WASHINGTON — Moody’s Investors Service said yesterday that it will maintain its negative outlook on U.S. airports for the next 12 to 18 months because of the economic crisis, and that unfavorable industry trends will put downward pressure on airport credit ratings.
In its annual sector outlook released this week, Moody’s also said that failed remarketings present the most immediate risk to airports with variable-rate debt exposure.
Financial market turmoil and airline capacity cuts have added to the stress on airports from high fuel prices, the rating agency said.
“Beyond near-term disruptions to capital markets and liquidity, we believe financing costs to airports will remain higher than in recent years,” the report said. “Through 2009 and 2010, we expect interest rates on all types of debt instruments will likely be higher than the historic lows of the last few years.”
Airports exposed to variable-rate debt structures, debt service reserve fund sureties, and swaps are facing higher-than-normal budget pressure, the analysts said. Many issuers are paying high costs to issue fixed-rate bonds, at 6% or 7% rates, and as much as 10% for variable-rate bonds. Additionally, lower-rated airport issuers have even more limited access to the market because of insurer downgrades and limited bank capital for letters of credit.
Moody’s analysts also said they do not expect any efforts to privatize commercial service airports this year, beyond Chicago’s Midway International Airport lease, which is expected to close during the next three months.
However, the analysts added, the contents of a Federal Aviation Administration funding bill that Congress may approve this year “could influence the demand for future airport privatizations” if it alters funding levels or the FAA’s pilot program for airport privatization.
Airports have been watching the FAA reauthorization legislation closely, hoping for an increase in the passenger facilities charge that some issuers use to back bonds. The PFC cap would be raised to $7 from $4.50 if the provision contained in the current FAA bill pending in the House is passed into law.
However, while the FAA estimates such a PFC change would increase airport revenues $1.1 billion per year, Moody’s analyst Kurt Krummenacker, the author of the report, said it is “not likely to have a significant credit impact.”
Airport credit is expected to modestly improve because of extra funding for airports and a tax measure that were included in the recovery package earlier this year, Moody’s said.
“The receipt of $1.1 billion of discretionary airport improvement program (AIP) grants will likely accelerate the timeline of projects that would have been funded by future AIP grants,” the report said. “In some cases, this capital funding may replace future planned bond issues, or it may fund planned projects that had been slowed or scaled back due to economic conditions.”
A provision that temporarily exempted private-activity bonds issued to pay for airport projects from the alternative minimum tax will also benefit airports, Moody’s said.
Looking farther into the future, Krummenacker noted that airports “need to be judicious about how they’re encumbering their revenue streams” as they plan to finance capital projects to support growth in demand in anticipation of an improved economy and increase in passengers. “It’s a delicate balance, and it’s a balance that’s different in each airport,” he said.
The rating agency said that although the short-term outlook is negative, the 91 airports that Moody’s rates continue to be creditworthy and will have stability over the long term, provided they carefully manage their expenses while the economy struggles to regain strength.
If ticket sales continue to drop through 2009 and 2010, however, “we would likely see a greater impact for credit ratings,” Krummenacker said.
For now, the agency’s greatest concern is with small airports and secondary hub airports. Larger airports and larger hubs tend to have higher ratings and more ability to withstand a downturn, he added.
