O'Hare terminal makeover's $8.5 billion price tag labeled a credit negative

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CHICAGO — Chicago’s $8.5 billion terminal renovation will drive up O’Hare International Airport’s leverage and airlines costs to levels that could damage its competitive edge, Moody’s Investors Service says in a report that labeled the newly approved plan a credit negative.

Moody’s rates O’Hare A2 with a stable outlook. O’Hare also carries ratings within the single-A level from Fitch Ratings, Kroll Bond Rating Agency and S&P Global Ratings.

Moody’s — which is no longer asked to rate Chicago’s bond deals — was the first to formally weigh in on Mayor Rahm Emanuel’s $8.5 billion plan and an initial $4 billion in bonding that was laid out in a new lease and use agreement approved by the City Council late last month.

“The proposed capital plan is credit negative for O’Hare Airport Enterprise because it will increase leverage and airline costs above those of the airport’s peers, weakening O’Hare’s competitive position and airlines’ profitability at the airport if growth fails to materialize,” Moody’s said in a commentary published Thursday in its weekly credit outlook.

Chicago chief financial officer Carole Brown told aldermen during a recent council committee hearing on the airport plans that she believed the city could hold the airport ratings steady despite the increase in debt because the makeover is needed to expand capacity and improve the airport's competitive edge. During questioning on the ratings, she said: “I don’t look at Moody’s anymore.” Moody’s is the sole agency to rate the city’s general obligation debt at speculative grade, assigning its Ba1 rating.

The Moody’s review was not all negative. “Key features of the agreement will mitigate the increased risk,” said the report by analyst Earl Heffintrayer.

The lease and use agreements contain credit-positive provisions to increase debt service coverage incrementally to 1.25 times in 2021 from 1.10 times and introduce an additional operating and maintenance expense reserve that will reach 25% of the following year’s expense by 2025.

“Combined, stronger coverage and greater liquidity and will allow the airport to cash-fund projects and reduce debt issuance, although they also will place additional negative pressure on airline costs,” Moody’s said.

With passenger levels stagnant at O’Hare, the capital plan paves the way for growth that could mitigate the negative effects. Passenger levels were only about 3% higher last year than in 2006, the previous peak. That compares to a 22% rise in total enplanements at all other large hubs during that period.

“The speculative nature of the capacity improvements amid stagnant growth suggests such growth is not assured,” Moody's analysts wrote.

O’Hare competes with Chicago’s Midway International Airport for origination and destination traffic and hubs in Dallas-Fort Worth, Denver, Detroit, Houston and Minneapolis for connecting traffic. O’Hare’s costs to airlines are currently above those competitors.

“Although most large US airports’ airline costs will rise because of expansion, the proposed increases at O’Hare are well above the increases at other airports,” Moody’s said.

Moody’s said at more than $7 billion, O’Hare’s current debt levels are more than other major airports and if the terminal capital plan is fully debt funded — as Brown has said it would be — then total debt would exceed $14.5 billion by 2022.

Moody’s expects O’Hare’s leverage to rise, based on net debt per origination and destination enplanement, to around $580 by 2022 from $313 in 2017. The next highest would be San Francisco Airport Commission at about $400 net debt per O&D passenger in 2022.

“Although airlines can pass increased costs to passengers, we think cost increases that are significantly higher than the increases of rival airports will diminish profitability and increase the risk of losing connecting services in the future,” Moody’s said.

The city expects to issue the $4 billion of general airport revenue and passenger facility charge backed bonds in at least two deals over several years with the first sale likely coming in late 2018 or early 2019. The city expects to return in the coming years for further authorization as the current plan relies on borrowing to cover the full cost.

Fitch Ratings has warned that a recent court ruling in Puerto Rico's Title III bankruptcy could pose a threat to the rating of special revenue credits rated above a municipality's issuer default rating. The report specifically noted O’Hare's rating. Fitch rates O'Hare GARBs A while it rates Chicago's general obligation debt BBB-minus.

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