Los Angeles Dept. of Apts.-LA Int'l Apt. Ent. -- Moody's assigns Aa2 to Los Angeles International Airport Enterprise's (CA) Series 2020B Refunding Revenue Bonds and Series 2020C-D Revenue Bonds; affirms outstanding ratings; outlook is stable
Rating Action: Moody's assigns Aa2 to Los Angeles International Airport Enterprise's (CA) Series 2020B Refunding Revenue Bonds and Series 2020C-D Revenue Bonds; affirms outstanding ratings; outlook is stable
Global Credit Research - 04 Aug 2020
New York, August 04, 2020 -- Moody's Investors Service, ("Moody's") has assigned a Aa2 to Los Angeles Department of Airports - Los Angeles International Airport Enterprise's (CA) (LAX) $578.1 million Senior Refunding Revenue Bonds, 2020 Series B (Private Activity/Non-AMT), $380.0 million Senior Revenue Bonds, 2020 Series C (Private Activity/AMT) and $120.0 million Senior Revenue Bonds, 2020 Series D (Governmental Purpose/Non-AMT). Moody's also affirmed Aa2 on $2.7 billion of outstanding parity senior lien debt and Aa3 on $4.4 billion of outstanding subordinate lien debt. The outlook is stable.
RATINGS RATIONALE
The ratings reflect LAX's strong liquidity, which is supported by federal grant funding through the CARES Act. LAX's existing liquidity should cover at least 13 months of cash outflows, including debt service, without receiving any revenue. We expect LAX's major airlines to continue making their payment obligations on time, which will extend liquidity reserves to around 49 months. Liquidity will be supplemented by a portion of the proceeds of the Series C and D bonds, which will be used to finance certain capital improvements at LAX and reimburse the Department for expenditures previously incurred by the department for certain capital projects at LAX . The rating affirmation also reflects LAX's superior market position as the largest airport in the second largest population center in the US. LAX faces limited competition from other regional airports that face operational restrictions and has the lowest air carrier concentration of any US airport. The recently approved rate agreement extension through 2032, signed by major airlines Alaska Airlines Inc., American Airlines Group Inc.(B2 negative), Delta Air Lines, Inc. (Baa3 negative), JetBlue Airways Corp. (Ba2 negative), Southwest Airlines Co. (Baa1 negative) and United Airlines Holdings, Inc. (Ba2 negative), will improve the ability to raise rates if enplanements remain volatile because it contains automatic rate increases if DSCR is expected to fall below 1.4x.
LAX is experiencing material declines in its passenger traffic, falling from approximately 44 million enplaned passengers in fiscal 2019 to about 31 million in fiscal 2020 due to the disruptions caused by the Covid-19 pandemic.
Moody's expect LAX's passenger traffic to begin to slowly start increasing from the current low levels through the remainder of the year but to substantially recover over the next 24-36 months. LAX has significant international traffic which accounted for almost 30% of the airport's enplanements in fiscal 2019. Moody's expects LAX's enplanement recovery to trail national averages given its above average exposure to international traffic, which Moody's expects to be slower to recover. However, the airport could see consolidation from other regional airports, like JetBlue's decision to move all operations to LAX from Long Beach, that would aid enplanement recovery.
LAX's construction risk constrains the rating. Price risk for the $3.8 billion remaining bond-funded value of the capital plan has been limited through the use of public-private partnerships for the construction of the Automated People Mover (APM) and Consolidated Rental Car Facility (CONRAC), and by fixed construction price contracts for terminal renovation projects managed by airlines. LAX is currently planning to accelerate some of the construction projects to take advantage of the downturn in traffic.
The Aa2 senior lien rating reflects the senior lien on net revenues and very strong DSCR that will remain above 3.0x in various slow enplanement recovery scenarios. The Aa3 rating on the subordinate lien debt reflects the second claim on airport revenue and relatively weaker total DSCR that will remain above 1.5x in various slow recovery scenarios.
The rapid spread of the coronavirus outbreak, severe global economic shock and asset price volatility are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The airports sector has been one of the sectors most significantly affected by the shock given its sensitivity to consumer demand and sentiment. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. The coronavirus crisis is not a key driver for this rating action. We do not see any material immediate credit risks for LAX. However, the situation surrounding coronavirus is rapidly evolving and the longer term impact will depend on both the severity and duration of the crisis. If our view of the credit quality of the airport changes, we will update the rating and/or outlook at that time.
RATING OUTLOOK
The stable outlook reflects LAX's adequate liquidity available to withstand the reduced demand caused by the coronavirus related disruptions and an expected traffic recovery over the next 24-36 months to support the current rating level.
FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS
- Given the high leverage and construction risk at the airport as well as the inherent operational risks in the airport industry, positive rating pressure is unlikely at this rating level.
FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS
- Sustained decline in traffic levels beyond the Covid-19 pandemic due to potential airline failures or negative trends in the fundamental drivers of the service area economy that would reduce demand for international travel
- Problems implementing current capital projects, including the LAMP projects procured through PPP methods, or significant, extended passenger diversion to other regional airports caused by construction at the airport
- Net revenue DSCR below 2.5x on senior lien bonds and total DSCR below 1.5x on all obligations, including availability payments on sustained basis.
LEGAL SECURITY
The senior lien bonds are secured by a pledge of net pledged revenues generated at LAX and the subordinate lien bonds are secured by a pledge of net pledged revenues subordinate to the claim of the senior bondholders. The senior lien bonds have an additional bonds test (ABT) that requires historic net revenues plus rolling coverage equal 125% of maximum annual debt service (MADS), or that the senior rate covenant has been met and will be met, including additional bonds, to the later of five years after issuance or three years beyond the use of capitalized interest. Subordinate bonds have an ABT that is similar to the seniors but with a subordinate net revenues threshold of 115% on subordinate debt.
The debt service reserve fund is fully funded with cash to meet the requirement of the lesser of MADS, 10% of par outstanding, or 125% average annual debt service.
USE OF PROCEEDS
Proceeds from the bonds will be used to refund certain outstanding bonds (Senior Revenue Bonds Series 2010A, 2010D and Subordinate Revenue Bonds Series 2010B), to finance certain capital improvements at LAX, reimburse the department for expenditures previously incurred by the Department for certain capital projects at LAX, to make a deposit to the senior reserve fund, to fund all or a portion of the interest accruing on the Series 2020C and Series 2020D Senior Bonds and to pay costs of issuance.
PROFILE
LAWA owns and operates Van Nuys Airport and owns and leases property at Palmdale in addition to LAX. Only the revenues derived from the facilities at LAX are included in the security pledge for this bond issue.
LAX is located approximately 15 miles from downtown Los Angeles on the western boundary of the city and occupies approximately 3,800 acres. The central terminal complex features a decentralized design with nine individual terminals constructed on two levels lining a U-shaped two-level roadway. LAX currently has a total of 115 contact gates in the central terminal along with a number of remote gate positions for a total of 134 gates. The existing airfield consists of four parallel east-west runways configured in two pairs. Approximately 10,429 public parking spaces are available at LAX in parking lots owned by LAWA. Cargo facilities at LAX provide approximately 2.2 million square feet of building space in 26 buildings on 166 acres of land devoted exclusively to cargo.
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.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website 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.
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.
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.
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Earl Heffintrayer Lead Analyst Project Finance Moody's Investors Service, Inc. Plaza Of The Americas 600 North Pearl St. Suite 2165 Dallas 75201 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
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