GMR Hyderabad Airport (GMRHA) printed USD350million 10-year bondovernight at 4.25% ytm. The 2027s are trading at 100.25offer (4.2% ytm,G+190bp) as we write. They look expensive to us, however, given lack ofvisible negative catalysts in an overall strong market, we initiate with a Hold.We caveat upfront that we haven’t yet spoken to the management, which hasbeen on the roadshow, so our views are based purely on secondary sources ofinformation.。    Key downside risks。    To start, we are a bit surprised that a small company like this got aBa1/BB+/BB+ rating, and even a positive outlook from S&P. Annualizedrevenues and EBITDA in the latest quarter were USD224million and USD142million respectively, with a total asset base of just USD564million and bookequity of USD62million. On top, the company has a chequered regulatoryhistory, especially in FY15when some of the fees were reduced to zero andEBITDA was a mere USD40million. Though the fees were restored in Nov’15,it seems the Air Passengers Association has challenged the order. Plus, thereis some uncertainty surrounding the tariff for ongoing 5-year control period(FY’17-21) and the ruling from AERA is expected on this in 4QFY18. Net net,we won’t completely rule out negative headlines coming back on the tarifffront. Separately, while the starting leverage is at 2.7x (gross), GMRHA isabout to start the next phase of expansion for a capex of INR20-25billion(~USD300-400million) over the next 3-4years. We also highlight that a newinternational airport has been announced for the State of Andhra Pradesh(395kms from GMRHA) and two regional airports are being contemplatedwithin 150kms radius of GMRHA, and there is indirectly a high dependence onthe Middle East which accounts for majority of the international passengers.。    Upside risks。    On the positive side, we acknowledge that the underlying asset is solid with along concession period of 60years, witnessing strong passenger growth andjust 4% revenue sharing with the government. It’s cash flows are welldiversified (between aero vs. non-aero revenues) and ring fenced, with minorityshareholders in the form of the State of Telangana and AAI, which reduces theimpact from parent, GMR Infrastructure’s weaker credit profile. On top, thebonds are secured, albeit it’s not clear if bondholders will be defined as“Lenders” under the Concession Agreement, and we understand that the FXrisk will be hedged.。

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