Chicago Chicago Midway International Airport; Airport; Joint Criteria

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1 Summary: Chicago Chicago Midway International Airport; Airport; Joint Criteria Primary Credit Analyst: Kevin R Archer, Chicago (312) ; Kevin.Archer@spglobal.com Secondary Contact: Joseph J Pezzimenti, New York (1) ; joseph.pezzimenti@spglobal.com Table Of Contents Rationale Outlook JULY 18,

2 Summary: Chicago Chicago Midway International Airport; Airport; Joint Criteria Credit Profile Chicago, Illinois Chicago Midway Intl Arpt, Illinois Chicago (Chicago Midway Intl Arpt) JOINTCRIT Long Term Rating AA/A-2 Downgraded Chicago (Chicago Midway Intl Arpt) Rationale S&P Global Ratings lowered its rating on the City of Chicago s $ million series 2014C second-lien revenue refunding bonds issued for Chicago Midway International Airport (MDW) to 'AA/A-2' from 'AA+/A-1'. The outlook is stable. The downgrade reflects the replacement of the existing letter of credit (LOC) from JPMorgan Chase Bank N.A. with a new LOC from Barclays Bank PLC on July 19, The rating's long-term component jointly reflects the rating on Barclays and the underlying rating (SPUR) on the Chicago Midway International Airport, assuming a low correlation level. The short-term component of the series 2014C bonds solely reflects the impact of the rating on Barclays. The Barclays LOC will cover principal and interest on the bonds, including the payment of unremarketed tendered bonds. The LOC also provides for a maximum of 49 days' interest coverage at a 12% rate. It is due to expire July 17, 2020, unless extended or terminated beforehand. At the same time, S&P Global Ratings affirmed its 'A' underlying ratings (SPUR) on the city's first- and second-lien general airport revenue bonds (GARB) issued for the airport. The outlook is stable. S&P Global Ratings also affirmed its 'AA+/A-1' rating on Chicago's second-lien revenue refunding bonds series 2004C-1, 2004C-2, and 2004D issued for MDW. The rating's long-term components reflect the application of joint criteria (assuming low correlation), between the secondary lien on the department's enterprise fund and direct-pay LOCs from Bank of Montreal for the series 2004C-1, 2004C-2, and 2004D bonds. The rating's short-term components reflect the liquidity support of each of the LOCs. The LOCs expire Nov. 25, The GARB rating reflects our overall view of MDW's creditworthiness and the very small amount of first-lien airport revenue bonds outstanding (only 2% of the total), with no plans to issue additional bonds on this lien. JULY 18,

3 The SPURs reflect MDW's good enplanement trends and consistently steady financial results despite its high debt levels. The rating also reflects our expectation that, despite the additional debt needs, the airport will maintain steady financial results. This is because of its fully residual nature and high levels of aeronautical activity due to its importance to Southwest Airlines Co. and serving the economically deep and diverse Chicago region. We also expect the city's pension issues will not negatively affect MDW's financial performance, given that Federal Aviation Administration regulations limit the use of airport revenues to airport purposes. As well, we expect the pension costs related to Midway's city employees will increase, but will be manageable given the residual nature of the airport's airline use and lease agreements. The SPUR reflects what we believe are the following credit strengths: A good competitive position as Southwest's largest hub and as a large-hub airport in the Chicago metropolitan area, providing low-cost carrier service to domestic travelers that it predominantly serves; Good air travel demand, with an average 10 million total annual enplanements from Enplanements increased 2.1% in 2016 to 11.3 million, a level that exceeds Midway's previous historical peak from fiscal 2015 (year ended Dec. 31), when it enplaned nearly 11.1 million passengers; Economically stable service area that provides a deep and diverse economy with good income levels; and Historically steady financial results that we expect to continue. In our view, offsetting credit risks include the airport's: Very high air carrier concentration and exposure to connecting traffic; and Debt levels we consider above-average and a rising airline cost structure from debt-financing capital improvement program (CIP) projects. Through its Department of Aviation, Chicago operates MDW and O'Hare International Airport. Only net revenues from MDW secure the bonds. Chicago levies a $4.50 passenger facility charge (PFC) per enplaned passenger that is not legally pledged but it uses to offset debt service before calculating annual rates and charges. The city also levies a customer facility charge (CFC) related to car rental activity at MDW. The CFC increased to $4.75 from $3.75 in July These revenues are legally pledged to pay debt service on MDW's second-lien 2010C bonds. As of Dec. 31, 2016, Midway has approximately $1.8 billion in revenue bonds outstanding, of which 98% (or $1.75 billion) is second-lien GARBs and 2% (or $28.7 million) is first-lien. Only about 7% of the airport's total debt is unhedged variable-rate. MDW has no put bonds or direct purchase obligations or CP notes outstanding. If it did, they would be subordinate to the revenue bonds. The CP program's capacity is $85 million. We also expect the airport to issue new money and refunding bonds only under the second lien, which has been its practice since In addition, the second-lien indenture allows the use of variable-rate bonds, which the first-lien indenture does not permit. We expect MDW will not issue additional first-lien bonds, not even for refunding purposes, because the remaining bonds outstanding are noncallable. MDW, 30 miles south of O'Hare and nine miles southwest of Chicago's central business district, serves a distinct market as a lower-fare alternative mainly for those traveling domestically. In 2016, it enplaned about 11.3 million passengers (63% are origin and destination passengers, and 97% are domestic), while O'Hare enplaned about 38.9 million (54% and about 86%, respectively). Despite its proximity to O'Hare, MDW has experienced relatively high JULY 18,

