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Rating Action:

Moody's affirms A2 and A3 on Chicago IL Midway Airport Enterprise senior and subordinate revenue bonds; outlook is stable

09 Nov 2020

New York, November 09, 2020 -- Moody's Investors Service has affirmed the Chicago (City of) IL Midway Airport Enterprise's (MDW) A2 ratings on $19.4 million of Senior Lien Revenue Bonds and A3 ratings on $1.3 billion of Second Lien Revenue Bonds. Overall, MDW has $19.4 million of Revenue Bonds and $1.7 billion of Second Lien Revenue Bonds outstanding. The outlook is stable.

RATINGS RATIONALE

The airport's credit quality is supported by the stable O&D passenger demand in the economically strong and diverse Chicagoland market that additionally facilitates the airport's role as a provider of east-west connectivity. Over the next five years, the airport is likely to see an improved competitive position while O'Hare airport implements large scale capital improvements that may disrupt passenger throughput and in the longer term, result in higher airline fees. Midway has high concentration risk in Southwest Airlines Co. (Baa1 Negative), which has accounted for more than 90% of total enplanements for the last five years. However, the airport's position serving the greatest number of passengers in the airline's network and the length of lease (expires at the end of 2027) help mitigate this concentration risk.

FY 2019 was the third year of Southwest passenger declines, due to their strategy of shifting connecting flights away from MDW in favor of other hubs. Further, MDW was materially impacted by its grounding of the Boeing 737 MAX narrow-body aircraft in March 2019, reflected by its overall 5.5% enplanement decline. Overall, enplanements have been down since FY 2016 and this trend may be accelerated due to coronavirus impacts and uncertain recovery timelines. Like all rated airports, MDW was materially impacted by the coronavirus outbreak. Through August 31, year-to-date enplanements totaled 2.9 million, down 57.5% from same period FY 2019 and is using its $82.3 million CARES Act monies to support airline costs. Ultimately, MDW's residual rate-making methodology puts revenue risk with the airlines, whose leases can only be discharged in airline bankruptcy and those leases have historically been upheld in bankruptcy court.

The airport is a department owned and governed by the City of Chicago (Ba1 Negative) and reported in the city's audit as an enterprise fund. The rating remains several notches above the GO because the airport is self-supporting and there are strong protections against diversion of airport revenues for non-aviation purposes via federal law. However, in the event of extreme fiscal distress, there is a degree of contagion risk stemming from its connections to the city. Deterioration of the city's financial condition could also change the local area economic environment which will impact MDW's market position.

RATING OUTLOOK

The stable outlook is predicated on our view that enplanements will recover at a rate similar to other US airports focused on domestic travel, with coverage, leverage and costs per enplanement returning to pre-pandemic levels.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

- Substantial enplanement growth from carriers other than Southwest

- Reduced overall leverage

- Improvement in credit quality of the City of Chicago

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

- Any change in FAA guidance or other precedent that would allow for greater revenue diversion from the enterprise to the city's general fund, or allow for debt service payments to be disrupted

- Deterioration of the credit profile of Southwest, or an indication that the airline may significantly reduce its presence at Midway

- A change to the airport's market position which leads to sustained enplanement declines

LEGAL SECURITY

Net revenues of the airport system. A rate covenant of 125% of debt service applies to first lien bonds and 110% of debt service for second lien bonds. Bondholders are protected by an additional bonds test that requires: 1) a consultant report showing that the rate covenant will be met or 2) a statement that the rate covenant has been met for the latest period with audited financial results. Debt service reserve requirements are cash funded at the standard three-prong test.

USE OF PROCEEDS

Not applicable.

PROFILE

Chicago Midway International airport is owned by the City of Chicago and operated by the Chicago Department of Aviation as a self-supporting enterprise fund of the city. The airport is located 10 miles southwest of Chicago's central business district with Southwest Airlines accounting for more than 90% of total enplanements for the last five years. The airport occupies approximately 840 acres with five active runways ranging from 3,800 to 6,500 feet. As of January 2020, there were 48 gates, approximately 52,000 square feet of concession space and 11,300 parking spaces. The airport's use and lease agreement was effective as of January 1, 2013 with a term through December 31, 2027 for signatory airlines and specifies a residual rate making methodology, where aggregate fees and charges paid by airlines must be sufficient to pay net costs of operating and maintaining the airport, including requirements under the bond indenture.

METHODOLOGY

The principal methodology used in these ratings was Publicly Managed Airports and Related Issuers published in March 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1140469. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Myra Shankin
Lead Analyst
Project Finance
Moody's Investors Service, Inc.
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New York 10007
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JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Kurt Krummenacker
Additional Contact
Project Finance
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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​
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