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Rating Action:

Moody's assigns initial A2 rating to Allegheny County Airport Authority, PA's Series 2021 airport revenue bonds, outlook stable

30 Jul 2021

New York, July 30, 2021 -- Moody's Investors Service, ("Moody's") has assigned an initial A2 rating to Allegheny County Airport Authority, PA's $823 million Airport Revenue Bonds, Series 2021A (AMT) and Airport Revenue Bonds, Series 2021B (Non-AMT). The authority is still determining the par allocation for each series. A stable outlook has been assigned.

RATINGS RATIONALE

The A2 rating considers the solid market position of Pittsburgh International Airport (PIT) benefiting from no competition in the Pittsburgh metro area, a diverse carrier base and additional non-operating revenue sources from gas drilling royalty revenue, state gaming act revenue as well as passenger and customer facility charges.

Following a 62.8% drop in annual enplanements in 2020 during the pandemic, enplanements have recovered to around 70% of 2019 enplanements similar to the national average. The airport's long-term use and lease agreement provides downside protection in the event that recovery reverts to summer 2020 levels.

Construction risk at the airport is high. However, Moody's expects that the authority will successfully execute the approximately $1.5 billion Terminal Modernization Program (TMP), airside terminal renovations, and airline tenant fit-outs at Pittsburgh International Airport (PIT) in the next few years while minimizing disruptions to operations at the airport. The authority defeased all outstanding legacy debt in 2019 which provides headroom for accommodating the additional debt required for financing the construction of the project.

The TMP encompasses the rightsizing of the airport and the construction of a new landside terminal closer to the gates. The project will reduce the footprint of the airport terminal facilities, eliminate the people mover system, reduce operating expenses by around $20 million per year, modernize the concession area and address inefficiencies in the current set up that was designed for a connecting hub and not an O&D airport.

Debt service coverage will likely remain narrow at or above 1.1-1.2x starting in 2025 and we expect days cash on hand to remain around 400 days (449 days cash on hand fiscal 2020) going forward based on the residual rate making framework. Debt service will be capitalized until 2025. The current Airline Operating Agreement and Terminal Building Lease (AOA) is a residual agreement and extends through December 31, 2028. The signatory airlines that signed the AOA amendment and extension through the end of 2028 are Alaska Airlines, American Airlines, Delta Air Lines, Southwest Airlines, Spirit Airlines, and United Airlines. These airlines and their affiliates accounted for approximately 90% of the passenger market share at the airport in 2019 and 91% in 2020.

Adjusted debt to operating revenue will increase substantially with the debt issuance to around 7.6x in 2021 and peak at 10.5x in 2024. The current forecast assumes additional debt issuances in 2023 and 2024 to finance the remaining portions of the TMP, airside terminal renovations, and airline tenant fitouts.

A key risk to management's leverage forecast is cost overruns or delays that would require additional debt issuances to finance capital expenditures.

We expect that cost per enplanement (CPE) will likely decline from the high level in 2020 of $20.50 to levels around $12 on average nominal dollars in the period 2021-28 as traffic normalizes and returns to a trajectory of mature growth.

RATING OUTLOOK

The stable outlook reflects our view that enplanements will recover at a rate similar to other US mid-sized airports. It also reflects our expectation of stable but narrow DSCR around 1.1-1.2x from 2025 and days cash on hand around 400 days.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

- Liquidity above 600 days cash on hand

- Maintaining debt service coverage sustained at or above 1.5x with residual airline agreement

- Enplanements return to pre-pandemic levels on a sustained basis

- Successful completion of Terminal Modernization Project and realization of expected cost savings

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

- Decrease in liquidity to below 250 days cash on hand

- Debt service coverage below 1.1x

- Sustained decline in enplanements

LEGAL SECURITY

The bonds are payable from and secured by a pledge of net revenues of the airport system. PFCs are not considered pledged revenue but PFCs available for debt service can be used to reduce debt service. Other revenue from customer facility charges, gifts, grants, gaming revenue and natural gas revenues can be designated as other pledged revenues, if so designated by the authority.

Bondholders are protected by a rate covenant test: (1) net revenues in each fiscal year will be at least equal to the required deposits to all funds and (2) net revenues in each fiscal year and any amounts available in the coverage account will be at least 125% of annual debt service and 100% of debt service on subordinate obligations.

Bondholders also benefit from a 1.25x additional bonds test. A common debt service reserve will be funded at the standard 3-prong test. The debt service reserve fund is currently cash funded.

USE OF PROCEEDS

Allegheny County Airport Authority intends to use the proceeds of the Series 2021A and Series 2021B airport revenue bonds to finance a portion of the construction costs of the Terminal Modernization Project (TMP) and to repay outstanding amounts under a subordinated $150 million credit facility that matures December 31, 2022. At the time of issuance, the authority had no other airport revenue bonds outstanding.

PROFILE

The Allegheny County Airport Authority, PA owns and operates Pittsburgh International Airport (PIT) and the Allegheny County Airport (AGC). Enplanements reached 4.9 million passengers in fiscal year 2019 but declined by 62.8% to 1.8 million passengers in fiscal year 2020 as a result of the COVID-19 pandemic. The authority derives most of its revenues through operation of Pittsburgh International Airport (PIT). PIT is the primary commercial aviation airport in the Pittsburgh Metropolitan Statistical Area (MSA) and there is no major competition with a radius of 100 miles.

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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.

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.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK 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.

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No Related Data.
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