Kroll Bond Rating Agency, Inc. U.S Airports Harvey Zachem Senior Director September 7, 2014
KBRA Airport Rating Methodology Kroll Bond Rating Agency (KBRA) published its General Airport Revenue Bond (GARB) Rating Methodology on April 23, 2014. Researched aviation/airport trends since deregulation, giving particular attention to impact of exogenous factors such as, economic downturns and catastrophic events. Gained appreciation of management s critical importance. Methodology applies only to senior and subordinate lien GARBs - not applicable to stand-alone passenger facility charge (PFC), customer facility charge (CFC), and letter of intent (LOI) bonds. Dallas-Fort Worth International Airport (DFW) marked our first airport rating assignment on June 9, 2014.
KBRA Approach KBRA s rating assessment is based on GARB s overall credit strength and reflects the ability to make timely, in-full debt service payments. Identifying six critical rating determinants: 1. Management 2. Economics/Demographics of the Service Area 3. Airport Utilization 4. Airport Debt/Capital Needs 5. Airport Finances 6. Legal Mechanics & Security Provisions
KBRA Approach Within each determinant, several appropriate sub-determinants are employed, some qualitative and others quantitative, to make a rating assessment for that determinant. The overall rating is determined by balancing these component ratings. Unlike a mathematical formula, certain determinants may weigh heavily depending on the profile of an individual issuer. KBRA undertakes a bankruptcy assessment with our outside counsel. KBRA also applies a stress test during the airport rating process under scenarios that KBRA expects the issuer could reasonably experience.
Management KBRA believes that airport management is complex and multi-faceted, and requires a high degree of expertise. In a deregulated environment, airports have been buffeted by the dynamics of the market and managers have had to respond to recessions, terrorist attacks, weather events, and pandemics. Given this level of complexity, management experience is highly valued by KBRA. Forward-thinking policies and procedures are viewed by KBRA as critical to an airport s long-term viability. KBRA expects airport management and signatory airlines to demonstrate ability to reach consensus on important issues. Processes and procedures for the safe, secure, and efficient operation of the airport in compliance with applicable regulations are viewed favorably by KBRA. Financial management policies and procedures include multi-year budgeting and frequent review of performance.
Economics/Demographics of the Service Area KBRA s approach assesses the size, strength, nature and diversity of the airport s catchment area, using metropolitan statistical area (MSA) census data and other economic information. The business environment in support of air travel is viewed closely. KBRA analyzes the degree of airport competition based on the proximity of larger or similar sized airports. Connecting hubs are analyzed based on geographic location, airport facilities, and business decisions made by the airlines, especially in light of the closure of certain hubs in recent years.
Airport Utilization KBRA views the level of passenger activity at a particular airport as an important determinant of credit strength. Year-to-year enplanement and available seat trends are also considered as a determinant of airline activity and non-airline revenue generation. Additional utilization metrics used include: origin and destination (O&D) enplanements carrier mix connecting and international gateway traffic. As airlines look to reduce excess capacity and undergo consolidation, KBRA believes that to fully assess these changes, airline load factors for a particular airport should be compared with the airline s system-wide average. Similarly, carrier yield by the Airport s primary carrier is compared to the airline s system average as a proxy for airport value to carriers.
Airport Debt/Capital Needs KBRA assesses the capital improvement plan from both content and planning process perspectives, including stakeholder involvement. Airside/Landside capacity is evaluated to determine the Airport s capacity to accommodate future needs. Debt issuance versus use of other funding sources is also considered. KBRA expects that the term of bonds will not be greater than asset being financed, and favors debt service structures to be declining to level. Various ratios are used to determine affordability and future financing flexibility, including debt per enplaned passenger and maximum annual debt service per enplaned passenger. These ratios are compared to calculated medians. Level of variable rate debt and synthetic interest rate management products within a system s debt structure. KBRA views a clearly defined reserve policy to manage variable rate debt and potential termination event risk as positive.
Airport Finances KBRA expresses no preference between residual, compensatory, or hybrid approaches. KBRA generally reviews debt service coverage ratios, reserve and liquidity levels, leverage and revenue, and expense trends as part of rating process. Airline cost per enplanement (CPE) is an overused metric, but is utilized as the industry-wide standard metric of affordability of an airports rates and charges to airlines. Airport s have shown propensity to seek revenue enhancement from non-airline sources. KBRA will typically run stress tests under which we apply our own assumptions and determine cost per enplanement.
Legal Mechanics & Security Provisions Key documents establish legal mechanics governing the issuance and repayment of debt. Nature of revenue pledge, the rate covenant, the additional bonds test, reserve requirement, and waterfall of revenues.
Dallas/Fort Worth International Airport (DFW) Rating Experience Thoughts The rating process began with site visit and comprehensive meeting. Site visit included: Tour of terminals undergoing extensive renovation project Completed areas (and areas still to be addressed) Airport Operations Center Fire Training Research Center Overall: Good perspective on scope of Airport operation Land available for expansion Plans for non-airline related development. Socioeconomic characteristics and diversified business environment support positive O&D trends; locational advantages for hubbing operation. Overall determinant ratings favorable, resulting in AA- assignment with a stable outlook for DFW s Joint Revenue Improvement Bonds.