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

Stand-Alone Passenger Facility Charge Debtprojections must be justified and consistent withhistorical trends.Faster-than-expected growth can result in the airportreaching its maximum PFC authorization levelbefore its bonds mature. This requires managementto create a debt structure that allows for earlyredemptions or escrow of excess annual collections.Simultaneously, Standard & Poor’s expects that airportmanagement would apply for further approvalto extend its authority to collect PFCs.Another factor in forecasting PFC revenues is thelevel of PFC-eligible passengers assumed by airportmanagement. Under federal statute, certain classesof passengers cannot be assessed a PFC, includingtravelers flying on tickets acquired with frequentflyer coupons, nonrevenue passengers, or those whohave already paid more PFCs than permitted. Inaddition, airport sponsors may exclude a class ofpassengers if they represent less than 1% ofenplaned passengers. Also, according to statute, theair carriers can keep $0.11 per PFC to compensatefor the administrative costs of collecting and remittingPFC revenues to the airport sponsor.Airport management should be able to demonstratethis mix, and forecast revenues should reflectonly eligible PFC passengers and net out airlines’collection fees.Debt Service CoverageDebt service coverage is an important determinantof credit quality since it reveals how much revenuecan decline before an airport cannot pay its debtservice. Standard & Poor’s considers PFC revenuemore vulnerable to airline shifts or financial difficultiesat airports with one airline dominating themarket and connecting enplanements. To mitigatethis concern coverage of PFC debt service by PFCrevenues should be higher than the standard coveragerequirement at O&D airports. For hubs concentratedin one or two airlines, stronger creditsdemonstrate annual coverage of PFC debt serviceby PFC revenues is between 1.50x-2.00x, whileO&D airports generally have between 1.35x-1.75xat a minimum. In practice, most airports prudentlymaintain stronger coverage levels from leveragingonly a portion of the PFC stream they receive.Because of the fixed-rate nature of PFCs annualdebt service is typically level over the life of thebonds. Standard & Poor’s analyzes lower coveragefor structures that include a subordinate lien on netairport revenues.Airport ManagementKey to the stand-alone PFC bond is airport management’sability to manage the PFC project andcollection process, and to quickly resolve any questionsregarding the proper use of PFCs. Standard &Poor’s reviews the airport sponsor’s PFC programto evaluate collection, monitoring, and administrativesystems, as well as the willingness and abilityto comply with the FAA’s record of decision, whichspecifies approved projects. Additionally, managementshould demonstrate air carrier compliancewith the PFC reporting and remittance proceduresoutlined in federal regulations. Airlines are requiredto remit all revenues to the airport monthly andwithin 30 days of the previous reporting period.Carriers are required to maintain financial managementof PFC revenues and submit quarterly reports.One of the proposed amendments to the PFC programin 2006 is requiring protected airlines reorganizingunder Chapter 11 to submit a monthlyPFC account statement and a quarterly report tothe FAA.The type of project to be financed and management’sexperience with capital projects are importantcredit factors. To the extent that projects areassociated with capacity enhancements, are clearlydistinct from other projects, and are manageableand achievable, the potential for misuse of PFCrevenues and possible termination is limited.Although in most instances, successful completionof a PFC project bears no relation to the revenuesrequired to service the debt, Standard & Poor’swill evaluate how well airport management hasmanaged PFC-eligible projects in the past, or howfrequently the airport has had to cure violationsthrough the informal resolution process. Projectdelays that result in scope changes or cost overrunsthat require additional PFC, lowering coverage,could be a rating concern.Legal ProvisionsThe legal provisions are important credit factors—specifically, indenture covenants to comply withcurrent and future provisions of the Aviation Safety& Capacity Expansion Act of 1990; all implementingfederal regulations governing use and administrationof PFC revenues; and all assurances requiredto prevent termination by the U.S. Department ofTransportation. Provisions outlined include thosegoverning use and administration of PFC revenues.Specific provisions of these covenants include:■ Obtaining FAA approval for all projects;■ Compliance with the National EnvironmentalPolicy Act of 1988 and the Airport Noise andCapacity Act of 1990;■ Not signing long-term leases with any air carrierfor PFC-funded facilities;■ Excluding PFCs from general airport revenues forpurposes of setting airline fees and charges;■ Terminating leases of facilities financed withPFC revenues if the facility is not fully utilizedwww.standardandpoors.com137