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

TransportationStand-Alone PassengerFacility Charge DebtLeveraging passenger facility charges (PFCs) hasproven to be an effective tool as airports lookto maximize their debt-issuing capacity or limit theeffect of capital improvements on the airline-supportedrate base. With proper structuring andstrong credit fundamentals, stand-alone PFCs orrevenue bonds where the only security is the pledgeof PFCs can receive solid investment-grade ratings.The PFC program is now an established and criticalsource of capital funding at U.S. airports. StandalonePFC bonds have some fundamental differencescompared with general airport revenue bonds.These include:■ The vulnerability of a fixed-rate revenue streamand debt service coverage to declines in enplanedpassengers attributable to a variety of reasons,including economic downturns, rising air fares,aviation fuel price increases, or natural disasters;■ Other events that could interrupt pledged revenueflow, such as an air carrier bankruptcy; and■ The ability of the Secretary of the U.S.Department of Transportation to terminate theairport’s power to levy the PFC.Airport management can reduce these risksthrough compliance with the FAA’s record of decisionand its “informal resolution process,” properoversight, strong management of PFC programs,and structural enhancements to the debt transactionthat provide ample coverage of debt service frompledged PFC revenues. Additionally, upon request,the FAA includes language in their record of decisionfor PFC stand-alone transactions, which indicatesthe FAA’s intent, in the case of a violation, toprovide a five-year cure period prior to termination.Most important is compliance with current andfuture provisions of the Aviation Safety andCapacity Expansion Act of 1990 and all implementingfederal regulations pertaining to PFCs.These provisions include those governing use andadministration of PFC revenues, as well as assurancesrequired to prevent termination by theDepartment of Transportation.Standard & Poor’s Ratings Services alsorequires management to agree to provide notificationif revenues from collections decline or are disrupted,or if it is notified by the FAA of apotential violation of federal regulations. Withcertain other legal assurances, the issuer can keepthe lien open and use PFC revenues on a pay-asyou-gobasis.With the stand-alone PFC pledge, Standard &Poor’s analysis will focus on the traditional creditfactors that support the airport’s general airportrevenue bond rating with a special emphasis onpassenger demand, debt service coverage, airportmanagement, the airport’s PFC program, legal andstructural provisions, and federal agreements—allof which are important in addressing the inherentrisks of the PFC program.Traffic AnalysisStandard & Poor’s examines the economic underpinningsof the airport’s service area. In most cases,a distinction is made between the added vulnerabilityfor connecting versus origin and destination(O&D) airports, with higher coverage requirementsfor airports without a strong and diversified O&Dbase. Careful consideration is given to traffic performancethrough national and local economiccycles, as well as susceptibility to fluctuationscaused by factors affecting the airline industry.Traffic variations will be reviewed in the context ofthese circumstances, as well as changes attributableto airline service decisions and growth in the numberof O&D passengers.Federal regulations allow connecting hubs to collecta disproportionate share of the PFC revenues.However, if connecting traffic declines, connectinghub airports stand to lose a greater amount of PFCrevenue than if a similar level of traffic declined atan airport with a greater proportion of O&D passengers.Most of this concern is reflected in the generalairport revenue bond rating, which considersthe concentration of connecting passengers and airlinemarket share.Other important traffic fundamentals are diversityin airlines and potential competition from otherfacilities. Low operating costs and favorable airlinerelations are credit strengths.Because pledged revenues are a direct function oftraffic levels and cannot be adjusted to meet debtservice obligations, passenger forecasts take on anew significance with PFC-backed bonds. While theairport already must have traffic levels that generaterevenues in excess of future PFC debt needs,136 Standard & Poor’s Public Finance Criteria 2007