ANALYSIS: What a rating means for Ryanair

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It was only a matter of time before Ryanair, which has built its airline empire on low costs, would make a move for the capital markets to access some of the cheapest funding going these days.

In March, Standard & Poor’s granted the carrier a “BBB+” rating, which is three notches above junk, making it “the highest-rated airline in the world”, says Howard Millar, Ryanair’s finance chief and deputy chief executive.

He says the move will allow the budget carrier to “achieve lower cost financing”, ensuring the carrier has “the lowest costs and the lowest fares in Europe”.

Supporting the investment grade rating is the carrier’s return on capital, which has averaged roughly 13% during the past six years, S&P notes in its rating analysis.

Ryanair’s passenger numbers – which S&P believes will grow 2-3% this year and 1-2% in 2015 based on the carrier’s “increasing route offering and improving economic conditions” – also figure in the rating analysis.

The carrier’s “operating efficiency”, which is driven by a “keen focus on costs”, is another key ingredient supporting the BBB+ rating, says S&P. This allows the carrier to operate at “significantly lower cost per passenger and cost per available seat-mile than its peers”.

However, one aspect that did not go unnoticed was Ryanair’s “reputation of less-friendly customer service”.

S&P says this could “slow down passenger volume growth”, especially during good economic conditions when people are willing to spend more money on flights.

The ratings agency acknowledges Ryanair is “taking measures” to become a more customer-friendly service.

“We will continue to monitor how this will affect demand in the near future.”

While a corporate rating makes perfect sense for Ryanair, as it opens new doors in the world of financing, it was by no means an essential move.

As Europe’s largest carrier by passenger numbers, and a ferocious buyer of new aircraft, backed by a solid balance sheet, Ryanair, unlike many carriers, can call the shots in the aviation finance market.

When word gets out that Ryanair needs funding, financiers and the US Export-Import Bank come running with offers of support, even before the ink on a formal funding request can dry.

The opposite is true for many of Ryanair’s competitors – which find themselves, cap in hand, at the mercy of the banks and the export credit agencies, willing to accept whatever financing is dealt.

Ryanair issued a $194 million Ex-Im-backed pre-funded bond in September 2012, smashing all previous records with the lowest spread for such a financing at that time.

The bond priced at mid-swaps plus 65 basis points for a coupon of 1.741%. The transaction was “over three times oversubscribed”, says Citi, which along with BNP Paribas acted as bookrunners on the deal.

No doubt Ryanair could have happily carried on issuing similar financings, and possibly at even cheaper pricing in today’s ultra-competitive finance markets, but the carrier is looking to move into another space altogether.

Market sources suggest Ryanair is eager to tap the bond market without the help of an export credit agency – a move that is made easier with the help of a credit rating.

Ryanair is rumoured to be looking at a €500 million ($680 million) bond issue in early summer, before it starts taking delivery of its 175 new Boeing 737-800s in September.

However, the carrier will likely need an additional rating, from Fitch or Moody’s Investors Service, before raising capital in this manner, say sources.

Ryanair’s treasurer at the time, Jim Dempsey, admitted in January that Ryanair was looking at the enhanced equipment trust certificate (EETC) market, a popular capital-markets financing tool with US carriers, to fund its aircraft.

He said the carrier was “toying” with the idea, but noted a problem with these financings is that they are dependent on the US dollar.

“Our business is based in euros… so we would like to see the development of a euro-based EETC, or a local currency-based EETC, to eliminate the currency risk,” he said.

Dempsey acknowledged the carrier was interested in pursuing the capital markets “in the next couple of years” in order to take advantage of the “favourable” interest-rate environment.

However, with an interest rate hike almost certainly on the cards in the not-too-distant future, the carrier, with its firm focus on cost cutting, undoubtedly knew it was wise to get the credit rating under its belt sooner rather than later.