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Rating Action:

Moody's revises outlook for Chicago IL O'Hare Airport Enterprise revenue and PFC-backed bonds to negative

09 Nov 2020

New York, November 09, 2020 -- Moody's Investors Service has revised the outlook on the outstanding Chicago (City of) IL O'Hare Airport Enterprise's (ORD) General Airport Senior Lien Revenue Bonds (GARBs) and Passenger Facility Charge (PFC-Backed) Revenue Bonds to negative from stable. The A2 ratings on $1.1 billion of GARBs and $419 million of PFC-Backed Bonds have been affirmed. Overall, ORD has $8.8 billion of GARBs and $471 million of PFC-Backed Bonds outstanding.

RATINGS RATIONALE

The airport's outlook has been revised to reflect the additional expected debt for the airport's planned capital expansion, bringing its leverage and costs per enplanement well above its peers. ORD has announced plans to move forward without adjustments to scope and timeline despite uncertainties around the recovery of air service demand. At $11.2 billion the program is amongst the largest in the US in terms of scope and amount still to be funded. ORD expects to issue approximately $7.8 billion through FY 2025, which the long-term signatory airlines approved in 2018. However, their current willingness to pay given passenger and financial loses may be reduced.

Fundamentally, ORD maintains a very strong market position and the large and economically diversified Chicagoland service area provides steady demand for air travel. At over 42 million enplanements, ORD was ranked third in the nation in FY 2019. Like all rated airports, ORD was materially impacted by the coronavirus outbreak and its performance is typical of an internationally-focused hub in the United States. Through July 31, year-to-date enplanements totaled 9.5 million, down 61% from same period FY 2019; PFC collections year-to-date July 31 were down 57.9% to $45.1 million. The airport's most recent scenarios expect recovery of FY 2019 enplanements levels in FY 2024 in the base case and FY 2025 in the low case, driven by domestic travel. ORD made strong efforts to reduce spending and it used the majority of its $294.4 million CARES Act monies to support airline costs; it does not expect to draw on reserves in FY 2020. Ultimately, ORD's residual rate-making methodology puts revenue risk with the airlines, whose leases can only be discharged in airline bankruptcy and those leases have historically been upheld in bankruptcy court.

The airport is a department owned and governed by the City of Chicago (Ba1 Negative Outlook) and reported in the city's audit as an enterprise fund. The rating remains several notches above the GO because the airport is self-supporting and there are strong protections against diversion of airport revenues for non-aviation purposes via federal law. However, in the event of extreme fiscal distress, there is a degree of contagion risk stemming from its connections to the city. Deterioration of the city's financial condition could also change the local area economic environment which will impact ORD's market position.

RATING OUTLOOK

The negative outlook reflects the expectation of additional leverage that will take ORD's leverage and airline costs well above peer airports and the strain of coronavirus-related shutdowns on demand at the airport and on the city's structural imbalance.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

- A capital plan which requires less additional debt to complete, reducing the costs recovered from the airlines while maintaining the competitiveness of the airport

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

- Any change in FAA guidance or other precedent that would allow for greater revenue diversion from the enterprise to the city's general fund, or allow for debt service payments to be disrupted

- A significant change in the business strategy of United or American Airlines

- A change to the airport's market position which leads to sustained enplanement declines or a market position materially weaker than before the coronavirus crisis relative to other airports.

LEGAL SECURITY

Senior lien bonds are secured by a pledge of general airport revenues. The Series 2011A, Series 2008A, and Series 2010F bonds are also secured by a subordinate lien pledge of the airport's PFC revenues. The PFC support is pledged through maturity on the 2011A bonds, but only through 2018 for the 2008A and 2010F bonds. The claim on subordinate lien PFC revenues is junior to the airport's PFC revenue bonds, payments for certain projects at the Gary/Chicago International Airport and would be junior to any Subordinated PFC Obligations issued by the airport, though none are currently outstanding or planned. The Series 2011B bonds are also secured by letter of intent grant receipts net of anticipated pay-go grant receipts. The PFC-backed revenue bonds are secured by a pledge of PFC revenues, with no recourse to airport revenues.

The rate covenant in the senior lien indenture provides for sufficient funds to pay the operation and maintenance expenses at O'Hare and at a minimum meet 110% of the total debt service on all outstanding senior lien bonds. All outstanding senior lien bonds are supported by a common debt service reserve sub-fund equal to the maximum annual debt service.

USE OF PROCEEDS

Not applicable.

PROFILE

O'Hare International Airport is owned by the City of Chicago and operated by the Chicago Department of Aviation as a self-supporting enterprise fund of the city. The airport is located 18 miles northwest of Chicago's central business district and is classified as a large hub airport by the FAA and is the primary commercial airport for the city. O'Hare occupies approximately 7,300 acres of land. The airport currently has seven active runways ranging from 7,500 to 13,000 feet with electronic and navigational aids that permit operations in more weather conditions. The airport has four terminal buildings, totaling 191 aircraft gates and four hardstand positions. Of the 191 gates, 20 are common use and 171 are preferential use allocated to United, American, Delta, Air Canada, Spirit, JetBlue and Alaska under the 2018 Airline Use and Lease Agreement. The airport also has approximately 18,000 public parking spaces, a hotel, 19 air cargo buildings, and nine aircraft maintenance hangars. United Airlines and American Airlines both operate hubs out of the airport. The airport's use and lease agreement was effective as of May 12, 2018 for a 15-year term for long term signatory airlines and specifies a residual rate making methodology, where aggregate fees and charges paid by airlines must be sufficient to pay net costs of operating and maintaining the airport, including requirements under the bond indentures.

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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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.

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