Credit Ratings and Cash Reserves: How They Influence the Borrowing Costs of Airports An Industry White Paper

Transcription

1 How They Influence the Borrowing Costs of Airports An Industry White Paper Peter Stettler, Director ACI-NA Finance Committee, May 3, 2010

2 The Start Ed White, Vice President Corporate Real Estate, Alaska Airlines ACI-NA Economic and Finance Conference, April 7, 2009 How They Influence the Borrowing Costs of Airports 2

3 The Issues Airports... Desire high ratings to reduce borrowing costs Maintain liquidity and coverage to achieve higher ratings Liquidity provides Source of internal capital funds Reserves to protect against decline in enplanements / revenues Airlines See liquidity and coverage as adding to their costs Are unsure this cost provides commensurate benefits How They Influence the Borrowing Costs of Airports 3

4 The Questions What is the basis for the difference in airport and airline ratings? Are liquidity and coverage important to a rating decision? - Discussed at October 2009 Committee Meeting Do airports achieve lower borrowing costs through higher ratings and cash reserves? Does the pursuit of higher ratings and cash reserves place costs on the airlines that outweigh their benefits? How They Influence the Borrowing Costs of Airports 4

5 Annual Debt Service Comparison Transaction 1 Transaction 2 Amount Borrowed $ 600,000,000 $ 600,000,000 Interest Rate 5.0% 6.0% Annual Debt Service $ 39,030,861 $ 43,589,347 Annual difference in debt service $ 4,558,486 Source: Ricondo & Associat es, Inc., April 2010 Prepared by: Ricondo & Associat es, Inc., April 2010 How They Influence the Borrowing Costs of Airports 5

6 The Model Capital Program Purpose: Cost of Project: Construction Period: Terminal expansion $600 million 4 years Construction begins: January 1 of Year 1 Completion date: December 31 of Year 4 DBO: January 1 of Year 5 Capitalized interest: Debt service reserve: For Construction Period MADS How They Influence the Borrowing Costs of Airports 6

7 Model Program Comparison Airport A Airport B Difference [B] - [A] Airport A Airport C Interest rate 5% 6% 5% 5% Difference [C] - [A] Sources of Funds (000) Principal Amount of Bonds $753,782 $790,913 $ 37,131 $753,782 $619,178 $ (134,604) Airport Funds , ,740 Interest Income 27,418 29,604 2,186 27,418 22,284 (5,134) TOTAL SOURCES $781,200 $820,517 $ 39,316 $781,200 $745,202 $ (35,998) Uses of Funds (000) Construction Costs $600,000 $600,000 $ - $600,000 $600,000 $ - Capitalized Interest 114, ,755 30, ,584 90,570 (24,015) Debt Service Reserve Fund 51,540 59,943 8,403 51,540 42,248 (9,292) Issuance Costs 15,076 15, ,076 12,384 (2,692) TOTAL USES $781,200 $820,517 $ 39,316 $781,200 $745,202 $ (35,998) How They Influence the Borrowing Costs of Airports 7

8 White Paper Model Parameters Rates and Charges Interest Airport Model CIP Schedule Rate Airport D Residual CIP Schedule 1 5.0% Airport E Residual CIP Schedule 1 6.0% Airport F Residual CIP Schedule 2 5.0% Airport G Residual CIP Schedule 2 6.0% Airport H Compensatory CIP Schedule 1 5.0% Airport I Compensatory CIP Schedule 1 6.0% Airport J Compensatory CIP Schedule 2 5.0% Airport K Compensatory CIP Schedule 2 6.0% Source: Ricondo & Associates, Inc. April 2010 Prepared by: Ricondo & Associates, Inc., April 2010 How They Influence the Borrowing Costs of Airports 8

9 CIP Schedule 1 CIP Schedule 1 Terminal Expansion Construction Period 4 years Construction begins January 1, Year 4 Construction complete December 31, Year 7 DBO January 1, Year 8 total funding requirement $600 million Refurbishment Program Construction Period 2 years Construction begins Janaury 1, Year 10 Construction complete December 31, Year 11 DBO January 1, Year 12 Total funding requirement $75 million How They Influence the Borrowing Costs of Airports 9

10 Residual Model Output Airport D Airport E Difference Par Amount of Bonds Issued (000) $ 842,402 $ 882,456 $ 40,054 Max Debt per Enplaned Passenger $ 229 $ 239 $ 10 CPE in Year 1 $ 5.50 $ 5.90 $ 0.40 CPE in Year 8 $ $ $ 2.92 CPE in Year 12 $ $ $ 2.85 Coverage Ratio in Year Coverage Ratio in Year Coverage Ratio in Year How They Influence the Borrowing Costs of Airports 10

11 Compensatory Model Output Airport H Airport I Difference Airport Cash Contribution to CIP (000) $ 147,264 $ 105,014 $ 42,250 Par Amount of Bonds Issued (000) $ 656,764 $ 743,229 $ 86,465 Max Debt per Enplaned Passenger $ 195 $ 212 $ 17 CPE in Year 1 $ 7.72 $ 7.87 $ 0.15 CPE in Year 8 $ $ $ 1.28 CPE in Year 12 $ $ $ 1.36 Coverage Ratio in Year Coverage Ratio in Year Coverage Ratio in Year How They Influence the Borrowing Costs of Airports 11

12 MMD Credit Spreads Difference in spreads is a factor of the market Difference in Interest Rate (%) How They Influence the Borrowing Costs of Airports 12

13 Observations Airports can reduce borrowing costs by: Achieving a higher credit rating. Lower interest rate reduces amount of Capitalized interest Debt service reserve Costs of issuance related to par amount of borrowing Savings influenced by credit spreads in the market Applying cash resources to capital program Use of cash lowers borrowing costs by: Reducing principal and overall resources for program Reducing amount of capitalized interest Reducing amount of debt service reserve fund Other costs of issuance related to par amount of borrowing How They Influence the Borrowing Costs of Airports 13

14 Next Steps Draft White Paper released for industry comment Comment period through May 21, 2010 Available at Submit comments to Airline question on whether costs of cash reserves, coverage ratios and higher ratings outweigh the benefits of the reductions in borrowing costs needs to be addressed. Looking for industry input on this issue: What constitutes costs in this analysis? How should costs and benefits be measured? How They Influence the Borrowing Costs of Airports 14

15 Moody s Median Days Cash on Hand vs. Enplaned Passengers 500 Days Growth Rate 8.0% % 4.0% 2.0% % % -4.0% -6.0% Days Cash 5 Year CAGR in Enplaned Passengers Annual % Change in Enplaned Passengers -8.0% CAGR = Compounded Annual Growth Rate Source: Moody's Investor Service, U.S. Airport Medians for FY 2008, November 2009 Prepared by: Ricondo & Associates, Inc., April 2010 How They Influence the Borrowing Costs of Airports 15

16 A Closing Thought Warren Buffet on cash: Cash is a bad investment over time.but You always want to have enough that nobody else can determine your future. CNBC, Warren Buffett and Bill Gates: Keeping America Great, original air date November 12, 2009, accessed from March 30, How They Influence the Borrowing Costs of Airports 16