New York, April 05, 2021 -- Moody's Investors Service has assigned Aa3 to the Charlotte (City of) NC Airport Enterprise's $277.56 million Airport Revenue Bonds, Series 2021A (Non-AMT) and $110.17 million 2021B (AMT). The outlook is stable.
RATINGS RATIONALE
The Aa3 rating is reflective of the fundamental strengths of Charlotte-Douglas International Airport (CLT), which combine one of the nation's lowest cost connecting hubs with a strong local economy and its growing demand for O&D travel. Enplanements have shown exceptional levels of resiliency through the coronavirus pandemic, and we expect recovery of demand for air service and financial metrics sooner at CLT than the US airport sector as a whole.
Coming into the pandemic, CLT's enplanements were at an all-time high, at nearly 24 million in FY 2019 with a growing percentage from O&D. Debt service coverage on a Moody's net revenue basis was 2.66x and its liquidity position among the strongest in Moody's rated portfolio at 1,455 days cash on hand. Its costs per enplanement were less than $2.00 despite material levels of capital spend, keeping it the lowest cost hub in American Airlines' network.
FY 2020 was impacted only in its last quarter, but enplanements were down approximately 19% to 19.4 million for the year. Management's response to these losses included a 6% budget reduction prior to CARES Act funding, service reductions, hiring freezes as well as targeted capital project deferrals; the result of these actions was only a 15% reduction in operating revenues. Moody's net revenue debt service was down to a still strong 1.55x, even without the benefit of the approximately $136 million in federal grants the airport received in FY 2020 which it opted to retain for future flexibility. Cost per enplanement was a still-low $2.26.
Given that FY 2020 had only a single quarter of impact from coronavirus, there is an expectation for further passenger declines for FY 2021 ending June 30, 2021. Financial metrics are expected to be further depressed until this demand recovers, which management forecasts in FY 2022. That said, despite the lower level of enplanements through the pandemic, American Airlines has demonstrated its commitment to CLT, with Charlotte's share of AA's total hub seat capacity increased from pre-pandemic levels. This indicates that AA is shifting connecting traffic away from its other domestic hubs in favor of Charlotte, which we believe is linked to its low cost structure. We think these actions will accelerate recovery and mitigate one of the airport's longer-term credit risk, the outsized exposure to reductions of AA's connecting operations.
The rapid and widening spread of the coronavirus outbreak and deteriorating global economic outlook have created a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.
RATING OUTLOOK
The stable outlook is predicated on our view that enplanements will recover at a rate faster than the broader US airport sector, with coverage, leverage and costs per enplanement returning to pre-pandemic levels.
FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS
- Successful completion of a capital plan which satisfies the airport's medium- to long-term infrastructure
- Sustained and projected debt service coverage ratio (DSCR) above 2.50x
- O&D enplanements above 8 million
FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS
- Sustained decrease in O&D enplanements
- Sudden and severe reduction in connecting traffic by American Airlines
- Material impact on financial margins from capital program: sustained decrease in net revenue DSCR below 2.0x, debt per O&D enplanement above $400, days cash on hand below 700
- Cost overruns or delays on the airports capital program that negatively affects airport operations or increase leverage above expectations
LEGAL SECURITY
All airport revenue bonds are secured by revenues after O&M. Passenger facility charges (PFCs) are not legally pledged but are expected to be used to support PFC Eligible Bonds and PFC Eligible Projects under the Bond Order.
The Bond Order defines revenues as operating revenues from Included Cost Centers, transfers and proceeds of business interruption insurance. The Included Cost Centers - the terminal complex and the airfield - determine airline rates and fees under the current airline agreement. Excluded Cost Centers include operating revenues from the city-owned fixed base operator (FBO) Wilson Air and cargo building, airline support facility, and other nonaeronautical leases. The Bond Order gives the City of Charlotte the option to include the Excluded Cost Centers in the net revenue pledge without going to the bondholders for consent, which it has opted to exercise beginning in FY 2022.
USE OF PROCEEDS
The 2021 issuance will be used to (i) refund outstanding Series 2010 and 2011 bonds for debt service savings, (ii) refinance 2020 BANs, (iii) fund certain capital improvements at Charlotte-Douglas International Airport, (iv) fund the debt service reserve fund and (v) pay the costs of issuance.
PROFILE
Charlotte-Douglas International Airport is classified by the FAA as a large hub and is the largest airport in the state of North Carolina and a connecting hub for American Airlines. CLT is located approximately seven miles from Charlotte's central business district. The airport is owned and operated as a department of the city. It has been run as an enterprise of the city since its establishment in 1935. The Aviation Director reports directly to the City Manager.
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.
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