Lawsuit creates credit challenge for Guam's airport

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A lawsuit challenging a retail concession contract at Guam's airport is credit negative for the airport authority, according to Moody’s Investors Service.

Luxury goods retailer DFS Guam brought the lawsuit in 2014 claiming that the procurement process at A.B. Won Pat Guam International Airport Authority that resulted in Lotte Duty Free winning the luxury goods storefront was tainted. Lotte counter-sued DFS Guam, which had formerly occupied the retail space for 30 years.

“A loss of the contract would be credit negative for GIAA, because a newly procured concession agreement could offer lower annual revenues and there could be a temporary loss in revenue if Lotte exits the airport before a new public procurement of the contract has been completed,” Moody’s analysts wrote in a report last week.

Moody's rates the authority's senior general revenue bonds Baa2 with a negative outlook.

The concession agreement with Lotte generates annual revenues of $15.2 million for the airport, and comprised 22% of its operating revenue in fiscal 2017, Moody’s said. The debt service coverage ratio is expected to remain above 1.25 times, Moody’s said, but could fall below the rating agency’s previous expectation of 1.5 times.

If it drops below 1.25 times, the airport would be required to hire an airport consultant to recommend revisions to its rate structure.

"GIAA takes the report issued by Moody's Investors Service very seriously," GIAA Chairman of the Board Ricardo Duenas said in a statement. "We've been very concerned that the court's decision could seriously impact GIAA's credit rating, its bond covenants and potentially its signatory airline agreements, and therefore, airport operations, the Guam visitor industry, and the economy of our island."

Guam Superior Court Judge Arthur Barcinas granted the airport authority a stay on May 9 on a ruling voiding its 10-year, $152 million concession contract, retail concession agreement with Lotte. The judge granted the request for a stay pending resolution of a motion by DFS.

In February, Barcinas had voided the airport authority’s agreement with Lotte, saying other bidders were deprived of their right to a full and fair consideration of their proposals. The court also recognized that the public interest would be served if Lotte remained as the concession operator and instructed the airport to abide by the terms of the agreement.

The airport authority appealed to the Guam Supreme Court.

While the Court's judgment ordered GIAA to abide by the voided contract, Lotte Duty Free was under no such obligation.

"Judge Barcinas' order created a potential financial disaster for the Airport, and thus, GIAA worked to get Lotte to agree to stay and abide by the terms of the voided concession contract, even during the on-going $110 million arrivals floor construction project," Duenas said.

GIAA was successful in getting Lotte to agree to abide by the concession contract pursuant to a Mediation Term Sheet dated April 26, 2018 mitigating the risk of violating its bond covenants and harm to the bondholders, according to the airport.

"We are hopeful that the Court permanently stays the judgment without further delay and allows the Supreme Court to decide this important matter, rather than accommodating DFS's continuing efforts to devalue the Airport concession,” Duenas said.

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Litigation Transportation industry Airport revenue bonds Guam