This week we review a very high yielding Yankee (U.S. dollar) bond from a very profitable, monopolistic company located in a country that appears to be as much "out of favor" with as many investors as it is politically with much of the rest of the world. However, this alone has not prevented U.S. in the past from finding gems for fixed income investors in places where few seem to be daring or brave enough to tread. Always mindful of our reputation of having had "no bond defaults," we found strong reasons to believe that this bond will not only uphold this repute, but that the high cash flow and over 11% yields of these 88 month Aeropuertos Argentina 2000 bonds, in U.S. dollars and B1/B rated, more than justify its slightly longer maturity date and will significantly enhance our Foreign and Global Fixed Income Portfolio.
Aeropuertos Argentina 2000
In 1998, the National Government of Argentina tendered for privatization, 33 airports in Argentina and was awarded to the company Aeropuertos Argentina 2000. Various conflicts led the National Government and Aeropuertos to renegotiate the concession contract on several occasions, which was finally resolved in 2006 with a new contract whereby Aeropuertos agreed to pay 15% of its income rather than abide by the former contract signed in 1998. Aeropuertos has pledged to invest 2 billion pesos, and the government extended the concession until 2028. Aeropuertos Argentina 2000 has operated 33 airports in Argentina since 1999, including Buenos Aires' Ezeiza and Aeroparque airports, as well as San Rafael, Malargüe, San Juan, San Luis, Bariloche, Esquel, Viedma, Puerto Madryn, Comodoro Rivadavia, Río Gallegos and Río Grande airports. Internationally, it has a 30-year concession to manage and develop Carrasco International Airport, Montevideo, Uruguay, as part of Puerta del Sur consortium, 30-year concession to manage Zvarnots Airport, Yerevan, Armenia and 15-year concession on Simon Bolivar Airport, Guayquil, Ecuador.
The mission embraced by Aeropuertos Argentina 2000 is to contribute to the social, economic, and cultural development of the country, by driving and fostering the national airport industry and its growth. Consequently, the Company has embarked in a process aimed at modernizing, converting, and expanding the existing airport infrastructure in an effort to achieve the ultimate goal of connecting the largest number of cities through an efficient airport network.
After digging deeper into the details of Aeropuertos Argentina 2000, we found the company to be very profitable and enviably positioned as Argentina's primary airport manager that handles 90 percent of Argentina's air traffic. Passengers traffic grew by 8.9% in 2012 to more than 20 million, and achieved the highest figures recorded so far by the company. Over the last five years, relative to the Argentine peso the U.S. dollar has appreciated about 9.4% per year. While this may appear to temper the growth evidenced in its year over year revenue numbers which is reported in pesos, which has ranged between 9.8% and 45.7% and has averaged over 22% a year for the last five years, even allowing for a large decline in the year 2011 we found its average annual growth in profits, at over 30%, to be astounding. Overall, the growth in profit from 65.7 million pesos at the end of 2007 (equivalent to about $20.88 million U.S. dollar at that time) to profits of 249.7 million pesos at the end of 2012 (equivalent to about $50.75 million U.S. dollars) might go a long ways in explaining why a regional credit rating of "arA" would be attributed Aeropuertos Argentina 2000, and we think this issue will make a sound addition to our client's fixed income portfolios.
We like companies that are profitable
Based on its 2012 annual report (ending Dec. 2012), over the last 3 years, Aeropuertos Argentina 2000 showed excellent gains in revenues, and has good operating and net income.
In millions of ARS pesos. Currently one ARS peso = about $0.182 in U.S. dollars.
1Q (only) 2013
Interest Coverage Ratios
Aeropuertos total debt at the end of the Q1 2013 appears to be about 2,444 million pesos ($444.4 million). Finance costs for this same period was about 43.3 million pesos ($7.8 million), and the operating income of 221.2 million pesos ($40.2 million) appears to provide a very healthy 5x's coverage for its debt expenses.
We like companies with lower debt to cash ratio
Cash and cash equivalents at the end of Q1 2013 decreased to about 84.2 million pesos, or about $15.3 million in U.S. dollars, largely due to cash flows used in its investing activities. Given its strong revenues and healthy cash flow (EBITDA), we see the higher debt to cash ratio as less concerning than in other situations that lack in steadily increasing revenues and sound cash flow.
We like companies that have sound balance sheets
Considering that all the financials of Aeropuertos are reported in Argentine pesos, which have devalued significantly over the last ten years, its equity value becomes much more difficult to assess. However, we think the government's concession agreement, good through 2028, represents a very significant value that is difficult to price, as its monopolistic positioning appears to provide Aeropuertos with nearly unlimited pricing power for its vital infrastructure services should the company need to increase revenues and cash flows to service its debt.
We like higher yields
The proceeds of this $300 million debt note (in U.S. dollars), issued in January of 2012, were used principally for the construction of needed infrastructure at the company's airports. Couponed at 10.75%, these notes pay interest and return some principle (sink) quarterly, and at the current discounted percentage of about 98.5 it not only provides remarkably high cash flow, but its average yield to maturity (in a little over 7 years) is over 11.2% !
The default risk is Aeropuertos Argentina 2000's ability to perform. Considering its historical and recent performance, and the excellent cash flow that is projected to service its interest bearing debt, as outlined above, it is our opinion that the default risk for this short to medium term bond is quite minimal relative to its remarkable return potential.
The hardest risk by far for U.S. to identify is the geopolitical risk. In spite of investor concerns over nationalization of YPF last year and a widespread dislike for the political direction many think that Argentina is headed towards, we find it increasingly difficult to understand many of the political changes within even in our own country, and sometimes find it hard to fathom the direction that the U.S. government appears to be headed towards. Therefore, speculation towards any new governmental intervention into an otherwise profitable enterprise such as Argentina Aeropuertos might seem rather pretentious. With that said, it is our opinion that diversification into many other countries, locations, and industries often serves to reduce overall portfolio risk. Our strategy is, as with other Yankee bonds, to focus on unique or required (and in this case monopolistic) services that can be seen as adding economic prosperity to the society it's associated with. Considering that safe and reliable airport services are vital to any country economic growth and development, we view Aeropuertos Argentina 2000's airport management services as an essential part of the Argentinean society.
We believe that these Aeropuertos bonds have similar risks and maturities to other high yielding Yankees bonds from Latin America such as Transportadora de Gas del Sur (TGS) 11% bonds, Argentina Government 8% bonds, Venezuela's state-owned oil company (PDVSA) 11.4% bonds, which are selected from some of our previous reviews.
Summary and Conclusion
After considering the sound and profitable fundamentals of Aeropuertos Argentina 2000, we see this company as a key player that has no equal within the Argentine economy. It has excellent revenues and cash flow, good profit margins, and several years of solid bottom line growth. Therefore, we think these medium term Aeropuertos Argentina 2000 Yankee bonds offer an extremely high yield relative to the financial risks that we can identify, and we see them as a very strong addition to our Latin America-South American portfolio.
Issuer: Aeropuertos Argentina 2000
Yield to Maturity: ~11.22 %
Disclosure: Durig Capital and certain clients may have positions in Aeropuertos Argentina 2000 bonds. I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Disclaimer: Please note that all yield and price indications are shown from the time of our research. Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. As a result of our institutional association, we frequently obtain better yield/price executions for our clients than is initially indicated in our reports. We welcome inquiries from other advisors that may also be interested in our work and the possibilities of achieving higher yields for retail clients.