4 levels of traffic demand that have been generally good and stable. From fiscal years , MDW's total annual enplanements averaged 10 million, ranging from about 8.6 million (in 2009) to about 11.3 million (in 2016). Following record high fuel prices and poor economic conditions, enplanements declined 11.2% at MDW in fiscal 2008, followed by eight consecutive years of year-over-year growth, averaging 3.9% annually. Management attributes the improvement to additional markets, better economic conditions, and expanding service from Southwest. For the five months ended May 31, 2017, total enplanements were 1.5% lower than the same period in 2016 due mainly to weather delays. Despite the small decrease, we expect enplanements will be generally stable. MDW has what we consider very high air carrier concentration and moderately high exposure to connecting traffic, with Southwest--the top passenger airline carrier--accounting for over 90% of total enplanements, and connecting traffic representing roughly half of total enplaned passengers. However, MDW's importance to Southwest as its largest hub airport somewhat offsets the risk. The airport's airport use agreement and facilities lease took effect Jan. 1, 2013, with a Dec. 31, 2027, expiration date. MDW employs a residual rate-setting approach. The agreement requires revenue sharing between the airport and airlines to incentivize growth of non-airline revenues, continual investment in airport infrastructure, and increased gate usage. Although the agreement's adoption did not coincide with the adoption of a multiyear CIP, MDW does require airline approval for capital projects. The city may implement any project without further approval so long as a majority-in-interest does not disapprove. MDW shares non-airline revenue with the airlines under certain conditions. As a fully residual airport, MDW's overall financial performance has been steady, with historical total GARB debt service coverage (DSC; S&P Global Ratings-calculated) of all debt (first and second liens) that has stayed at levels we consider sufficient. They have generally ranged from 1.0x to 1.1x from , and we expect this will continue. The indenture securing the GARBs includes an unlimited 1.1x rolling coverage rate covenant, which allows uncommitted cash in the revenue fund and other available money (such as PFC and federal letter-of-intent funds dedicated to GARB debt service) to meet the covenant test. The 1.1x coverage requirement is low relative to the 1.25x requirement we typically see for GARB financings. Our DSC calculations exclude the uncommitted cash in the revenue fund. Including these funds, as permitted for satisfying the rate covenant and additional bonds test, total DSC for 2016 was about 1.01x and 1.11x without. Given the airport's fully residual nature, we expect MDW's total GARB DSC (S&P Global Ratings-calculated) will be near 1x for Historically, MDW has maintained what we consider below-average liquidity relative to that of its peers. We expect this will fluctuate somewhat, and will likely remain below average but at levels we consider adequate for the rating. From fiscal years , the airport's audited unrestricted cash and investments balance has ranged from about $38.7 million to $69.5 million, providing days' worth of unrestricted cash on hand to cover operating expenses. Including MDW's operations and maintenance (O&M) reserve, the airport's liquidity position has ranged from about $61.7 million-$89.5 million, providing days' cash on hand. For fiscal year-end 2016, MDW's audited unrestricted cash and investments balance totaled $43.8 million, equaling 113 days' cash on hand and 175 days after including the O&M reserve. City officials estimate that the airport will have similar levels of cash at the end of fiscal MDW has two floating-to-fixed-rate swaps outstanding that relate to the 2004C and 2004D second-lien variable-rate JULY 18,

