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Rating Action:

Moody's upgrades to A3 Metropolitan Knoxville Airport Authority, TN's Series V-A-1 revenue bonds; outlook is stable

17 Jan 2020

Approximately $8.8 million of rated debt affected

New York, January 17, 2020 -- Moody's Investors Service has upgraded Metropolitan Knoxville Airport Authority, TN's (authority) Local Government Public Improvement Bonds (Revenue Program V), Series V-A-1 to A3 from Baa1. The outlook is stable. The bonds were originally issued by the Sevier County Public Building Authority, TN.

RATINGS RATIONALE

The upgrade to A3 reflects the strong enplanement growth at McGhee Tyson Airport (TYS or airport) in recent periods, which has directly resulted in improved financial performance. Additionally, the authority successfully eliminated its exposure to variable interest rates by refunding the vast majority of the Series V-A-1 bonds with a $39.6 million fixed rate note with Branch Banking and Trust Company (BB&T, A1 (cr)) in the first half of 2019. The Series V-A-1 outstanding $8.8 million balance as of June 30, 2019 is fully hedged through its 2021 maturity via a swap with Raymond James Financial Products.

Enplanements reached a new record in fiscal 2019 at 1.2 million, as American Airlines Group, Inc. (LT Corporate Family Rating, Ba3 stable) and ultra-low cost carrier Allegiant Air have stimulated significant passenger growth at TYS by supplementing existing service (Miami and New York-LaGuardia), adding new routes to non-traditional markets (Pittsburgh and Denver) or upgrading to larger aircraft on existing routes. The local economy generates an adequate amount of demand for air travel originating in Knoxville but there also is a healthy amount of tourists coming to the region in order to visit the Great Smoky Mountain National Park, the most visited national park in the US according to the National Park Service. The Knoxville regional economy is anchored by a significant number of major employers in an array of industries ranging from healthcare, manufacturing, universities, and government institutions. The authority's master plan assumes an annual enplanement growth rate of 2.4% going forward, which we believe is reasonable. Enplanements have increased 18.8% through the first four months of fiscal 2020 through October.

Higher passenger throughout has resulted in increasing non-aeronautical revenues and stronger financial metrics such as the debt service coverage ratio (DSCR). The authority's net revenue DSCR reached 2.22x in fiscal 2019, up from 1.97x in fiscal 2018 and 1.74x in fiscal 2017. Given the expectation of continued enplanement growth at the airport, relatively level debt service schedule and no additional debt needed to fund capital improvements in the near term, we expect the authority's net revenue DSCR to remain at or exceed 2.0x going forward. Liquidity remains a key credit strength for the authority and reached 906 days at fiscal year-end 2019.

The A3 rating also considers the competition for passengers within the air service area from much larger airports like Nashville and Atlanta, both of which are within a reasonable driving distance between two and three hours. Additionally, the rating also factors in the lack of an indenture required 12-month cash-funded debt service reserve fund for all of the outstanding series of debt and fixed rate notes. However, Moody's acknowledges the fact that the authority strives to maintain a debt service reserve fund of around two times the current debt service balance, including interest.

RATING OUTLOOK

The stable outlook considers our expectation of conservative budgeting and management practices that results in strong financial performance with DSCRs above 2.0x and liquidity above 600 days cash on hand.

FACTORS THAT COULD LEAD TO AN UPGRADE

- Significant expansion in the regional economy that produces sustainable enplanement growth above the national average

- Meaningful expansion in air service offerings combined with increased competition and lower average airfares and airline costs

- Introduction of a debt service reserve fund for all outstanding series of debt

FACTORS THAT COULD LEAD TO A DOWNGRADE

- Net revenue DSCR below 1.75x on a sustained basis

- Liquidity below 600 days on a sustained basis

LEGAL SECURITY

The bonds are secured by the net revenues of the authority pursuant to loan agreements between the authority and the Public Building Authority of Sevier County (PBA). The PBA is a conduit issuer. The bonds are secured by a rate covenant that requires the authority to maintain rates and charges sufficient to provide for 1.2x of debt service requirements. There is also an additional bonds test in which net revenues must exceed 120% of debt service requirements, either prospectively or retrospectively. There is no indenture required debt service reserve fund for any of the outstanding bonds.

PROFILE

Metropolitan Knoxville Airport Authority, TN is an instrumentality of the City of Knoxville. The authority operates McGhee Tyson Airport (TYS) and the Knoxville Downtown Island Airport, a general aviation reliever airport. The authority is evaluating the development of a general aviation airport in Oak Ridge. TYS has two 9,000 by 150 foot parallel runways, one of which is under construction and upon completion will increase to 10,000 feet in length. There are also 12 gates, 9 rental counters and more than 4,000 parking spaces. The airfield is shared with the Tennessee Air National Guard and the Tennessee Army National Guard.

TYS is an origination and destination (O&D) airport and the third largest airport in the state. The primary service area for the airport is the City of Knoxville and its Metropolitan Statistical Area (MSA), which comprises the heart of "Tennessee Resource Valley". In addition, a broader regional market is defined as the Tennessee, Kentucky, Virginia, North Carolina, South Carolina and Georgia counties lying within 100 miles of McGhee Tyson Airport, which is the largest airport in the region.

METHODOLOGY

The principal methodology used in this rating 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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