At first glance, Sydney Airport Limited (ASX:SYD) would be pretty high on a list of companies facing substantial risks in a rising interest rate environment:
- It has $8 billion in net debt (6.7x EBITDA – most companies are limited to 3x-3.5x)
- Higher interest rates usually mean tighter capital markets (making it harder to refinance, and Sydney Airport has shown no intention of paying down debt)
- 40% of that debt is in USD (risky if the US Dollar strengthens, and US interest rates are rising)
- It looks fully priced (although Sydney Airport is priced on the dividend yield, as rates rise you can still expect SYD shares to fall)
There's a double or triple whammy there for shareholders in that higher interest rates will reduce earnings, make it more difficult to refinance debt and the US Dollar will likely strengthen as US rates rise (making AUD repayments worth less, and boosting the interest expense). Even if none of that has an impact, Sydney Airport shares may fall anyway if investors sell out of them to buy bonds or keep cash in the bank instead.
However, Sydney Airport has recently taken numerous actions to strengthen its credit position, most notably refinancing debt to push out the 'maturity' (repayment date) into the future. The average maturity is now in 2024, with only 18% of the company's debt coming due in the next 3 years.
While that reduces the risk of a repayment 'cliff' – for example if the company has to refinance a major facility but is unable to because of lower lender appetite – it doesn't change the risk of higher interest rates. This slide from the company's recent annual report suggests significant vulnerability to higher rates, because almost all of the facilities have a 'floating' rate, which means the rate moves in line with market rates:
Interest rates on some of Sydney Airport's debt are probably already climbing. I think it is basically a given that the company faces higher interest repayments in the future.
However, focusing on that alone also overlooks Sydney Airport's position as the predominant airport in Australia and a natural target for booming south-east Asian passenger numbers. This gives the company significant pricing power and it has a history of delivering growing earnings.
I think it is quite unlikely that Sydney Airport will face any major financial stress in the foreseeable future, but it is also unquestionable that the company carries a huge amount of debt. Higher interest rates will bite sooner or later, and in the event of unusual/unforeseen circumstances, high levels of debt are a significant added risk for shareholders.
