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Rating Action:

Moody's downgrades to A3 from A2 the Phoenix, AZ Airport Enterprise - Car Rental Facility revenue bonds; outlook stable

20 Nov 2020

New York, November 20, 2020 -- Moody's Investors Service has downgraded to A3 from A2 the rating on Phoenix (City of) AZ Airport Enterprise - Car Rental Facility revenue bonds. The outlook is stable. The rating action affects approximately $302 million of revenue bonds outstanding.

RATINGS RATIONALE

The downgrade reflects the broad contraction in air travel and related demand for rental car activity during the coronavirus pandemic at a time when the facility had historically low liquidity because of recent capital investments. At the same time, leverage is higher than other rated rental car facilities. Demand for socially distanced vacations at regional attractions like the Grand Canyon and Sedona will buoy the Phoenix airport rental car market, but business travelers will be slow to return. The strong market position of the Phoenix Sky Harbor International Airport as the dominant air service provider in Arizona and domestic tourism draw in a time of low international travel supports prospects for a faster post-coronavirus recovery than the airports sector nationally.

In 2019, the rental car agreements between the airport and rental car companies were amended to provide for contingent rent if customer facility charge (CFC) collections are insufficient to pay debt service and O&M. This is a favorable change for bondholders in a period of high uncertainty. Management currently does not anticipate imposing contingent rent or increasing the CFC rate, but these options are on the table if conditions worsen. The current CFC rate of $6.00 per transaction day is above average which may limit headroom for a rate increase. Management will contribute $5 million of its CARES Act proceeds to support the facility in fiscal 2021.

Moody's expects net revenue DSCRs, which subtracts reimbursements to the City of Phoenix for transportation O&M, will drop below 1.0x in fiscal 2021 and remain below 1.5x through at least fiscal 2022 in Moody's range of cases. Consequently, liquidity will decline in fiscal 2021 before a gradual recovery that is significantly slower than Moody's expectation for liquidity accumulation before the outbreak. Liquidity was at a weaker position in the initial months of the pandemic, ending fiscal 2020 (June 30) with cash reserves equal to 1.8x the following year's debt service. Surplus CFC cash reserves, together with additional leverage, were used to fund the Sky Train project which will improve connectivity to the ConRAC compared with the current busing system and have environmental benefits by removing carbon emitting busing operations. The project is currently on schedule and on budget, and Stage 2 of construction is slated for completion in mid-2022. Moody's views superior liquidity to be a distinguishing factor for ConRAC facilities given the potential for medium to long-term competitive threats from other forms of transportation like transportation network companies or autonomous vehicles.

The rapid spread of the coronavirus outbreak is creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The airports sector, as well as related rental car facilities, has been one of the sectors most significantly affected by the shock given its sensitivity to consumer demand and sentiment. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. However, the situation surrounding coronavirus is rapidly evolving and the longer term impact will depend on both the severity and duration of the crisis. The impact of the coronavirus crisis is a key driver for this rating action.

RATING OUTLOOK

The stable outlook reflects Moody's expectation that financial metrics like DSCRs and cash to debt service will remain suppressed but adequate for the rating category over the coming year before beginning a steady recovery. Moody's expects liquidity will hit a trough in fiscal 2021 but at least one year of debt service will be maintained in cash reserves, including the debt service reserve fund, in the expected range of cases.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

-Liquidity measured by cash to debt service above 4.0x

-DSCR, net of O&M reimbursements, consistently above 1.5x

-Completion of the Sky Train Phase 2 extension on time and budget

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

-DSCR, net of O&M reimbursements, below 1.25x for a sustained period

-Protracted O&D enplanement declines

LEGAL SECURITY

The bonds are secured by pledged revenues of the facility, primarily customer facility charge (CFC) revenues net of administrative expenses and transportation O&M costs. The bonds are additionally supported by a cash funded debt service reserve fund.

USE OF PROCEEDS

Not applicable.

PROFILE

CFC revenues are charged to rental car users that land at Phoenix Sky Harbor Airport. Most rental car companies are located in consolidated rental car facility near the airport that is accessed by city provided bus service. The facility was completed in 2006.

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.

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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.

Earl Heffintrayer
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Kurt Krummenacker
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No Related Data.
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