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Smith's Research & Gradings
September 14, 2020

Smith's Research & Gradings

S&P Places 98 Airports on CreditWatch Negative

S&P Places 98 Airports on CreditWatch Negative

S&P Global Ratings placed 98 ratings on most U.S. airports and airport-related obligations on CreditWatch with negative implications, affecting 63 different obligors.

This week, SRG had a chance to talk with Kurt E. Forsgren, S&P Global transportation sector leader and senior credit analyst on Airports.

"The S&P CreditWatch placements are based on our view that a material change in the performance of airports and related issuers has occurred and the magnitude of the rating impact on individual credits has not been fully determined," Mr. Forsgren said.

S&P noted the ongoing COVID-19 pandemic will result in materially depressed, unpredictable, or anemic passenger activity levels for an extended period, which is increasingly weakening the overall credit quality of U.S. airports and airport-related issuers.

Given the highly uncertain industry conditions and challenges ahead, Mr. Forsgren sees rating downgrades of one or more notches as likely across the portfolio.

"In our view, the airport sector is venturing into uncharted territory with likely slow systemwide passenger traffic growth; a smaller and weakened airline industry; and airport operators exposed to credit risk from a business model untested in the current, severely stressed operating environment," Mr. Forsgren explained. "Demand is the key.  Time horizons, predictions regarding the evolution of the coronavirus pandemic, and related impacts remain highly ambiguous. At this point we see activity levels eventually recovering in the 2023-2024 time frame, but it is obviously having material impacts that we believe should be reflected in ratings today, not two years from now.

"So, the question is: Do we rate through the cycle?  In a word, no.  We believe current airport financial forecasts based on estimates of passenger recovery scenarios are subject to considerable uncertainty. We view this precipitous decline not as a temporary disruption with a relative rapid recovery, but rather as a backdrop for what we believe will be sluggish air travel for a prolonged period, which will be reflected in financial metrics and performance," Mr. Forsgren said. "We believe our ratings should be current, reflect the credit quality and be consistent and comparable across all of ratings, not just a particular sector."

For those reasons, the transportation team previously lowered 17 ratings on 10 not-for-profit airport infrastructure issuers.  After completing a review of the portfolio and in combination with stagnating traffic levels and a shrinking airline industry, S&P made the decision to place the remaining airports on CreditWatch Negative totaling to 98 ratings and 63 obligors.

Under S&P Global's criteria, market position is a primary credit factor that incorporates activity-level trends; passenger volatility; rate-setting flexibility; and additional considerations outside of the operator's control, including health scares.

"Our rating criteria is working," Mr. Forsgren added. "We are able to handle the COVID Pandemic within our existing framework."

After the initial round of rating changes, the direction of future ratings will be driven, in part, by how management handles the financial impacts of the activity declines.  Mr. Forsgren expects there will be a vaccine but wants to see how management plans on navigate the financial pressures and reach sustainable operations given the service level cuts by airlines. Some management discussions are filled with expectations based on previous projections. Other management discussions have shown decisive actions that will allow revenues to cover fixed costs.  The CARES ACT revenues have helped, to be sure.  But, the Federal bailout money is no substitute for having recurring revenues to pay fixed costs.

While most airports operate residually, many have sizable concession revenue streams.
Also, Mr. Forsgren noted, " Some airports have charged higher fees in order to make up for lost revenue. Others have foregone fee increases.  Many if not most have actually deferred the fees being charged to airlines with various repayment terms."

What's Next?
For those ratings placed on CreditWatch, S&P will likely follow a similar analytical approach by reviewing their market position assessment and other considerations. All U.S. airport and related ratings will be analyzed with respect to their ability to mitigate the financial pressures of lower traffic volumes and navigate an evolving landscape. This will inform our prospective view to determine if financial metrics are achievable, sustainable, and align with current rating levels. (See "This Time Is Different: An Anemic and Uncertain Passenger Recovery Will Challenge Airports' Credit Quality," published Aug. 7, 2020, on RatingsDirect.)

"We believe defaults are not imminent and the sector as a whole benefits from several factors that have historically supported positive credit trends, including recovery from economic cycles and disruptions .Given the generally strong financial flexibility across the airport sector pre-COVID-19, liquidity—including federal aid along with debt restructurings to improve cash flow debt service coverage—can provide interim credit support at the investment-grade level," Mr. Forsgren said.

He concluded, "Our rating actions incorporate our opinion regarding the health and safety risks posed by the COVID-19 pandemic, which we view as a social factor in our environmental, social, and governance framework and is resulting in significant operating and financial pressures for the sector. We will continue to evaluate these risks as the situation evolves and update the market periodically as events warrant."

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