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Flughafen Zurich AG

Primary Credit Analyst:

Juliana C Gallo, London (44) 20-7176-3612; [email protected]

Secondary Contact:

Beata Sperling-Tyler, London (44) 20-7176-3687; [email protected]

Research Contributor:

Kritika Verma, Mumbai; [email protected]

Table Of Contents

Credit Highlights

Outlook

Our Base-Case Scenario

Company Description

Business Risk

Financial Risk

Liquidity

Other Credit Considerations

Government Influence

Issue Ratings - Subordination Risk Analysis

Reconciliation

Ratings Score Snapshot

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JULY 18, 2019 1

Table Of Contents (cont.)

Related Criteria

Related Research


Flughafen Zurich AG

Business Risk: STRONG

Vulnerable Excellent

Financial Risk: MODEST

Highly leveraged Minimal

aa+

aa-

Anchor Modifiers Group/Gov't

Issuer Credit Rating

AA-/Stable/--

Credit Highlights

Overview

Key Strengths Key Risks

Strong position as the operator of Switzerland's key airport. High customer concentration and reliance on one airline, Swiss

International Airlines AG.

Wealthy catchment area that faces only limited competition for originating and

departing traffic.

High share of transfer passengers, for which Flughafen Zurich

(FZAG) has significant competition.

Robust financial risk profile despite significant capex and dividends. Uncertainties related to future international acquisitions and

their implications for FZAG's credit profile.

Relatively supportive regulatory framework, although the proposed changes to

airport charges might signal toughening regulation.

Significant tariff reduction will challenge earnings.

We expect FZAG's aviation revenues to fall in 2020 and 2021. The Swiss Federal Council has decided not to adopt

some of the initial proposals by the regulator, the Federal Office of Civil Aviation (FOCA). The Federal Council's

decision not to adjust the calculation formula of the allowed return may result in much lower weighted average cost of

capital (WACC), with market participants expecting a reduction to about 3.5%-4.0% from 5.8%, although this is not yet

final. As a result, we are forecasting aviation revenues to drop by 20%-25% for Zurich Airport during 2020-2021. That

said, we expect FZAG's funds from operations (FFO) to debt to remain above 35%--commensurate with the

rating--albeit with less headroom for underperformance.


Chart 1

FZAG will launch its Swiss franc (CHF) 1.2 billion mixed-use real estate project, The Circle, in 2020, but the pre-let

environment remains somewhat challenging. With a current pre-letting rate of about 60%, the flow of bookings has

been slower than FZAG expected, particularly for office space. That said, the company still has a target letting rate of

75%-80% at launch. In our view, this project is strategically important to Zurich Airport and should contribute to real

estate revenue growth of about 7%-9% in its first year of operation.

There have been signs of slowdown in operating performance in 2019 compared to strong passenger growth in recent

years. Zurich Airport's passenger traffic increased by more than 5% per year in 2016-2018. In the first six months of

2019, passenger numbers increased by 2.4%, compared with the company's expectations of 3% for 2019. We

understand that the recent soft traffic performance might be related to capacity cuts of Vueling, Germania, and

EasyJet. This should continue into Q3 2019 due to softer macroeconomic prospects for the eurozone. That said, our

forecast indicates passenger growth of about 2% in 2019.

Retail activities have been challenging over the past quarters. This includes both landside and airside retail. These are

exposed to online shopping competition and softer passenger trends, respectively. In the first six months of 2019,

commercial turnover was relatively flat at 0.5%, with spend per departing passenger declining by 2.1%. In 2018, the

new Dufry duty free contract and traffic growth boosted commercial activity earnings, resulting in commercial

turnover growth 5.6% higher than in 2017. For 2019, we expect commercial activities to increase modestly, mostly in

line with passenger growth.


Flughafen Zurich AG

Outlook: Stable

The stable outlook on FZAG reflects our view that it will maintain its solid operating performance and manage its

capex program and future acquisitions while maintaining credit metrics commensurate with its current credit

quality. Specifically, we expect its adjusted FFO to debt will remain above 35% and its free operating cash flow

(FOCF) to debt will decline no further than 10% in the 2018-2020 period.

