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

Transportationthe parameters under which future debt holdersmay claim on revenues on an equal basis as existingbondholders. Most ABTs in the airport sector allowfor the use of projected revenues in meeting the typical1.25x existing and future debt service obligations.This use of projected revenues is inherentlyweaker than a requirement to demonstrate coveragefrom existing cash flow.Meeting the ABT requirement through the useof non-reoccurring cash flow items such as fundbalances, coverage accounts, reserves, etc. areviewed as a credit weakness. Sometimes, the issuermay have the standard legal provisions withrespect to the ABT and rate covenant, but operatesat a much higher level and has committed todoing so by adopting a board policy to maintainthe rate covenant and ABT at a higher multiplethan required under the indenture or bond resolution.In these cases, the issuer’s board policy mayhave a direct impact on the ratings outcome andcan help bolster otherwise weak or adequateindenture provisions.The flow of funds is always closely reviewed inrating airport revenue bonds, as it specifies theorder and timing in which system revenues are usedto meet the obligations created under the indentureor bond resolution. This establishes the relative lienposition of the debt service payments in relation toother issuer obligations. Standard & Poor’s alsolooks to see what reserve funds are established andthe required reserve funding levels. Finally, a criticalcomponent to the flow of funds is an evaluation ofthe disposition of surplus funds. With a few exceptions,U.S. airports are restricted by federal lawwith regard to how airport-generated revenues maybe applied, specifically prohibiting their use fornon-airport purposes. Thus, taking airport-generatedsurpluses to support the general fund of a city orto make distributions to shareholders is notallowed. This allows U.S. airports to be viewed ashaving essentially a closed flow of funds.The presence of reserve funds for debt service,operations and maintenance, or a capital improvementfund can be beneficial to an issuer. In particular,additional reserve funds that can be used tomeet debt service requirements can also be viewedas an additional source of liquidity. Most airportrevenue bonds have a debt service reserve fundthat is funded based on IRS regulations at bondclosing. Some bond resolutions or indentures giveflexibility as to the timing of the debt servicereserve fund, giving issuers the ability to issue debtand fund the reserve from net pledged revenuesover time—usually no more than five years.However, the extent to which this ability is exercisedcould result in an incrementally lower ratingdepending on the inherent liquidity of the issuerand its overall credit quality. Funding of the debtservice reserve requirement in an amount less thanthe IRS regulations could also have credit implications,especially for weaker credits or those thathave experienced erosion in liquidity.Other, more liberal debt service reserve requirementscall for a “springing reserve,” whereby netrevenues are required to fund a reserve over a periodof time if coverage drops below a predefined multiple.While this allows the issuer flexibility in fundingthe reserve requirement, it also is of limited valuegiven that at the precise time when liquidity is apotential problem or is deteriorating the issuer is alsounder pressure to fund a reserve fund. A fully fundeddebt service reserve fund provides the most financialcushion to bondholders. Anything less than thisrequirement could have rating implications dependingon the issuer’s business and financial profile.More recently, interest rate swap transactions arebeing entered into in conjunction with debtissuances in order to save on interest costs, increasefinancial flexibility, or to synthetically advancerefund bond issuers. For the most part, swapsentered into by transportation issuers have been tolock in fixed interest rates on variable-rate debtissuances. Evaluation of the swaps includes theassignment of a “debt derivative profile” score. Fortransportation revenue bonds, it is important thatthe indenture cover these new types of transactions.Specifically, most indentures have provisions thatallow swap interest payments to be made from thesame revenue source that pays debt service.In addition, termination payments are generallyjunior to the debt service obligations, which help toensure that an early termination will not negativelyaffect the ability to meet debt service requirements.Some airports have termination payments that areon parity with debt service or payable from operations.The risk of termination can be mitigated ifthe issuer has good liquidity and strong revenuegenerating capabilities.The goal of the legal provisions is to provide adequateprotection to bondholders while allowingmanagement sufficient flexibility to respond tochanging business conditions. Where the indentureor bond resolution varies from the standard securityand covenant provisions—either providing significantlatitude or restrictions on the issuer—theseprovisions will be evaluated in context of the inherentcredit quality of the issuer or can make a differencein the ratings outcome.FinancesThe analysis of airport financial operations varies,depending on its rate-setting approach. At a residualairport, the airlines collectively assume financialrisk by ensuring payment of all airport costs not134 Standard & Poor’s Public Finance Criteria 2007