5 bonds, and has Goldman Sachs Capital Markets Inc. (guaranteed by Goldman Sachs Group Inc.) and Wells Fargo as counterparties. As of June 30, 2017, the Goldman swap had a mark-to-market value of approximately negative $15.3 million, while the Wells Fargo swap had a mark-to-market value of approximately negative $10.8 million. These valuations are not in MDW's favor. The swaps, in our view, pose low contingent liquidity risk to the airport, given the differential between the underlying rating on MDW's second-lien revenue bonds (which we rate 'A') and the rating trigger (which is below 'BBB+') that would prompt the airport to make a swap termination payment if the swap valuation at termination is not in MDW's favor. MDW's CIP for totals $427.6 million, of which roughly $139.6 million is for parking and roadway projects; $117.8 million for terminal projects; and $71.9 million for airfield, terminal ramp, and support facilities projects. Most of the CIP costs will be debt-financed, with $291.2 million from the 2016 bond issue, about $79.7 million from the series 2014 bond issue, and about $18.6 million from the series 2010 bond issue. About $34.3 million of airport improvement program grants and $3.7 million of Transportation Security Administration grants will fund the rest. We consider MDW's debt burden above average but manageable relative to that of peers. The airport's debt per enplanement is about $157, based on $1.8 billion of debt outstanding as of Dec. 31, million enplaned passengers in We consider MDW's airline cost per enplanement average relative to that of peers. The airport's airline cost structure for 2015 is $9.25 per enplanement, $8.92 for fiscal 2016 (assuming nearly 11.5 million enplanements), and a budgeted $9.62 for fiscal 2017 (assuming 11.9 million enplanements). Projections done by a consultant in connection with the 2016A and 2016B bonds, which city officials still consider valid and we consider reasonable, assumes annual increases of 2.1% in 2017, 2.0% in , 1.9% in 2023 and 2024, and 1.8% in The projections include the resulting debt service from the series 2016 bonds and MDW's projected airline cost per enplanement reaches $15.13 projected by Due to the use agreements' fully residual nature and a permissive and very low 1.1x rate covenant, we expect total DSC (S&P Global Ratings-calculated) to remain low, near 1x. Outlook The stable outlook reflects our expectation that total GARB DSC (S&P Global Ratings-calculated) will stay near or above 1x, the airport's liquidity position will stay near current levels, and enplanement levels will be relatively stable during the two-year outlook period. Upside scenario Although unlikely, we could raise the ratings within the outlook period depending how well MDW manages higher debt levels and a higher airline cost structure from debt-financing its CIP. The airport's ability to consistently maintain an adequate liquidity position and total GARB DSC (S&P Global Ratings-calculated) at or above 1x as it proceeds with funding its capital needs will be important factors. Downside scenario Although unlikely, we could lower the ratings within the two-year outlook period if the airport is unable to consistently maintain 1x total GARB DSC (S&P Global Ratings-calculated), MDW's liquidity position materially erodes, or enplanement levels drop significantly. JULY 18,

6 Ratings Detail (As Of July 18, 2017) Chicago Midway International Airport 2nd ln Long Term Rating A/Stable Affirmed Chicago, Illinois Chicago Midway Intl Arpt, Illinois Chicago (Chicago Midway International Airport) (wrap of insured) (MBIA) (ASSURED) (SEC MKT) Chicago (Chicago Midway Intl Arpt) arpt (BAM) (SECMKT) Chicago (Chicago Midway Intl Arpt) AIRPORTS Long Term Rating A/Stable Affirmed Chicago (Chicago Midway Intl Arpt) JOINTCRIT Long Term Rating AA+/A-1 Affirmed Chicago (Chicago Midway Intl Arpt) JOINTCRIT Long Term Rating AA+/A-1 Affirmed Chicago (Chicago Midway Intl Arpt) (BAM) Chicago (Chicago Midway Intl Arpt) 2nd lien ser 2004C -1&2 (AMT) dtd 12/14/2004 RMKT dtd 05/06/2010 due 01/01/2035 Long Term Rating AA+/A-1 Affirmed Many issues are enhanced by bond insurance. Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at for further information. Complete ratings information is available to subscribers of RatingsDirect at All ratings affected by this rating action can be found on the S&P Global Ratings' public website at Use the Ratings search box located in the left column. JULY 18,

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