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

Transportationstrong preference will exist for facilities supportingorigin and destination (O&D) traffic, rather thanconnecting hubs. Only large hubs, as defined by theFAA, will generally be considered. Projects at largehubs should represent key additions to the air travelsystem, which would enhance the likelihood ofcontinued demand for these facilities.Airport management must be experienced andhave a clear understanding of its rights and privilegesunder these arrangements.An increasing enplanement and aircraft operationtrend will be considered a strong positive factor.Cargo growth will be examined closely for the providingcarrier, as well as the rate of growth, if acargo facility is being evaluated. Increased activitywill place a premium on the value of all airportrelatedprojects, and Standard & Poor’s views theseas possessing increased protection.Project EssentialityElements that reflect essentiality include projecttype, inherent demand, strong support of airportmanagement, and importance to the operation ofthe airport facility.Although many different types of projects havebeen financed through special facility bonds, projectsthat fit most easily, from a credit perspectivefall into the following categories:■ Terminal space;■ Fueling facilities; and■ Cargo facilities and aircraft hangers.Projects at airports that are designed to satisfydemand that significantly exceeds currently availablefacilities, and where there is limited ability toprovide adequate locations to meet this demand aretypically more creditworthy. Unmet demand overand above the completed project will ensure that anew tenant for the facility can be found, if needed.Standard & Poor’s considers projects that cannotbe located off the airport more essential than thosethat can. The most creditworthy projects are forterminal and fuel hydrant facilities. Inherentdemand for the project is the most important ratingfactor. Typical questions asked include: How manyair carriers want projects of this type? Are all existingfacilities fully utilized? In addition, a multi-tenantfacility with a diverse mix of tenants is superiorto a project serving fewer tenants.Airport involvement is critical to this approach.Airport management must be involved in the designof the facility, and the project should fit in the overallmaster plan. In addition, Standard & Poor’sevaluates the specific nature of the facility. Themore tailored it is for one airline’s needs, the moredifficult it may be to relet.Standard & Poor’s also considers the percentagerepresented by the new project of the total availablespace for this purpose. For example, a new cargofacility that is only 10% of all existing space will bedeemed weaker than one that represents 50%. Thisfact must be viewed in the context of the amount ofother space available for additional facilities of thistype and the potential for additional facilities andfuture competition for the project.Finally, the security backing these transactions isproject specific and, therefore, adequate insuranceprotection must be provided. This would include,but not necessarily be limited to, property insuranceat full replacement value; title insurance to eliminateconcerns over ownership; and business interruptioninsurance to mitigate concerns aboutmeeting debt service obligations due to temporaryinterruptions in operations.Legal FactorsAlthough legal arrangements will vary from projectto project, in a typical financing Standard & Poor’sreviews transaction documents and opinions toassess the bankruptcy-remoteness of the issuer/lessor,contractual terms governing the use of the facilityby the air carrier and legal protections availableto the airport in the event of an air carrier’s default.Among other factors, this review assesses the risksthat an air carrier in a reorganization bankruptcyproceeding may be able to remain in possession ofits portion of the facility while not paying rent orotherwise performing on its related tenant obligations,that the air carrier may be able to recover orstay the application of funds in the transaction, andthat the airport may be prevented from dispossessingthe defaulting air carrier and reletting its spaceon a timely basis.Recent air carrier bankruptcies have shown thatair carrier challenges to the characterization of leasingstructures, attempts to avoid pre-petition payments,and attempts to recover unapplied funds orreserves, may disrupt expected cash flows and delayor frustrate the exercise of remedies. Standard &Poor’s believes that the likelihood of an air carrierin bankruptcy taking these or similar actions andthe adverse affect of the actions on a project wouldbe greatest where the project’s credit risk is concentratedin a predominant or single tenant.In a multi-tenant special facility financing, creditrisk diversification may somewhat reduce the likelihoodof air carrier challenges that adversely affectthe financing. Even in the bankruptcy of the lowestrated key tenant, however, the air carrier is likely totake some of the previously discussed actions thatchallenge the weakest aspects of the structure. As aresult, Standard & Poor’s assessment of the legaland structural risks will be an important element ofthe rating analysis. Standard & Poor’s considers anumber of other factors in its rating analysis of140 Standard & Poor’s Public Finance Criteria 2007