Downside scenario

We could lower the rating if business or financial performance deteriorates, specifically if FFO to debt falls below

35% or if FOCF to debt becomes negative. This could happen if tariff cuts are higher than we currently expect, or if

acquisitions or investments are higher than we assume in our base case. The latter would become likely if the

Circle project were to go over time or over budget. Geopolitical challenges and a consequent drop in traffic or

increase in country risk--related to international activities--might also impede operating performance and thus put

pressure on the rating, although we see the probability of these as low. A quick appreciation of the Swiss franc

versus the euro could also affect passenger sales and thus put pressure on the rating. Finally, all else being equal, a

one-notch downgrade of the Canton of Zurich may result in a similar action on FZAG.

Upside scenario

We see further upside as limited while the construction of the Circle is ongoing. For a one-notch upgrade to the

rating, we would need to revise upward the stand-alone credit profile (SACP) by at least two notches, all else being

equal. We see this as remote over the next two years.

Our Base-Case Scenario


Flughafen Zurich AG

Assumptions Key Metrics

In our base-case assumptions for 2019-2021, we

assume:

• Switzerland's real GDP increasing by 0.9% in 2019,

1.5% in 2020, and 1.4% in 2021.

• Consumer price index increasing by 0.6% in 2019,

0.9% in 2020, and 1.0% in 2021.

• Annual passenger volume growth for FZAG of

2.0%-3.0% in 2019-2021, based on a multiplier of

GDP growth and guidance from carriers.

• A strong relationship remains between GDP growth

rates and passenger numbers at the airport and their

retail activity.

• Flat aeronautical tariffs in 2019, followed by a

20%-25% drop in the final few months of 2020 and

full-year 2021, in line with a potential lower WACC

for the next regulatory period. Real estate revenue

growing only modestly until the opening of the

Circle in 2020.

• Heavy, partly debt-funded capex program of CHF1.2

billion for 2019-2021.

• Ordinary dividend of CHF100 million plus

extraordinary dividend of CHF100 million for 2019,

followed by a dividend policy of 35%-45% of net

profit for 2020-2021.

• We are also factoring into our forecast period

potential acquisitions of about CHF150 million per

year in 2019-2021.

2018A 2019E 2020E 2021E

EBITDA margin (%) 56.5 55-57 55-57 51-53

FFO to debt (%) 72.6 56-58 47-50 41-43

Debt to EBITDA (x) 1.2 1.0-1.5 1.5-2.0 2.0-2.5

All data S&P Global Ratings-adjusted. A--Actual.

E--Estimate. FFO--Funds from operations.

Base-case projections

FZAG's large capex and potential future acquisitions, combined with lower aviation charges, will result in downward

trending credit metrics. However, we forecast these metrics will remain above our 'AA-' rating guidelines of adjusted

FFO to debt exceeding 35%.

Although FZAG's S&P Global Ratings-adjusted debt should increase, its balance sheet should remain one of the

strongest among the European airports that we rate.We expect FZAG to generate strong cash flow, which should

enable it to continue to fund the vast majority of its capital spending--about CHF400 million- CHF420 million per year

in 2019 and 2020. That said, shareholder returns will total about CHF210 million in 2019, and we expect future

acquisitions of CHF150 million per year. This will consume cash, causing adjusted debt to rise to close to CHF1 billion

by 2020 from about CHF728.9 million in 2018.


Flughafen Zurich AG

Company Description

FZAG is the owner and operator of Zurich Airport, Switzerland's largest airport, with a license to operate the airport

until 2051. In 2018, the airport handled 31.1 million passengers and 493,222 tons of cargo, servicing 206 destinations

(141 European and 65 intercontinental destinations) in 68 countries. Aviation earnings contributed 60% of total FZAG

revenues.

In addition to aviation services, Zurich Airport is also involved in commercial, real estate, and service activities, which

are closed related to its aviation services. The nonaviation activities contribute about 40% of total FZAG revenues.

