CHICAGO – The benefits of airline support, favorable lease terms, and a $8.5 billion modernized terminal layout won’t necessarily protect Chicago O’Hare International Airport against rating pressures as debt levels swell, Fitch Ratings said in its initial review of the city’s new O’Hare plans.

“Leverage related risks have been a key consideration” in O’Hare’s single-A level rating and it’s already elevated at nearly 10 times net debt to cash flow available for debt service on more than $7 billion of existing debt, Fitch said.

“Additional debt to fund this capital plan will likely keep overall airport leverage above the current 10 times level for many years. The 'A' rating could be pressured to the extent there is a sustained upward shift in leverage,” Fitch wrote. “Further, a capital program of this size will carry considerable cost and execution risks as the budget could evolve upward.”

Mayor Rahm Emanuel won City Council approval last month for the new lease and use agreement to replace a 35-year pact that expires in May, the $8.5 billion terminal redevelopment plan, and $4 billion in initial borrowing.

Chief financial officer Carole Brown has said the city expects to fund the program with general airport revenue and passenger facility backed debt and is exploring other financing options such as private investment and special facilities revenue debt.

Travelers wait in line at the American Airlines Group customer assistance desk inside O'Hare International Airport on Feb. 9, 2018.
Chicago is embarking on an $8.5 billion capital plan at O'Hare that will modenize its terminals. Bloomberg News

Fitch Ratings offered a positive review of the lease, calling it “an essential step to allow the airport to address both the modernization and the expansion of the airport to serve long-term growth for domestic and international service, as well as hub activities for United Airlines and American Airlines.” The new agreement runs through 2033.

Airline support offsets some concerns over leverage as it highlights the carriers' recognition of “both the value and the cost implications to maintain service in a strong Chicago market.”

Fiscal provisions of the agreements get good marks, as they gradually increase the minimum annual debt service coverage levels from 1.10 times to 1.25 times by 2021 and add a supplemental operating and maintenance reserve fund that is targeted to reach a funding level of 25% of annual operating costs by 2025.

“The overall financial integrity of the airport should remain sound given the provisions to boost coverage levels and operating reserves,” Fitch said.

City officials highlighted the positives. “Fitch correctly articulates the credit positives of investing in capacity, technology, and terminal modernization at one of the world’s busiest airports and an economic engine for the Midwest,” said Finance Department spokeswoman Molly Poppe. The review came after discussion between city and Fitch analysts. Moody’s released an initial analysis last week calling it a credit negative.

Fitch analysts have not yet reviewed any new financial or cost forecasts on the new lease and capital plan. The cost per passenger was already forecast to rise from the current $15 level to more than $25 in five years under Fitch's rating case scenario.

“The new capital plan will only exacerbate the degree of cost increases and likely place O'Hare as one of highest cost airports in the U.S. and a much higher cost level versus the city's Midway Airport,” Fitch said. "Effective implementation and successful delivery of a capital program of this size will be among the greatest challenges while airport leverage will be sustained at relatively high levels."

Other major international airports have undertaken major construction programs, including facilities in New York, Los Angeles, and San Francisco regions. They also face steep increases to airport costs and have not experienced adverse demand shifts as a result, thanks to the market's strength, Fitch added.

Chicago plans to redevelop O'Hare's existing terminals, expand the existing international terminal, and demolish one domestic terminal to replace it with another global terminal to smooth international and domestic connections.

With its runway reconfiguration nearly completed, the shift to terminal redevelopment is a “logical step” given the airport’s current capacity constraints, Fitch said. The makeover is expected to result in 25% more gate capacity.

Fitch has warned in previous reports that a recent court ruling that’s under appeal in Puerto Rico's Title III bankruptcy could pose a threat to special revenue credits rated above a municipality's issuer default rating. Fitch rates Chicago’s general obligation debt BBB-minus.

Moody’s Investors Service and S&P Global Ratings rate O’Hare at the same level as Fitch at A2 and A, respectively, and Kroll Bond Rating Agency assigns an A-plus.

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