TEXT-Moody's cuts Aruba Airport Authority bonds to Ba1
reuters.com Fri March 14, 2003 05:43 PM ET (The following statement was released by the rating agency)
NEW YORK, March 14 - Moody's Investors Service lowered the rating on the $72 million Series 1997A and 1999 revenue bond debt of Aruba Airport Authority to Ba1 from Baa3. This concludes the review for downgrade. The rating outlook is negative.
Approximately $43 million of the Series 1997 bonds are insured by MBIA and are rated Aaa based on the claims paying ability of the company. This rating action reflects continued weakeness in the airport's tourist based air service market, as reflected in the 13% decline in its passenger facility charge eligible enplaned passengers since 2000. Also considered was the potential for further near term stress on the airport's financial operations given the tourist based economy and the dependence on the U.S. market. While financial performance appears to have stabilized in 2002 with only a projected small decline in net revenues from 2001, this incorporates a number of non-recurring revenue increases and expenditure reductions. The 2003 budget is based on a 1% passenger growth forecast that Moody's believes may be too optimistic.Moody's also has concerns over the lack of organizational consensus on near term strategy, as has been reflected in the delayed approval of the 2003 budget.
The airport's 13% decline in passengers since 2000 has brought passenger levels to below that of 1999. Airport officials have based the 2003 budget on a forecast of 1% passenger growth in 2003. This appears to be somewhat optimistic given the potential negative impact that a war with Iraq could have on international U.S. tourism. North American tourists accounted for 70% of the tourist visits in 2002, followed by Latin Americans at 18%. The Latin American market, dominated by Venezuelans, declined 3% during 2002 reflecting the economic situation in Venezuela.
Also considered is the precarious financial state of the US airline industry. American Airlines is the dominant carrier at 27%, followed by US Airways at 10%, and the local Dutch Caribbean Airlines at 8%. Continued retrenchment by the airlines could affect lift to Caribbean destinations. KLM has added back a number of routes that it was going to cancel from Aruba which should help traffic to Europe and South America, though they won't offer the same level of service as in 2002. The 2003 adopted budget indicates preliminary financial results for 2002 showing revenues declining slightly from 2001. However, this is in part due to a number of non-recurring revenues including receipt of proceeds from a litigation settlement. Of particular interest will be whether these revenues will be considered towards calculating the 1.35 times rate covenant test for 2002. The 2003 budget, which was adopted two months into the fiscal year at the end of February 2003, projects a 1.65 times debt service coverage.
In Moody's opinion this appears to be optimistic given the projected growth in passengers and revenues and the roughly 14% in assumed additional cost reductions. Management's assessment and strategic response to any significant changes in traffic and revenues during the course of the year will be an important factor in assessing the airport's creditworthiness. To its credit the Authority has taken a number of steps to increase fees and charges to offset the decline in finances since September 11th. Thishas helped stabilize the airport's financial picture. Proactive measures include implementing a $2.50 per passenger security charge in March 2003. The airport authority's board has the power to increase the passenger facility charge if needed.
In addition, a $20.5 million court judgement against the government of Aruba, after a deal to create a motor sports complex ended in a dispute with the developers, increasingly seems unlikely to affect the Airport Authority. Bondholders also benefit from a number of reserve accounts held in the United States, including a cash funded debt service reserve totaling almost $10 million.