FZAG also manages eight airports in Latin America, mainly in Brazil, Chile, and Colombia. The company has also

developed projects in Asia. International business contributed CHF83 million of revenue in 2018.

FZAG derives its earnings from aviation and nonaviation activities. The company's total reported revenues and

adjusted EBITDA amounted to CHF1.152 million and CHF621.7 million, respectively, in 2018, with the vast majority

of the contributions from Zurich Airport.

Chart 2 Chart 3

FZAG is 33.3% owned by Canton of Zurich and 5.1% by the City of Zurich. The remaining shares are free float.

Business Risk: Strong

FZAG has a strong competitive position as the largest airport in Switzerland and a secondary hub in Europe.FZAG is

by far the largest airport in Switzerland. More than 31 million passengers used Zurich Airport in 2018, compared with

17.7 million in Geneva Airport and 6.4 million in EuroAirport Basel Mulhouse Freiburg, FZAG's most significant

domestic competitor. Unlike Zurich Airport, EuroAirport Basel Mulhouse Freiburg concentrates more on low-cost

airlines and does not serve as a hub.


Flughafen Zurich AG

On a European scale, we view Zurich Airport as a second-tier hub. Its wealthy catchment area contains about 8 million

inhabitants within two hours' drive. In our view, Zurich Airport is one of the most resilient airports to macroeconomic

shocks in Europe thanks to its stable and reliable catchment area. In comparison with major European airports, Zurich

Airport's growth was 4.8% above the average in 2018.

Chart 4

FZAG's passenger mix is favorable, but exposed to some airline concentration. In 2018, 72% of total travellers were

origin-destination (O&D) passengers--in other words, they either started or finished their journey in Zurich Airport. We

consider O&D journeys to be generally less susceptible to passenger choice and airline performance than transfer

traffic, with which it competes with Munich and Dusseldorf airports and, to a lesser extent, larger European hubs such

as Heathrow Airport, Charles de Gaulle, Amsterdam Schiphol, and Frankfurt. The airport is also one of the

international hubs for finance, attracting a significant number of higher-yielding business travelers, who account for

31% of FZAG's total passengers. These customers demand direct flights to and from Zurich, which in our view makes

it unlikely that the Zurich's position as a regional hub will change.


Flughafen Zurich AG

Chart 5

That said, Zurich airport has a high airline concentration risk, in our view. FZAG is exposed to Lufthansa Group and

the Star Alliance; if these airlines' competitive positions weaken, it could affect traffic at Zurich Airport. Star Alliance

contributed about 65.3% of FZAG's traffic in 2018, with Swiss International Airlines accounting for 52.9%. These are

among the highest concentrations in Europe. However, we note that second-tier European hubs such as Copenhagen

and Rome have a track record of attracting new airlines when route cuts have freed up significant capacity in the past.

Zurich Airport was minimally affected by the collapse of its second-largest carrier, Air Berlin, in 2017. Swiss

International Airlines and low-cost carriers, namely EasyJet and Vueling, quickly picked up this traffic.


Flughafen Zurich AG

Chart 6

Tough measures from the regulator reduces the predictability of the regulatory framework.Historically, we have viewed

the regulatory framework to which Zurich Airport is exposed as supportive and predictable. This was particularly

evident during the first regulatory period (2016-2020), although stability has been challenged in the recent past. Zurich

is subject to a framework of economic regulation under a "hybrid till" model, whereby a portion of the exceeding

profits from commercial activities on airside and car parking cross-subsidize the aviation business, leading to lower

charges for airlines. This model is between single-till (Heathrow, Gatwick, and Avinor), where the regulator considers

all activities simultaneously when setting acceptable returns, and dual-till (Schiphol, Dublin, and Aena), where the

regulated Aviation business must stand alone and earn its cost of capital entirely on its own, with retail and real estate

remaining out of the regulated scope altogether. Zurich Airport's charges are subject to a regulatory review by FOCA.

In recent years, strong traffic growth and good cost management beating the 5.8%-5.9% regulated WACC have fueled

an aviation return on capital employed of 8.8% in 2018.

