MOODY'S ASSIGNS Baa2 RATING TO $19.2 MILLION ARUBA AIRPORT AUTHORITY N.V. REVENUE BONDS
Moody's Investors Service has assigned a Baa2 rating to $19.2 million of airport revenue bonds of the Aruba Airport Authority, N.V. The rating carries a stable outlook and also applies to $63.9 million of parity debt outstanding. Proceeds from the current issue will finance cost overruns of the airport improvement program that the Authority embarked on in 1997. In Moody's opinion, the Baa2 rating is supported by the airport's underlying fundamentals including the service area, passenger projections, and airline diversity, despite the project delays and cost overruns. This is a private placement taxable 144A offering, which matures in 2015.
Aruba Airport Authority N.V. (AAA) is a limited liability corporation under Aruban law. The sole owner of all capital stock of AAA is the Government of Aruba. AAA is managed by a two Managing Directors reporting to a governing board consisting of at least five members appointed by the Government of Aruba.
ORGANIZATIONAL CHANGES AND DEMONSTRATED INDIRECT GOVERNMENT SUPPORT MITIGATE CREDIT CONCERNS OVER COMPLETION BONDS
The cost overruns and the significant increase in debt are credit concerns that, in Moody's opinion, are somewhat offset by the still moderate debt levels, recent organizational changes, demonstrated indirect government support and structural enhancements.
The Authority issued $63.9 million in April of 1997 to finance a complete overhaul and expansion of the Reina Beatrix International Airport's terminal facilities. The project encompasses the quadrupling of the airport's terminal facilities and associated access roads and parking facilities; the construction of new facilities for US and non-US departures; expanded concession space; as well as eight passenger loading bridges and baggage delivery systems. The Authority has experienced significant delays and cost overruns during the implementation of the 1997 airport improvement program due to unexpected utility relocations and a reassessment of the scope of the program.
In March of 1999, the AAA entered into a Modification and Settlement Agreement with the contractor to settle a variety of conflicts that had resulted from the delays. The agreement stipulates completion dates of August 31, 1999 for the first phase of the project and August 15, 2000 for the second phase scheduled for completion on August 15, 2000. It also contains billing, warranty and other provisions that officials expect will shield the Authority from further unexpected cost overruns.
The revised $89.6 million budget for the airport improvement program represents a 32.2% increase over the original project budget. Of the $33.7 million required to complete the project, approximately half will be funded through the current issue. The balance of the funding will come from an $8 million equity contribution from the Authority, $7 million from unused proceeds of the 1997 bonds, and $2.7 million in miscellaneous cost reimbursements by third parties.
Moody's has gained comfort from a number of organizational changes in the AAA structure including the appointment of a Managing Director of Finance which should provide adequate supervision of the financial elements that are critical to the project's long term success. While the government of Aruba has not pledged any formal financial support, it has supported the project by allowing the AAA to retain the full amount of the passenger departure fee. The original plan of finance had the airport remitting $6 back to the government. This demonstrated support is a positive rating factor. Structural enhancements supporting the rating include a relatively short 15 year amortization schedule, fairly restrictive convenant provisions, and a cash funded reserve for maximum annual debt service.
DIVERSE REVENUE BASE THOUGH HEAVY RELIANCE ON PASSENGER DEPARTURE FEES
The airport benefits from a diverse revenue stream which contains a mixture of airline and nonairline revenues in addition to the critical passenger departure fee. In Moody's opinion the authority's ability to impose a Passenger Departure Fee was significant rating factor since it provides increased levels of financial flexibility. This Passenger Departure Fee is not part of the regular rate-making methodology and any revenue sharing with the airlines is at the Authority's discretion. Over the next five fiscal years, the Fee is expected to average 54.8% of the Authority's gross revenues. The AAA uses the fee to keep airline rates at or below regional averages. The Fee is currently $20 per person, and officials intend to implement an increase to $23 effective January 1, 2000.
