S&P - Public Finance Criteria (2007). - The Global Clearinghouse

Airport Revenue Bondsports can be viewed as residual-like enterprises withno outflows of cash to governments or investors.In most instances an airline’s decision about whichairports to serve is based more on fare levels, loadfactors, and overall yields they expect in that marketrelative to other markets rather than airport charges.Collectively, airport costs typically constitute approximately7% of an airline’s total cost structure.The primary value of use agreements lies in establishingprocedures for operating the airport andmethods for charging rates and fees. Once thisframework is established, even if the use agreementsexpire, the same procedures of revenue collectionand management likely will be used to run the facilityand most airport operators retain the authority toimpose fees by local ordinance if necessary.While use agreements may provide an additionallevel of comfort if a particular airline ceases tooperate or alters its routing structure, the inherentdemand in the air traffic market remains the ultimatesecurity for the bondholder. A strong marketwill continue to attract carriers to serve thatdemand, while even the strictest use agreementwill not, in and of itself, ensure timely payment ofdebt service.Legal ProvisionsThe legal protections afforded bondholders by theindenture, resolution, or other supporting securitydocuments and the specific legal provisions pertainingto the business operations of the airport enterpriseare important components of the ratinganalysis and can bear a direct influence on the outcome.These provisions are evaluated in the contextof the credit strengths and weaknesses of the issuer.Legal provisions alone cannot prevent operatingand financial performance declines, interruptions ofdebt service payments, and the overall risk of creditdeterioration. It is the underlying credit quality ofan issuer that determines the degree of influencethat legal provisions will bear on a bond’s rating.For airport operators with a weak business andfinancial profile, more liberal legal provisions willoften result in assigning a lower rating than if theyhad been more stringent. For an issuer with astrong business and financial profile, the presenceof the very same more liberal legal provisions maynot have an influence on the rating at that point intime. If their credit quality starts to deteriorate,however, it is likely that more liberal legal provisionswill increase the potential for a downgrade.The rate covenant and how it is calculated isreviewed to see the degree to which cash flow fromoperations is needed to cover fixed charges. Mostsenior lien airport revenue bonds have a ratecovenant with a defined 1.25x minimum level of debtservice coverage. However, how that 1.25x minimumcoverage requirement is met can vary significantly.The strongest means of meeting this requirement isfrom operating cash flow with no addition to revenuesfrom other sources (such as a coverage accountas described below) or offsets to the debt servicerequirement from other revenue sources. Cash balances,other non-operating revenues (such as nonrecurringgrant revenues), and reserve funds aresometimes included in the definition of revenues orotherwise allowed in the use of calculating the ratecovenant, but these sources can be depleted and arenot reliable ongoing revenue streams.It is important that the definition of revenuesproviding coverage is limited to revenues fromoperations and that they are sufficient, 1x, to meetoperating and debt service requirements (“sufficiency”).Other sources of revenues, such as passengerfacility charges, are given greater credit in the calculationof debt service to the extent that they arepledged to bondholders.Many airport credits meet their rate covenantrequirement through the use of coverage accounts.While “rolling coverage” helps to keep user costslow, it is also important that the issuer limits theamount of reliance on coverage accounts anddemonstrates sufficiency. The actual or forecasteduse of these other sources to meet the debt servicerequirements could have negative ratings consequences.Other factors that weaken the ratecovenant are legal provisions that give the issuer theability to net debt service requirements. A frequentexample is the provision that allows for the nettingof passenger facility charges or grant revenues fromdebt service. This results in a more generous calculationof debt service coverage.Standard & Poor’s calculates debt service coverageand the issuer’s ability to meet the rate covenantfrom an indenture perspective and from an operatingcash flow perspective, which places greateremphasis on the ability to meet operating requirementsfrom operating cash flow alone. While generatingreal coverage of debt service obligations fromannual reoccurring cash flow provides for a strongerrate covenant, Standard & Poor’s does not make arating distinction based on the presence or absenceof this provision alone. More dominant operators oftransportation infrastructure with strong businesspositions and rate flexibility can have weaker ratecovenants that allow for coverage accounts with nocredit implications, all things being equal. Theopposite is true of weaker operators.The additional bonds test (ABT) usually is basedon the rate covenant multiple and the calculation ofthe ABT’s coverage requirements shares the inherentstrengths and weaknesses of the rate covenant.The ABT is perhaps viewed as the primary legalfactor in terms of affecting the rating as it outlineswww.standardandpoors.com133