At present, 30% of the exceeding profits from commercial activities on airside and car parking activities

cross-subsidize the aviation business. The regulator surprised market participants with a proposal to increase the

subsidy from retail to 50% from 30%. It also proposed an increase in subsidy from car parking to 75% from 30% for the

next regulatory period (2020-2024). This proposal, in combination with the reset of overearnings, would have implied a

25% reduction in aviation revenues. The Swiss Federal Council revised the regulator's proposal and communicated the

final decision of the Ordinance on Airport Charges on June 14, 2019. The Swiss Federal Council decided not to

implement the increase of the transfer payment from airside shopping and car park cross-subsidization from the


Flughafen Zurich AG

nonaviation segment, meaning that the 30% transfer remains the same. That said, the Federal Council decided not to

adjust the calculation formula of the allowed return (weighted average cost of capital; WACC). This might result in

much lower WACC, with market participants expecting about 3.5%-4%, but it has not yet been set. As a result, a

significant tariff cut is inevitable. We are modeling aviation revenues to drop by 20%-25% for Zurich Airport during

2020-2021.

This will meaningfully harm the company's credit metrics and should reduce its current rating headroom. That said, we

still expect financial ratios to be commensurate with the current rating.

Peer comparisonTable 1

Flughafen Zurich AG - Peer Comparison

Industry Sector: Infrastructure

--Fiscal year ended Dec. 31, 2018--

--Fiscal year ended March

31, 2018--

Flughafen Zurich

AG

Aeroporti di Roma

SpA daa PLC Avinor AS Gatwick Funding Ltd.

(Mil. CHF)

Revenue 1,100.6 1,053.9 1,010.4 1,331.1 1,022.7

EBITDA 621.7 640.2 349.0 460.4 553.5

FFO 529.1 521.3 311.9 365.8 418.2

Interest expense 13.2 49.4 34.7 86.1 145.3

Cash interest paid 15.3 50.8 33.2 81.4 129.3

Cash flow from operations 535.3 510.8 305.7 393.1 360.5

Capital expenditure 383.6 206.6 151.7 286.5 297.0

Free operating cash flow 151.7 304.1 154.0 106.6 63.6

Discretionary cash flow (49.0) 23.7 110.4 78.2 (797.0)

Cash and short-term investments 545.0 369.7 406.9 197.5 23.4

Debt 728.9 1,271.9 558.0 2,729.6 3,412.3

Equity 2,414.9 1,247.0 1,575.4 1,650.9 255.6

Adjusted ratios

EBITDA margin (%) 56.5 60.7 34.5 34.6 54.1

Return on capital (%) 12.1 20.5 9.9 5.1 9.2

EBITDA interest coverage (x) 47.1 13.0 10.1 5.3 3.8

FFO cash interest coverage (x) 35.5 11.3 10.4 5.5 4.2

Debt/EBITDA (x) 1.2 2.0 1.6 5.9 6.2

FFO/debt (%) 72.6 41.0 55.9 13.4 12.3

Cash flow from operations/debt

(%)

73.4 40.2 54.8 14.4 10.6

Free operating cash flow/debt

(%)

20.8 23.9 27.6 3.9 1.9

Discretionary cash flow/debt (%) (6.7) 1.9 19.8 2.9 (23.4)

CHF--Swiss franc. FFO--Funds from operations.

Among the airports we rate, we see Gatwick, Avinor, Dublin Airport, and Aeroporti di Roma (AdR) as the closest peers


Flughafen Zurich AG

to Zurich Airport. Compared to most of its peers with strong business profiles, FZAG benefits from its nature as a hub,

very wealthy catchment area, and good track record in the recession. This is offset by its relatively smaller size,

concentration around a single airline, and exposure to a single asset, Zurich Airport.

Compared to Flughafen Zurich, Gatwick serves significantly more passengers (46.1 million versus 31.1 million) and has

a more diversified airline mix; easyJet and British Airways together account for 57% of its flights, and are not part of

the same air alliance, whereas Swiss International Airlines generates 53% traffic in Zurich. However, Zurich has a

higher share of long-haul traffic (25% passengers versus 19%).

