MOODY'S ASSIGNS Baa2 TO REVENUE BONDS OF ARUBA AIRPORT AUTHORITY N.V.
New York, 03-14-97 -- Moody's Investors Service assigned a Baa2 long-term debt rating to Aruba Airport Authority N.V. for its US$ 62 Million of revenue bonds expected to come to market later this month. This is the first US dollar denominated issue by an Aruban entity. The debt, together with roughly $23 million of Authority funds, will fund a variety of improvements at the Reina Beatrix International Airport, Aruba's only airport facility. Moody's understands that these securities are being sold in privately negotiated transactions without registration under the Securities Act of 1933 (the Act) under circumstances reasonably designed to preclude distribution thereof in violation of the Act. The issuance has been designed to permit resale under Rule 144A.
The Baa2 rating reflects the unique nature of this credit including the Aruban government's position as sole shareholder of this limited liability corporation; Aruba's position within the Caribbean tourist industry; the island's location outside the hurricane belt; management's proactive policy toward airport development; the treaty with the US regarding a preclearance facility for US bound passengers, as well as Aruba's stable political environment stemming from the island's democratic institutions, a high level of education and relatively high and evenly distributed wealth levels. These factors offset credit concerns regarding the inherent risks and volatility of a tourist based economy; uncertainties regarding the future of the national carrier, Air Aruba, the dominant position of American Airlines, and implementation of major change in cost recovery methodology.
Aruba Airport Authority N.V.(AAA) is a limited liability corporation under Aruban law incorporated on February 19, 1994. The sole owner of all capital stock of AAA is the Government of Aruba. AAA is managed by a Managing Director under supervision of a supervisory board consisting of at least five members appointed by the Government of Aruba. The Government of Aruba, a stockholder, must approve any motion to dissolve the corporation, application for bankruptcy or for an official moratorium. The government's role was a significant credit factor and contributed to the Authority's Baa2 rating.
On January 1, 1997, the Aruban Parliament approved legislation transferring the assets and liabilities of the airport for an initial term of 60 years to the AAA. The AAA will receive all operating revenues and pay all operating expenses as well as assuming responsibility for capital improvements. The current issue, together with other AAA funds, will finance the quadrupling of the airport's terminal facilities and associated access roads and parking facilities. The current terminal facility was constructed in 1972 and is severely constrained given the current and projected passenger demands. Key to this expansion will be the construction of new facilities for US departures, non US departures, expanded concession space, as well as 8 passenger loading bridges and baggage delivery systems.
Moody's felt that a major credit strength that will give Aruba a competitive advantage in serving the large US tourist market will be the construction of a special facility for US bound passengers containing preclearance processing Federal Inspections Service (FIS) facilities for US immigration, customs and agriculture officials. Location of this facility in Aruba is per a 1994 Agreement between the Netherlands in respect of Aruba and the US in which the US agrees to fund the staffing of this facility upon completion. In addition to providing access to potential new markets in the US that have limited or no FIS capabilities, it provides Aruba with the potential hubbing traffic from the southern Caribbean and South America to US destined flights as well as providing US carriers flexibility in diverting US bound flights away from constrained international gates toward domestic gates at key US facilities.
Located 19 miles from the northern coast of Venezuela, Aruba is a parliamentary democracy with a population of 80,000. The Island's democratic institutions, a high level of education and relatively high and evenly distributed wealth levels, provide for a stable political environment. Formally part of the Netherlands Antilles, it became an autonomous region (Status Apparte) within the Kingdom of the Netherlands in 1986. The new status is the product of a long and evolutionary process which grew more out of a desire to gain autonomy from the Netherlands Antilles, than from the Kingdom itself. Under the new constitutional arrangement, Aruba has full jurisdiction over internal affairs. It has its own constitution and legal system. The Kingdom of the Netherlands is responsible for external affairs, mainly defense and foreign policy.
One of the major credit concerns is the vulnerability of the tourism industry to external shocks such as a downturn in the U.S. economy. However, Aruba is much less exposed to natural disasters than other Caribbean destinations because the country is outside the hurricane belt. The industry's long term potential is also enhanced by a number of distinct advantages over many other countries in the region, including the country's political stability, its multilingual work force and modern tourism infrastructure. Room capacity almost tripled in the last nine years, leading to a similar increase in the number of tourists visiting the island each year.
Aruba's growth in tourist arrivals between 1987 and 1996 was 12% per annum, significantly outperforming the Caribbean as a whole which grew at 5%. The market is dominated by the US, Venezuela and the Netherlands; the US market share has declined from 69% in 1987 to 57.8% in 1996. While Venezuela has almost doubled during that time, representing 11.7% in 1996, market share has declined in recent years reflecting the troubled Venezuelan economy. The continued steady growth in Latin American, Canadian and European markets suggests potential for increased penetration in these markets.
Airline carrier concentration is another potential credit concern. American Airlines is the dominant carrier, accounting for 37.9% of the passenger enplanements in 1996. Air Aruba is the next largest carrier at 23%. The Government has a majority ownership in Air Aruba which is currently in the midst of a restructuring. The airline owes the government roughly $30 million and recently the government decided to convert the debt to equity, which would give it 95% ownership. The government's policy to divest itself of the airline appears to have changed somewhat after the recent possibility of an American Airlines strike though the final outcome of the restructuring and ultimate fate of the carrier remain unclear.
Air Aruba has had continual financial problems in the past and owes the airport $2.8 million. The government and the AAA have come to an agreement regarding the charges outstanding prior to July 31, 1996, which will be paid before closing. The AAA has instituted a credit policy that will apply to all airlines including Air Aruba and will be part of the airlines' operating agreement. Any airline delinquencies after that time will be treated as a non payment under the agreement and the ability of the airline to use AAA facilities may be suspended.
The airport feasibility consultant's projections call for annual enplanement growth of 1.1% after 2000. Moody's has reviewed a number of sensitivity anaylses and feels comfortable with the ability of the airport to cover debt service. However any extended drastic reduction in enplanements from the current levels, or a major change in the status of the preclearance facilities, would have an adverse impact on the Authority's finances.
Factored into the rating were the favorable legal covenants in the indenture. Among these was a rate covenant which imposes the annual obligation to maintain revenues after payment of operating and maintenance expenses of 1.35 times the debt service amount. In addition there are fully funded reserves for operations, renewal, and replacement and a debt service reserve equaling the maximum annual debt service. These reserves combined with the rate covenant provide an additional level of bondholder protection in the event of a short term disruption of service.
The Aruba Airport Authority N.V. is headquartered in Aruba and is the exclusive provider of airport services for Aruba.
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