Ratings service downgrades airport
Moody’s lowers bonds a notch to A3, but no borrowing is planned
Moody’s Investors Service has lowered Memphis International Airport’s credit rating, signaling higher costs for future borrowing, but posing no immediate issues.
Moody’s, a New York researcher that looks at businesses’ ability to repay debts, downgraded the rating on the airport’s outstanding revenue bonds one notch, to A3 from A2, and revised an investor outlook to stable from negative.
The new rating came a day after the city’s leading passen- ger carrier, Delta Air Lines, on Tuesday announced plans to cut a third of its Memphis flights and take away hub status Sept. 3. Delta will drop from 94 flights a day to 60 as it grounds about three-quarters of the 50-seat regional jets connecting the city to smaller markets.
The ratings downgrade should have little practical impact because the airport isn’t planning new borrowing and has reduced overall debt by more than a third over the past decade, said Mem- phis International chief operating officer Scott Brockman.
“In my mind, it’s more psychological than it is operational or financial,” Brockman said.
A3 puts the airport in seventh place among Moody’s ratings on long-term bonds, which range from Aaa to C.
Moody’s and its peers Standard & Poor’s and Fitch conducted annual reviews of Memphis airport finances within the past
Right now, it has no effect whatsoever on our existing debt ... We will not default on any of them, and the bondholders are perfectly fine.” Scott Brockman, Memphis
International COO
week. Brockman expected reports from the latter two to be released soon.
Moody’s had put Memphis airport bonds under a negative outlook a couple years ago after Delta began slashing flights.
The rating service said the airport’s challenges include heavy reliance on two customers, FedEx on the cargo side and Delta, and rising costs per enplanement as passenger activity decreases.
“The downgrade to A3 reflects the increased risk at the authority’s Memphis International Airport posed by the sharply reduced service levels, recently announced service reductions by Delta, and the subsequent increase in costs to all other airlines at the airport under the residual airline use and lease agreement,” a Moody’s news release stated.
“Moody’s views the increased costs as providing additional stress to airline service in the near term as the airport currently stands at peak annual debt service. The outlook has been changed to stable as the A3 rating category accounts for the increased risk of service disruptions and also reflects Moody’s view that a strong management team will be able execute on strategies to reduce the operational footprint at the airport as evidenced by past experience at exceeding financial projections,” the release added.
When the airport borrows money or refinances existing debt, the interest rate is based on bond ratings and market conditions at the time. Brockman said a change from A2 to A3 might mean as much as a one-quarter percentage point increase in interest rate.
“We have no intention of issuing any debt in the foreseeable future,” Brockman said. The earliest date at which the airport might have to refinance bonds is July 1, 2020.
“Right now, it has no effect whatsoever on our existing debt. Our existing bonds, they are issued at the rate they’re issued at. We will not default on any of them, and the bondholders are perfectly fine.”
By July 1, the airport will have reduced debt to $395 million from $634 million at the end of 2002, Brockman said. It’s paying nearly $50 million a year in debt service.
Delta’s latest cuts won’t affect the airport’s ability to pay debts and operate in the fiscal year that starts July 1. Payments on Delta’s leased space in the terminal can’t be reduced until July 1, 2014, although the carrier’s landing fee payments would go down with reduced flights. FedEx accounts for about 85 percent of airport landing revenue, which provides a major share of airport income. The other 1 5 percent is split among passenger carriers led by Delta.
Moody’s said, “The stable outlook acknowledges that the increased risk as the airport transitions from a connecting hub to a purely origination and destination market is accounted for in the A3 rating. Financial performance as measured by debt service coverage should remain stable under the terms of the residual use agreement. Additionally, Moody’s believes that the facility is poised to retain similar cargo levels at the Memphis facility and that any weakness provided by slowing economic conditions will be most felt at secondary facilities.”
It said increasing local traffic flying in and out of Memphis or lower costs per enplanement could improve the bond rating. Alternately, the rating could be downgraded further based on “significant activity reduction by FedEx at the airport, further deterioration in air travel demand in the Memphis market, or significantly drawing on liquidity levels below 250 days to manage the transition period ... .”