We see AdR's competitive position as stronger than Zurich's, reflecting its much larger size in terms of passengers

handled, beneficial location, status as a major tourist destination, relatively diverse asset base, and higher profitability.

State-owned Avinor operates nearly all airports in Norway and is therefore much larger than Zurich in terms of

passenger numbers, reaching 54.4 million in 2018. Oslo airport alone generates about 28.5 million passengers, roughly

in line with Zurich. Although Avinor's catchment is comparable to Zurich's in terms of GDP per capita, its overall

profitability is lower than FZAG's due to the presence of smaller, loss-making airports in the portfolio. We also

consider SAS (B/Stable/--) and Norwegian (not rated), Avinor's main carriers, to be weaker clients than Lufthansa and

Swiss International Airlines.

daa is similar to Zurich in terms of size, but it is exposed to the much smaller and less wealthy catchment area of

Ireland. Of FZAG's peers, daa has the second-lowest EBITDA per passenger after Avinor.

Table 2

Selection Of EMEA Airports With Strong Business Risk Profiles

Aeroporti di

Roma SpA

Flughafen Zurich

AG

Gatwick Funding

Ltd. daa PLC Avinor AS

Country of location Italy Switzerland United Kingdom Ireland Norway

Business risk profile Strong Strong Strong Strong Strong

Financial risk profile Modest Modest Significant Modest Intermediate

Ownership or

concession maturity

2044 2051 Ownership Ownership Ownership

Asset type O&D O&D O&D O&D Network

Runways 5 3 1 2 45

Regulator ENAC FOCA CAA CAR Ministry of Transport and

Communications

Group passengers (mil.) 48.80 38.40 46.45 58.20 54.39

Passengers (mil.) Fiumicino Zurich Gatwick Dublin Oslo

43.00 31.11 46.45 31.50 28.50

% O&D 75 72 N.A. 84 74

% long haul passengers 29 25 19 15 2

% business passengers 20 31 17 20 N.A.

Top three airlines Alitalia (34%) Swiss International

(53%)

EasyJet (43%) Ryanair (42%) Norwegian (38%)

Ryainair (17%) Edelweiss Air (8%) British Airways

(18%)

Aer Lingus

(33%)

SAS (38%)

Vueling (7%) EasyJet (3%) Norwegian (11%) - Widerøe (10%)


Flughafen Zurich AG

Table 2

Selection Of EMEA Airports With Strong Business Risk Profiles (cont.)

Aeroporti di

Roma SpA

Flughafen Zurich

AG

Gatwick Funding

Ltd. daa PLC Avinor AS

No. of airlines 109 77 51 56 46

Destinations >230 206 228 >200 125

No. ATMs (thousand) 307.74 278.46 285.95 226.18 249.29

Seat load factor 0.78 0.78 0.86 0.83 N.A.

Figures are S&P Global Ratings adjusted. Fiscal year ended Dec. 31, 2018, except Gatwick Funding Ltd. (year ended March 31, 2019). ATM--Air

traffic movement. EMEA--Europe, Middle East, and Africa. N.A.--Not available. O&D--Origin and destination. Source: S&P Global Ratings.

Financial Risk: Modest

Although credit metrics are still commensurate with FZAG's financial risk profile after applying the tariff cut, rating

headroom may reduce further if the company issues additional debt to fund capex, dividends, and potential mergers

and acquisitions. Although FZAG's real estate (mainly the Circle) and aeronautical capex program could bring some

earnings upside in the medium to long term, they are also going to increase leverage on the company's balance sheet

in the short to medium term, particularly as the company is committed to maintaining its 40% payout ratio and it has

committed an additional dividend of CHF100 million per year by 2020. The high level of capex (approximately

CHF873 million) and the Circle capex (approximately CHF285 million) for 2019-2021 makes FZAG more susceptible

to traffic shocks and credit market deterioration, which could make the rating more volatile.

