Rating Action: Moody's assigns initial Baa2 rating to Key West International Airport's (FL) Airport Revenue Bonds, Series 2022; outlook stableGlobal Credit Research - 15 Aug 2022New York, August 15, 2022 -- Moody's Investors Service has assigned an initial Baa2 rating to the Key West International Airport's ("EYW" or "the airport") $39.7 million Airport Revenue Bonds (Key West International Airport), Series 2022 (AMT). The rating outlook is stable. RATINGS RATIONALEThe assignment of a Baa2 rating to the Key West's Airport Revenue Bonds, Series 2022 reflects the airport's strong traffic recovery, supported by pent-up demand for domestic tourist destinations and the incorporation of the airlines Allegiant Travel Company (Ba3 stable) and JetBlue Airways Corp. (Ba2 stable) to the airport's operations. In fiscal year 2021, enplanements were 94% and 39% higher than in 2020 and 2019, respectively. Between January and June 2022, traffic was approximately 50% above the levels registered in the same period in 2019. The use agreement between EYW and all the airlines operating at the airport entails a minimum annual commitment that enhances the predictability of cash flows. Moreover, Moody's incorporates into its assessment the demonstrated support from the Florida Department of Transportation (FDOT, Aa2 stable) in the form of grants for capital investment projects. FDOT is providing a grant for approximately 35% of the design and construction of a new concourse.The rating is constrained by the airport's small size and low enplanement levels relative to peers at the same rating category. Key West Airport's credit profile is susceptible to high volatility in enplanements given its small service area and concentration in tourism. While the airport exhibits a strong and rapid demand rebound after times of contraction, its traffic profile is highly volatile. Moody's cautions that the traffic growth experienced in 2021 will likely not be sustainable because of labor shortages that may affect seat capacity and a normalization of demand. Going forward, Moody's expects enplanement levels more in line with those registered historically.After the bond issuance Moody's expects an average Net Revenue Debt Service Coverage Ratio (DSCR) of around 2.25x and Adjusted Debt per O&D Enplanement of approximately $83 over the 2025-2027 period. The Airport Revenue Bonds, Series 2022 will be used to partially finance the design and construction of a new concourse that is expected to be completed by 2025. Moody's expects the new concourse to enhance revenue due to the new concession space and passenger boarding bridge charges. The debt service for the proposed issuance does not start until 2025, which provides an adequate cushion for cash flow generation while the new facilities are under construction. Balancing this credit strength, the signatory agreement expires in 2026, only one year after debt service is set to commence. Moody's anticipates that, apart from the new concourse, the airport's capital investment plan will include only minor works that will be financed on a pay as you go basis with grants and airport funds, limiting the potential for increased leverage.RATING OUTLOOKThe stable outlook reflects Moody's view that EYW will manage its liquidity and capital plan in a prudent manner to reflect changes in economic or operational conditions and not exceeding the expected leverage levels.FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGBetter than expected enplanement levels and cash accumulation that on a sustained basis result in:- Days cash on hand above 500 days;- Total net revenue DSCR above 2.5x;- Leverage with adjusted debt per O&D passenger declining below $75.FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGDecrease in enplanements or cost overruns related to the capital plan, or both, that on a sustained basis result in higher leverage and deteriorated liquidity such that:- Days cash on hand is below 300 days;- Total net revenue DSCR is below 1.5x;- Adjusted debt per O&D passenger is above $100.LEGAL SECURITYThe bonds are secured by a first lien on net airport revenues. The rate covenant requires that airline rates and charges be set to achieve at least 125% coverage of annual debt service. The provisions include an additional bonds test equal to 1.25x maximum annual debt service. Bonds are additionally protected by a debt service reserve sized to the lesser of a standard 3-prong test.USE OF PROCEEDSThe proceeds of the Series 2022 Bonds, together with other legally available funds, will be used to: (1) finance capital investments (2) refinance all amounts outstanding under an existing line of credit, (3) fund the Reserve Account, (4) pay capitalized interest and (5) issuance costs.PROFILEKey West International Airport is a FAA small-hub owned by Monroe County (FL) and operated as a separate enterprise fund of the County. The airport is located within the city limits of Key West, Monroe County, Florida and covers approximately 268 acres.METHODOLOGYThe principal methodology used in this rating was Publicly Managed Airports and Related Issuers published in March 2019 and available at https://ratings.moodys.com/api/rmc-documents/60106. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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