In the worst case scenario GHIAL may have to restructure its bank facilities and possibly inject more equity. "We do not expect a restructuring," says Kapur. "We should be back to profitability in January or March 2010."

GMR's airport business looks to have weathered the passenger downturn and also the peccadillos of the domestic bank market. To avoid the large step up in margins GHIAL has had to endure, Kapur says once Delhi's T3 is operational in March they will explore refinancing options before the current financing's reset option on 7 December 2010. DIAL is backed by 17-year Rs3,650 Crore local bank debt and a 13-year $350 million dollar debt that closed December 2007 on a 55/45 debt-equity split.

The Indian bank market has tightened further since GMR's two deals, moving from a three-year margin reset option as standard to just two years, further hindering leverage and long-term margin visibility for infrastructure deals. Highly levered infrastructure deals require certainty of margin over the life of the loan – international bank finance appears most apt to fill the requirement but the question is liquidity.