Further international acquisitions in 2019-2020 are still likely. Although these acquisitions could provide additional

growth and regional diversification, they expose FZAG to higher country and currency risks. We expect the focus of

the FZAG will be on the successful delivery of the Circle project and other growth capex projects in Zurich Airport's

terminals.

We expect FZAG's FOCF and balance sheet should enable the company to maintain relatively solid operational and

financial performance, despite the tariff cut; marked increase in capex; and some potential additional international

acquisitions. We expect FFO to debt will remain above 35% in 2019-2021 but FOCF will decline until the completion

of the Circle project.

Financial summaryTable 3

Flughafen Zurich AG - Yearly Data


--Fiscal year ended Dec. 31--

2018 2017 2016 2015 2014

Rating history AA-/Stable/-- A+/Positive/-- A+/Stable/-- A+/Stable/-- A/Stable/--

(Mil. CHF)

Revenues 1,100.6 1,022.4 1,001.1 978.2 953.3

EBITDA 621.7 572.2 561.4 541.2 518.5

FFO 529.1 490.1 467.6 453.7 432.6

Interest expense 13.2 15.3 18.7 20.2 26.1


Flughafen Zurich AG

Table 3

Flughafen Zurich AG - Yearly Data (cont.)


--Fiscal year ended Dec. 31--

2018 2017 2016 2015 2014

Cash interest paid 15.3 20.2 19.2 20.7 35.5

Cash flow from operations 535.3 523.4 468.2 456.4 437.2

Capital expenditures 383.6 274.7 186.1 224.2 249.0

Free operating cash flow 151.7 248.7 282.0 232.1 188.2

Discretionary cash flow (49.0) 51.7 90.6 148.6 126.3

Cash and short-term investments 545.0 544.6 497.8 422.0 414.5

Gross available cash 510.8 524.4 389.2 322.8 182.0

Debt 728.9 654.3 709.3 790.2 996.6

Equity 2,414.9 2,401.1 2,260.1 2,212.4 2,140.5

Adjusted ratios

EBITDA margin (%) 56.5 56.0 56.1 55.3 54.4

Return on capital (%) 12.1 10.8 10.5 10.0 9.1

EBITDA interest coverage (x) 47.1 37.5 30.1 26.8 19.8

FFO cash interest coverage (x) 35.5 25.3 25.3 23.0 13.2

Debt/EBITDA (x) 1.2 1.1 1.3 1.5 1.9

FFO/debt (%) 72.6 74.9 65.9 57.4 43.4

Cash flow from operations/debt (%) 73.4 80.0 66.0 57.8 43.9

Free operating cash flow/debt (%) 20.8 38.0 39.8 29.4 18.9

Discretionary cash flow/debt (%) (6.7) 7.9 12.8 18.8 12.7

FFO--Funds from operations.

Liquidity: Strong

We consider FZAG's liquidity to be strong, mainly deriving from ample liquidity sources on hand (such as the undrawn

long-term revolving credit facility and available cash holdings), its ability to generate solid FOCF, and its demonstrated

access to debt markets. These sources compare favorably with liquidity uses, given the particular high capex. We

expect liquidity sources will cover uses by at least 1.5x over the next 12 months and by more than 1.0x over the

following 12 months.


Flughafen Zurich AG

Principal Liquidity Sources Principal Liquidity Uses

We estimate liquidity sources for the 12 months from

Dec. 31, 2018 as follows:

• Unrestricted cash and fixed-term deposits of

CHF510 million. We exclude the cash held in the

Airport of Zurich Noise Fund.

• Availability of CHF239 million under a committed

credit line due over the 12 months.

• Cash FFO of CHF530 million-CHF570 million under

our base-case scenario.

We estimate major liquidity uses for the 12 months

from Dec. 31, 2018 to comprise:

• No material debt maturities (only about CHF1.8

million).

• Capex of about CHF430 million for the upgrade and

expansion of the airport's infrastructure and the

Circle. In our liquidity calculation for FZAG, we do

not include insurer Swiss Life's capex commitment

to the Circle project because we consider that the

investment-grade rated Swiss Life Group AG

(A+/Stable/--) has sufficient liquidity sources to

fund its commitments.

