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29 May 2019
New York, May 29, 2019 -- Moody's Investors Service ("Moody's") has assigned an A2 rating to the Kansas City (City of) MO Airport Enterprise's $98.5 million Airport Special Obligation Bonds (Kansas City International Airport Terminal Modernization Project) Series 2019A (AMT), $800.0 million Airport Special Obligation Bonds (Kansas City International Airport Terminal Modernization Project) Series 2019B (AMT), and $65.0 million Airport Special Obligation Bonds (Kansas City International Airport Terminal Modernization Project) Series 2019C (Non-AMT) issued by the Kansas City Industrial Development Authority. The airport additionally has $110 million of General Improvement Airport Refunding Revenue Bonds rated A1. The outlook is stable.
The A2 rating on the senior lien appropriation obligations is based on the conditional lien that the obligations will have on net revenue, weaker than the unconditional claim provided for senior lien airport revenue bonds that are rated A1 (and were affirmed on January 28, 2019 considering the credit effects of the planned appropriation obligations), and the large amount of debt expected to fund the terminal modernization project (TMP). Debt issuance for the program, projected by the airport to increase to slightly more than $1.5 billion, will increase adjusted debt per O&D enplanement to near $285, which is high for an airport of its size. The high leverage will be mitigated by provisions in the proposed airline use and lease agreement that provides for residual rate-making to recover actual debt service and operating expense while also providing for annual deposits to a capital fund that will result in debt service coverage ratios by net revenues above 1.25x once the TMP is completed. The A2 rating additionally considers the demonstrated need for a modern terminal facility that meets the needs of airlines, reduces operational inefficiencies of multiple screening areas, and provides for greater opportunities for concession revenue than the current facility provides.
The ratings consider that construction risk of the TMP is managed through a development agreement with experienced developer Edgemoor that contains a guaranteed maximum price ($1.36 billion) that includes ample contingency and escalation equal to 17% of hard construction costs. Construction risk is also addressed through 100% performance bonds from Edgemoor's contractor and the ability of the airport to step in to subcontracts in the event the developer is unable to fulfill its obligations. The remaining $140 million of project costs will be procured by the airport or by airlines that enjoy better purchasing power for some items such as hold room furniture. The approach to construction management is stronger than most airport projects.
Senior appropriation obligations achieve a senior pledge of net revenues only after the city appropriates debt service for the next fiscal year and the airport delivers a certification that the rate covenant is expected to be met, providing a rating distinction from outstanding senior lien airport revenue bonds. Moody's expects these events to occur on an annual basis given the city's existing debt policies, charter requirement to pass a budget well ahead of the fiscal year, and ample demand for the airport to produce adequate net revenue under the terms of the use and lease agreement. Federal legislation that limits to the use of airport derived revenue from being used for non-aviation related purposes also eliminates the potential that the city not appropriate and use funds for other general purposes. Limits on airport revenue supports an appropriation obligation rating closer to that of the senior airport revenue bonds. The structure of the senior appropriation obligations has not been court tested and weighs on the rating.
The A2 rating also reflects the moderate economic conditions of the service area, where Moody's expects recent strong growth to moderate and follow national growth over the long-term, posing a challenge to the airport consultant's long-term enplanement growth rate of 2.4%.
The stable outlook reflects our expectation airlines will sign the airport use and lease agreement by the May 30, 2019 deadline, that cost increases to the TMP will be low, and that low single digit enplanement growth will support expected credit metrics.
FACTORS THAT COULD LEAD TO AN UPGRADE
- Completion of the TMP below current GMP costs.
- Enplanement growth well above expectation of 2.4% annual growth that reduces adjusted debt per O&D enplanement of $200 or airline cost per enplanement below $10.
FACTORS THAT COULD LEAD TO A DOWNGRADE
- Significant construction cost overruns either through relief events or replacement of the developer.
- Adjusted debt per O&D enplanement above $350, which could occur with cost overruns or a decline in enplanement levels from fiscal 2019 levels.
- Failure of the city to appropriate debt service for the bonds
Senior appropriation obligations are conditionally secured by the net revenues of the airport on parity with senior lien revenue bonds annually if the city appropriates debt service for the obligations and delivers a certificate that the airport expects to meet the rate covenant for the upcoming fiscal year. If either of those events does not occur, bonds are subordinate to senior lien airport revenue bonds in the fiscal year in which the conditions are not met. All bonds are additionally secured by a series specific cash funded reserve fund, though the airport may fulfill the debt service reserve fund requirements for the appropriation obligations through a surety from a credit worthy counter party. The rate covenant requires net revenues, including the use of rolling coverage of 25% of debt service, equal to or above 1.25 times senior debt service (which includes senior appropriation obligation debt service if conditional requirements are met) and 1.00 times total debt service.
USE OF PROCEEDS
Proceeds of the Series 2019A, 2019B, and 209C bonds will be used to pay costs of the Terminal Modernization Program, fund a debt service reserve, and pay issuance costs.
The enterprise is a department of the City of Kansas City, Missouri. The department oversees the operation of Kansas City International Airport (MCI) along with the Charles B. Wheeler Downtown Airport, which is a general reliever airport. Both airports are located within the city's limits.
The Kansas City International Airport (MCI) is located 18 miles north of downtown Kansas City, Missouri, and is comprised of 10,680 acres. MCI officially opened on November 11, 1972 and serves as the primary passenger air carrier airport. MCI has three fully instrumented runways and a full complement of parallel taxiways that are capable of handling any aircraft in service today. To accommodate all passengers, the airport has three passenger terminals that have a total of over one million square feet with 66 boarding gates and 47 passenger boarding bridges. Each of the three terminals includes a full complement of offices, restrooms, areas for food and beverage concessions, areas for news and gift shops, departure lounges and baggage handling facilities though only 2 terminals comprising 41 gates are currently in operation. The airport has 25,471 parking spaces to accommodate vehicles for airport visitors.
The Charles B. Wheeler Downtown Airport (MKC) formerly served as the city's air carrier airport prior to MCI's opening in 1972. The airport is conveniently located across the river from the downtown area and is comprised of 601 acres, approximately the same size as when it was dedicated in 1927. The airport currently services the general aviation community as a reliever airport.
The principal methodology used in these ratings was Publicly Managed Airports and Related Issuers published in March 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
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