CHICAGO – Moody’s Investors Service downgraded $6.5 billion of Chicago O’Hare International Airport general airport revenue bonds one notch due to the airport’s high leverage, narrow financial margins, and economic and construction risks tied to its ongoing $8 billion expansion.

The downgrade to A2 from A1 and assignment of a stable outlook comes ahead of the city’s sale of about $1.5 billion of refunding GARB and bonds backed by passenger facility charges slated for early next month. Citi is the senior manager on the PFC bonds and Barclays Capital is senior manager on the GARBs.

Moody’s affirmed the A2 rating on $800 million of PFC debt. The GARB credit’s challenges are heightened by weak economic growth, the ongoing bankruptcy of American Airlines, which operates a hub at O’Hare, and the O’Hare Modernization Program expansion plan. Moody’s had previously assigned a negative outlook to the GARBs.

“The airport faces an extended period of high debt-service requirements as a result of the large projects being delivered in the OMP. Moody’s believes these are important projects that position the airport well for future growth, but resulting debt levels are not appropriate for the A1 rating category, particularly in light of the many economic and industry pressures that threaten to stunt or reduce travel demand for the foreseeable future,” Moody’s wrote.

A spokeswoman for the city’s Finance Department in a statement highlighted the positive long-term benefits of the OMP and other recent strides in expanding concessions and airline service.

“The ongoing OMP is already reducing delays and increasing capacity for the future. With U.S. air traffic predicted to double in the next 20 years, O’Hare is taking the necessary steps with our airline partners and the federal government that will ensure that O’Hare is ready to meet future demand and remain a strong cornerstone of the national aviation system,” she said.

The upcoming sale offers five tranches of senior-lien refundings including a Series A for $477 million, a Series B for $219 million, a Series C for $65 million, a Series D \for $52 million and a taxable Series E for at least $1 million. The deal always includes two PFC refunding tranches, including an Series A for $121 million and Series B for $351 million.

The city earlier this year redeemed its first-lien GARBs and with the upcoming deal will pay off all of the airport’s second lien and a portion of third-lien bonds for savings. With the deal, the city also will consolidate its O’Hare GARBs into one senior lien made up of the refunding bonds and existing third lien debt.

“The airport’s decision to consolidate debt into the senior lien adds stability to the rating,” Moody’s wrote. The city also will bolster its debt service reserves with cash as part of the sale.

The PFC refundings of 2001 debt are expected to generate more than 9% in present-value savings.

The stable outlook is supported by analysts’ expectations that passenger levels and costs per passenger will remain at or near forecasted levels. It also recognizes the experience of the airport staff in financing and delivering large capital projects that helps offset construction risk.

The GARBs are secured by general airport revenue while the PFCs are secured by the fees imposed on flights.

The credit remains supported by the region’s large economy and the airport’s strong originations and destinations market, its unique dual hub status with American and United Airlines, and the on-time and on cost completion of the $3.28 billion first phase of the expansion plan.

Additional credit pressures stem from weaker than forecast passenger levels and material costs risks for both the OMP and the city’s annual $90 million capital improvement program.

The airport relies on airline revenues for 65 % of its operating revenues and its debt per passenger is $410, much higher than Moody’s median of $86 for all airports.

Though May, passenger levels were up by 3.7% following a decrease of 0.1% in 2011 when more than 33 million passengers used the airport.

Fitch Ratings and Standard & Poor’s have not yet released updated reviews. Fitch last year affirmed its AA-plus, AA and A-minus ratings on O’Hare’s first, second and third liens, respectively, and A rating on the PFC debt. S&P rates the PFC bonds and third-lien GARBs A-minus with a positive outlook. The second-lien GARBs are rated AA-minus; the first-lien ones are rated AA.

The airlines have agreed to a scaled-down second phase of the OMP for $1.17 billion, with negotiations pending on future projects. The airlines have resisted Mayor Rahm Emanuel’s efforts to begin those talks early.

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