• Dividends of about CHF210 million (including the

additional dividend of about CHF98 million).

Debt maturities

• 2019: None

• 2020: CHF300,000

• 2021: None

• 2022 onward: CHF750,000

• Total: CHF1,050,000

Other Credit Considerations

To incorporate the strengths and the resilience of FZAG's financial risk profile, we raise the company's SACP by one

notch to 'a+' from 'a'.

Government Influence

We add one notch of uplift to FZAG's SACP to reflect what we see as a moderate likelihood of timely and sufficient

extraordinary support by the Canton of Zurich, FZAG's largest single shareholder.

We base our view of a moderate likelihood of government support on our assessment of FZAG's:

• Strong link with the Canton of Zurich. The canton remains a significant shareholder, despite its relatively low stake

(33.3% plus one share). The obligation of the canton to hold more than one-third of FZAG's shares, and hence to

maintain its influence over FZAG as a shareholder, is stated in the Airport Act. We also base our view of the strong


Flughafen Zurich AG

link on signs that the government is committed to providing timely and sufficient support to the airport in the event

of financial distress.

• Role being of limited importance for the canton. In our opinion, the canton appears to focus more on maintaining

operations at the airport than on taking measures to maintain or improve FZAG's creditworthiness.

Issue Ratings - Subordination Risk Analysis

Capital structure

FZAG's capital structure primarily comprises approximately CHF1 billion senior unsecured debentures plus unsecured

bank loans issued by the Chilean subsidiary, A-port S.A., and Florianopolis airport in Brazil. FZAG's total gross debt,

excluding lease liabilities, stood at CHF1.099 billion as of December 2018.

Analytical conclusions

We rate the senior unsecured debt issued by FZAG at 'AA-', the same as the issuer credit rating, reflecting the

company's modest financial risk profile. We consider that FZAG has low enough leverage to limit the possibility of any

lenders being significantly disadvantaged relative to other lenders.

Reconciliation

Table 4

Reconciliation Of Flughafen Zurich AG Reported Amounts With S&P Global Ratings' Adjusted Amounts

--Fiscal year ended Dec. 31, 2018--

Flughafen Zurich AG reported amounts (mil. CHF)

Debt

Shareholders'

equity Revenue EBITDA

Operating

income

Interest

expense

S&P Global

Ratings'

adjusted

EBITDA

Cash flow

from

operations

1,128.1 2,414.8 1,152.9 571.0 326.5 12.5 621.7 538.4

S&P Global Ratings' adjustments

Cash taxes paid -- -- -- -- -- -- (77.2) --

Cash taxes paid - other -- -- -- -- -- -- -- --

Cash interest paid -- -- -- -- -- -- (15.3) --

Postretirement benefit

obligations/deferred

compensation

111.6 -- -- 0.2 0.2 0.7 -- --

Accessible cash and liquid

investments

(510.8) -- -- -- -- -- -- --

Share-based

compensation expense

-- -- -- 1.2 -- -- -- --

Nonoperating income

(expense)

-- -- -- -- (1.1) -- -- --

Reclassification of interest

and dividend cash flows

-- -- -- -- -- -- -- (12.4)

Noncontrolling

interest/minority interest

-- 0.0 -- -- -- -- -- --


Flughafen Zurich AG

Table 4

Reconciliation Of Flughafen Zurich AG Reported Amounts With S&P Global Ratings' AdjustedAmounts (cont.)

Revenue - other -- -- (52.3) (52.3) (52.3) -- -- --

Cost of goods sold - other

nonoperating

nonrecurring items

-- -- -- 40.7 40.7 -- -- --

EBITDA - other -- -- -- 60.9 60.9 -- -- --

OCF - other -- -- -- -- -- -- -- 9.3

Total adjustments (399.2) 0.0 (52.3) 50.7 48.5 0.7 (92.6) (3.1)

S&P Global Ratings' adjusted amounts

Debt Equity Revenues EBITDA EBIT

Interest

expense

Funds from

operations

Cash flow

from

operations

728.9 2,414.9 1,100.6 621.7 375.0 13.2 529.1 535.3

CHF--Swiss franc.