Conservative management of operating expenses has resulted in widening financial margins for the Authority over the last three Fiscal Years. Over that period, the Authority's operating ratio (O&M as a percentage of operating revenues) declined from 73.7% to 55.4%, while its net take down (net revenues divided by gross revenue and income) rose from 30.8% to 47.3%. Both of these financial indicators are now around the Moody's industry median. Results through May 31, 1999 show a continuation of these trends. Over the next five years, a fairly conservative stress case scenario calls for average annual growth in operating revenues (including Passenger Departure Fees) of 9.3%, while operating expenses are projected to grow by 6.1% annually. During this period, the aforementioned increase in the Passenger Departure Fee should result in comfortable financial margins for the Authority, as indicated by a projected average operating ratio of 54.1% and a projected average net take down of 47.6%. Under this scenario, officials expect these margins to allow them to keep the airline cost per enplaned passenger between $7.96 and $9.27, which is competitive for the region.
RECALIBRATED PASSENGER PROJECTIONS PROVIDE ADEQUATE COVERAGE EVEN UNDER STRESS SCENARIOS
The airport feasibility consultant's projections have been significantly revised since the 1997 issuance and forecast an average annual growth in enplanements between 1999 and 2004 of 2.1%, which is consistent with the average growth rate over the last five years of operations. The revisions reflect restatement of the government's baseline 1996 passenger data which was found to be overstated, as well as changes in assumptions over the number of cruise ship passengers. Over the forecast period, the revised projections call for average debt service coverage of 1.76x. Under several fairly conservative stress scenarios, coverage does not fall below 1.58x over the same period. Net revenues available for debt service in FY 1998 covered maximum pro forma annual debt service 1.1x. The projected wider margins starting in FY 2000 are mainly a result of the anticipated increase in Passenger Departure Fee revenues.
In assigning the Baa2 rating to the 1997 issue Moody's subjected the projections to a number of stress scenarios which brought debt service coverage below the 1999 stressed levels. The Baa2 rating reflects the ability of the airport to perform under stressed conditions.
AIRPORT'S SERVICE AREA AND UNIQUE U.S.A. PRE-CLEARANCE FACILITIES ADD STRENGTH TO CREDIT
The Reina Beatrix International Airport is the only airport on the Aruba and is a critical factor in the island's tourism-based economy. Between 1987 and 1998, tourism arrivals in Aruba's grew at an average annual rate of 9.8%. Aruba competes with other Caribbean destinations, but has had a stable share of between 4.1 and 4.3% of the Caribbean market since 1991. Major attractions of the country include its political stability, its multilingual work force, modern tourism infrastructure, and the fixed exchange rate of the Aruban florin to the U.S. dollar. In addition, its position outside the Caribbean hurricane belt makes the country less exposed to natural disasters. In the medium term, the Country faces preservation, infrastructure and capacity issues as a result of the explosive growth of the tourism industry over the last ten years.
In 1998, U.S. tourists accounted for 58.2% of all tourism to Aruba, and Moody's views the 1994 treaty with the U.S. regarding a pre-clearance facility for U.S. bound passengers as a key credit positive. The facility will include pre-clearance processing Federal Inspections Service (FIS) facilities for US immigration, customs and agriculture officials. In Moody's opinion, the facility will provide the airport and the country with an important competitive advantage, providing access to potential new markets in the US that have limited or no FIS capabilities. It also provides Aruba with potential hubbing traffic from the southern Caribbean and South America to U.S. destined flights.
DIVERSE CARRIER BASE IS A POSITIVE CREDIT FACTOR OFFSETING AMERICAN AIRLINES DOWNSIZING
The airport benefits significantly from its diverse carrier base. American Airlines is the island's largest carrier accounting for 23% in 1998, down from 46% in 1996. While this has negatively affected passenger growth, American's departure has been offset by increased service from other US carriers including Continental and TWA. The latter is significant in that they represent new markets of Houston and San Juan. Air Aruba is the second largest carrier at 15% . Recently purchased by the Venezuelan carrier Aserca, Air Aruba is attempting to expand from its traditional markets which, if successful, could positively impact future traffic.
IMPLEMENTATION OF NEW OPERATING AGREEMENT AND DEVELOPMENT OF NEW MARKETS WILL BE KEY IN FUTURE EVALUATIONS OF CREDIT
The Authority plans to implement a cost recovery methodology effective on January 1, 2000. The airport's major airline, American, accounted for 23.3% of enplanements in 1998. The carrier mix at the airport is fairly diverse and the Authority has made it a priority to attract new service to the airport. The Authority's projected cost per enplaned passenger in 2001 will be $8.12, which is below the regional average. Over the forecast period, the successful implementation of the new operating agreement, as well as the ability of the Authority to attract new service to the airport and keep its rates competitive with airports in the region will be key rating drivers.
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