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Rating Action:

Moody's revises outlook of Birmingham Airport Authority, AL to positive; A3 rating affirmed and assigned to Series 2020 bonds

05 Mar 2020

Approximately $259.6 million of rated debt affected

New York, March 05, 2020 -- Moody's Investors Service ("Moody's") has revised the outlook of Birmingham Airport Authority, AL (authority) to positive from stable. Simultaneously, Moody's has affirmed the A3 rating on the outstanding airport revenue bonds and assigned an A3 rating to the $121.0 million Airport Revenue Bonds, Series 2020 (Non-AMT). Upon the closing of the Series 2020 bond sale, the rating will be withdrawn on the Series 2010 airport revenue bonds.

The authority operates Birmingham-Shuttlesworth International Airport (BHM or airport).

RATINGS RATIONALE

The revision of the outlook to positive primarily reflects the authority's improved leverage position and financial flexibility. In December, the Authority used cash on its balance sheet to prepay its Series 2003 and Series 2007 Airport Revenue Bonds. By the end of fiscal 2020 (ended June 30), the Series 2020 bonds will be the only series of debt outstanding and indebtedness will total $107 million versus $167 million as of fiscal year end 2019. Debt per origin and destination (O&D) enplanement will fall to $70 (or $96 including Moody's Adjusted Net Pension Liability (ANPL)), versus $110 (or $139 including the ANPL) in fiscal 2019. Given the authority's modest 2020-2024 capital improvement plan that does not require additional debt, indebtedness will continue to decline by an average of approximately $6 million annually over the next decade to approximately $45 million outstanding at the end of fiscal 2030.

As a result of the deleveraging, debt service requirements will drop to under $10 million per year from $16 million historically, resulting in airline cost savings between $2 to $3 per enplaned passenger. BHM's market position and ability to attract additional low cost and ultra-low cost carrier service stands to benefit from the annual debt service reduction, by increasing airline competition, driving down average air fares and stimulating further demand for air travel in the Birmingham-Hoover combined statistical area (CSA). Moody's has historically noted that a relatively high CPE in the $11-12 range has been cost prohibitive for recruiting ultra-low cost airlines.

The decline in annual debt service requirements will also increase the authority's financial margins and headroom above its financial covenants, with its Moody's net revenue debt service coverage ratio (DSCR) projected to increase to around 2.2x by fiscal 2021 versus 1.5x historically. The authority's flat debt service schedule and operating expense controls will allow it to maintain DSCRs consistently above 2.0x over the next few years, assuming modest enplanement growth of around 1.5% annually. The higher margins and DSCRs bolster its ability to weather any potential short-term disruptions in air travel demand, including a scenario where the length and severity of the coronavirus outbreak intensifies or the grounding of The Boeing Company's (Baa1 rating under review for possible downgrade) 737 MAX is further prolonged.

RATING OUTLOOK

The positive outlook reflects Moody's expectation that the expected deleveraging will provide the authority a higher level of financial flexibility to better manage through the current uncertainty in the air travel market.

FACTORS THAT COULD LEAD TO AN UPGRADE

- Sustained enplanement growth at or above similarly-sized airports

- Sustained DSCRs above 2.0x on a Moody's net revenue basis

- Leverage below $100 adjusted debt per O&D enplaned passenger

- Maintenance of liquidity levels above 600 days cash on hand

FACTORS THAT COULD LEAD TO A DOWNGRADE

- Significant decline in enplanements due to weakened competitive position versus nearby airports

- Sustained declines in DSCR below 1.3x

- Leverage above $200 debt per O&D enplaned passenger on a sustained basis

- Liquidity below 300 days cash on hand

LEGAL SECURITY

According to the new 2020 trust indenture, which is largely similar to the 1990 indenture, airport revenue bonds, including the Series 2020 bonds, are secured by a pledge of net revenues of the authority. Passenger facility charges (PFCs) are not pledged to bondholders but can be used to pay debt service for PFC-eligible projects.

The authority covenants to maintain rates to cover debt service (net of PFC monies deposited into the Bond Fund) by at least 1.25x, inclusive of transfers from surplus funds of the authority up to 25% of the aggregate amount required to be deposited in the bond fund for such fiscal year. The debt service reserve fund is funded at the lesser of 125% of average annual debt service, maximum annual debt service, or 10% of principal.

Additional bonds secured by the net revenues of the authority may be issued. However, this is an either-or test: historical revenues provide at least 1.25x coverage of annual debt service of existing and new debt, or prospective revenues, based on an independent consultant's report, provide at least 1.25x coverage for (i) the earlier of a) each of first three fiscal years following completion of financed project; or b) the first three fiscal years following the capitalized interest period of the additional bonds; and, (ii) the first five fiscal years after the issuance of the additional bonds.

USE OF PROCEEDS

Proceeds of the Series 2020 bonds along with restricted cash currently held in the debt service reserve fund will be used to refund the outstanding Series 2010 bonds, fund the Series 2020 debt service reserve fund and pay the costs of issuance.

PROFILE

BHM is a small hub airport located five miles northeast of downtown Birmingham. The airport has two runways and one terminal building which opened in 2013 with three concourses. The airport offers commercial air service to 19 destinations from four airlines.

METHODOLOGY

The principal methodology used in these ratings was Publicly Managed Airports and Related Issuers published in March 2019. 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, 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.

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.

Jose Mendez
Lead Analyst
Project Finance
Moody's Investors Service, Inc.
7 World Trade Center
250 Greenwich Street
New York 10007
US
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.
250 Greenwich Street
New York, NY 10007
U.S.A
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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