The Gary/Chicago International Airport Authority's BBB rating on 2014 airport development zone revenue bonds is on watch evolving due to a Fitch Ratings tax-supported rating criteria change.
The rating agency placed the credit on the watch this week based on the criteria change that caps the rating distance between a revenue secured rating and the related local government's general credit quality.
“The ‘BBB’ rating in question is not the rating of the airport authority itself based on its operating revenues, but the rating of the airport’s tax increment financing district, which overlaps the land of both the airport and portions of the city of Gary,” said Fitch analyst Michael D’Arcy. “The TIF district is called the Airport Development Zone (ADZ). So, these are TIF bonds backed by property tax increment revenues.”
In cases where a pledged revenue stream may be commingled with other governmental revenues or otherwise exposed to the operations of a parent local government with weaker general credit quality, the relationship can limit the rating on revenue bonds with strong independent credit characteristics.
Fitch began reconsidering its criteria on tax-supported debt after rulings in Puerto Rico’s bankruptcy case shook market beliefs that repayment of special revenue debt would continue to be repaid during bankruptcy proceedings.
Fitch does not rate the city of Gary and the airport is not owned by the Indiana city.
“That is not material to this rating,” Fitch analyst Amy Laskey said. “The notching is off the airport authority operating risk and that is what we are working to assess now.”
The bond rating faces a downgrade if Fitch determines the credit quality of the authority is below a level that can support the current security rating given the maximum notching permitted under Fitch's tax-supported criteria. The criteria took effect in Jan and Fitch placed 10 ratings on ratings watch negative and 7 under criteria observation. The rating agency expects to resolve the evolving watch on the Gary/Chicago airport bonds within the next four months.
Fitch would affirm the existing rating if it determines that the authority's general credit quality is within the maximum notching permitted under the criteria and the credit fundamentals of the bonds remain consistent with a 'BBB' rating.
Fitch may upgrade the rating if it determines that the authority's underlying credit quality is sufficiently strong that it does not limit the bond rating, and that the credit fundamentals of the bonds have improved.
The city has struggled economically for years, losing residents and businesses. Gary’s deficit grew to $42.5 million in 2019 from $7.3 million in 2018.
Last year it completed a sale-leaseback deal to keep the city afloat. Without it, the city would have run out of cash by the end of the year, with the yearly deficit projected to grow between $3 million and $5 million yearly, reaching $58 million by 2023 according to Curtis Whittaker of Whittaker & Co., a financial analyst hired by the city last year.
Despite the city’s weak economy, development at Gary Chicago International Airport and within the ADZ has been active, according to Fitch. The ADZ encompasses 4,155 acres along the western limits of Gary, including portions of the airport authority.
The rating agency said historically weak collection levels and a large number of appeals led to revenue volatility; but collection levels have improved markedly since 2014 and the number of tax appeals appears to have stabilized.
The protections offered by Indiana's TIF neutralization law are another important factor supporting the current rating. The legislation adjusts base assessments to preserve the captured incremental revenue if the assessed value declines.
“The security structure for the bonds has an adequate level of resiliency to anticipated revenue declines associated with typical economic downturns,” Fitch stated. “At current leverage, pledged revenues could withstand a 47% decline before coverage falls below 1.0x, 5.7x the Fitch Analytical Stress Test decline of 8.2% and 1.7x the largest historical decline of 28%. These cushions are consistent with a BBB assessment for the resilience of the security through economic declines.”
The airport issued the bonds in November 2014 as it underwent a privatization. S&P Global Ratings assigned BBB-plus rating to the bonds. Proceeds financed the completion of a 10-year-old runway expansion project that officials said "would result in economic and financial benefits to the airport and the entire region."
The bonds are secured from tax increment revenues generated within the airport development zone. The bonds also featured a cash-funded debt service reserve fund sized at maximum annual debt service and a supplemental reserve. The supplemental reserve fund does not provide sufficient credit enhancement to affect Fitch's rating on the bonds.