• FZAG reports according to International Financial Reporting Standards. The company is listed on the Swiss stock

exchange in Zurich and reports its results semiannually.

• We adjust FZAG's reported figures (see table 2) by deducting noise-related charges from revenues, EBITDA, and

cash flow using the disclosures provided in the company's annual report. Although FZAG deducted noise charges

from its 2018 figures, and therefore there is no revenue from the passenger-related noise charge, FZAG continues to

levy aircraft-related noise charges and we deconsolidate this from the revenue and resulting operating profit and

loss from the EBITDA of about CHF14 million.

• We adjust reported debt by adding CHF111.6 million of pension deficit. Under IFRIC 12, we adjust revenues and

cost of goods sold with income (CHF40.7 million) and expense (CHF40.7 million) from construction projects as part

of concession agreements.

• In addition, we net CHF510.8 million surplus cash against FZAG's debt, which excludes CHF34.2 million of cash

and cash equivalents held at the Airport of Zurich Noise Fund.

Ratings Score Snapshot

Issuer Credit Rating

AA-/Stable/--

Business risk: Strong

• Country risk: Very low

• Industry risk: Low

• Competitive position: Strong

Financial risk: Modest

• Cash flow/Leverage: Modest

Anchor: a


Flughafen Zurich AG

Modifiers

• Diversification/Portfolio effect: Neutral (no impact)

• Capital structure: Neutral (no impact)

• Financial policy: Neutral (no impact)

• Liquidity: Strong (no impact)

• Management and governance: Satisfactory (no impact)

• Comparable rating analysis: Positive (+1 notch)

Stand-alone credit profile : a+

• Likelihood of government support: Moderate (+1 notch from SACP)

Related Criteria

• Criteria - Corporates - General: Reflecting Subordination Risk In Corporate Issue Ratings, March 28, 2018

• General Criteria: Rating Government-Related Entities: Methodology And Assumptions, March 25, 2015

• Criteria - Corporates - General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers,

Dec. 16, 2014

• General Criteria: Group Rating Methodology, Nov. 19, 2013

• General Criteria: Methodology: Industry Risk, Nov. 19, 2013

• Criteria - Corporates - Industrials: Key Credit Factors For The Transportation Infrastructure Industry, Nov. 19, 2013

• Criteria - Corporates - General: Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013

• Criteria - Corporates - General: Corporate Methodology, Nov. 19, 2013

• General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013

• General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers,

Nov. 13, 2012

• General Criteria: Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010

• General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009

Related Research

• Proposed Changes To Airport Charges For Flughafen Zurich AG Might Signal Toughening Regulation, Nov. 29,

2018


Flughafen Zurich AG

Business And Financial Risk Matrix

Business Risk Profile

Financial Risk Profile

Minimal Modest Intermediate Significant Aggressive Highly leveraged

Excellent aaa/aa+ aa a+/a a- bbb bbb-/bb+

Strong aa/aa- a+/a a-/bbb+ bbb bb+ bb

Satisfactory a/a- bbb+ bbb/bbb- bbb-/bb+ bb b+

Fair bbb/bbb- bbb- bb+ bb bb- b

Weak bb+ bb+ bb bb- b+ b/b-

Vulnerable bb- bb- bb-/b+ b+ b b-

Ratings Detail (As Of July 18, 2019)*

Flughafen Zurich AG

Issuer Credit Rating AA-/Stable/--

Senior Unsecured AA-

Issuer Credit Ratings History

30-Apr-2018 AA-/Stable/--

21-Apr-2017 A+/Positive/--

21-Apr-2015 A+/Stable/--

*Unless otherwise noted, all ratings in this report are global scale ratings. S&P Global Ratings’ credit ratings on the global scale are comparable

across countries. S&P Global Ratings’ credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and

debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees.


Flughafen Zurich AG


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