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Rating Action:

Moody's changes outlook to negative on A.B. Won Guam International Airport Authority's Baa2 senior lien revenue bonds rating

14 Mar 2018

New York, March 14, 2018 -- Moody's Investors Service has affirmed the Baa2 rating on the A.B. Won Guam International Airport Authority's senior General Revenue Bonds and changed the rating outlook to negative from stable. This rating action follows Moody's recent outlook change to negative on the Ba1 Issuer Rating for the Government of Guam on March 13, 2018. For full details, please refer to the Government of Guam press release (https://www.moodys.com/research/Moodys-changes-outlook-on-Government-of-Guams-Ba1-Issuer-Rating--PR_904506217).

RATINGS RATIONALE

The change in rating outlook to negative reflects Moody's assessment of the linkage between Guam International Airport Authority and local economic conditions in Guam. As a result of the federal tax reform, the Government of Guam faces an estimated $67 million decrease in general fund revenue for fiscal year 2018. While the airport operates fairly independently from the government, we expect that the authority would not be able to disconnect itself from any material financial stress at the government level having a negative impact on local economic conditions and the tourism sector in the next 12 to 18 months.

Until now, the tourism sector and local economic conditions have not been impacted by the government's fiscal pressures. A deterioration of local economic conditions could put negative pressure on travel demand to and from the island, and would likely have an impact on enplanements and routes offered by airline carriers. In that regard, Delta Airlines has recently decided to no longer serve the Guam Airport and United Airlines also reduced some of its weekly Japan flights as result of lower demand from Japan. Guam Airport expects to offset the lost Delta and United seats in fiscal year 2018 largely with additional air travel offered by Air Seoul and other Korean airlines.

The Baa2 rating continues to benefit from the airport's monopoly position as the only commercial airport in the territory of Guam, providing an essential transportation link for an island economy. The authority's hybrid ratemaking framework has supported fairly stable operating performance over the last few years despite its inherent susceptibility to the volatility of passenger enplanements. Landing fees are based on a residual rate-setting methodology and enplanement fees, arrival fees and immigration inspection fees on a compensatory rate-setting methodology. Constraining credit factors include the airport's limited scale and higher vulnerability to event risks such as typhoons as well as political events, and the narrowness of its island economy with a significant dependence on a volatile tourism sector and US military activity. Passenger enplanements are largely concentrated on Japan (55% of passenger enplanements) and Korea (30% of passenger enplanements). Enplanement trends are vulnerable to economic downturns in these markets and a strengthening of the US dollar against their local currencies.

FACTORS THAT CAN LEAD TO AN UPGRADE

- Sustained enplanement growth from non-traditional markets that leads to lower airline costs and greater passenger diversity

- Completion of capital program on time and on budget

- Improved liquidity profile

FACTORS THAT COULD LEAN TO A DOWNGRADE

- Erosion of the government's financial position and liquidity or deteriorating local economic conditions that would negatively impact the authority's financial flexibility

- A downturn in enplaned passengers that weakens the authority's financial profile

- Liquidity levels materially below historic levels

LEGAL SECURITY

The general revenue bonds are secured by a pledge of revenues of the authority derived from the authority's fully residual airline use and lease agreement, with operation and maintenance costs paid prior to debt service set-asides. Bonds benefit from a rate covenant of net revenues at 1.25x debt service that includes the use of rolling coverage of 25% of debt service. Bonds are also protected by an additional bonds test that requires either historical or prospective debt coverage of net revenues at 1.25x maximum annual debt service and a cash funded debt service reserve sized to the standard 3-prong test. The debt service reserve fund is invested through an investment agreement guaranteed by CDC Ixis (backed senior unsecured rated Aa2), a French bank. The guarantor must post collateral or issue a new guarantor if the rating falls below Aa3.

PROFILE

The A.B. Won Guam International Airport is the only commercial airport on the island of Guam for both passenger and cargo that offers service to US mainland and other countries in the Asia-Pacific region. The airport authority is a public corporation of the Government of Guam.

The airport has a 758,000 square foot terminal with 21 airline parking positions. There are two parallel east-west runways. Airport facilities include various cargo facilities and hangars as well as two business/industrial parks. In fiscal year 2016, the airport generated total operating revenue of around $65 million and enplanements were around 1.8 million.

METHODOLOGY

The principal methodology used in these ratings was Publicly Managed Airports and Related Issuers published in October 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

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

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.

Kathrin Heitmann
Lead Analyst
Project Finance
Moody's Investors Service, Inc.
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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.
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JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

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