Memphis International Airport benefits from significant cargo operations from FedEx Corporation (Baa2 negative) which has mitigated historical volatility in passenger enplanements. The airport generates nearly 47% of operating revenue from cargo airlines, and 99% of cargo revenue is paid by FedEx.
Constraining credit factors remain the authority's high debt service legacy costs, rising required airline revenue which will result in higher cost per enplanements, as well as rising leverage due to a large capital plan. The authority's $785 million 5-year capital plan includes a $251 million project to optimize the airport's footprint and modernize Terminal B, and a $304 million consolidated deicing facility. The capital plan is sizeable and will require around $160 million in additional debt to be issued in 2021. We project that debt to operating revenue will see a sharp peak above 6.5x in fiscal year 2021, after which the metric will fall below 5.0x, in line with previous expectations.
RATING OUTLOOK
The stable outlook reflects our expectation of stable DSCRs supported by the airport's airline agreement, and stable cargo operations to help offset pandemic related pressure on passenger airlines. The authority's liquidity also serves as a material buffer.
FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS
- Completion of the capital plan with significantly lower than expected debt
- Debt service coverage above 1.75x, on a sustained basis
- Debt to operating revenue below 3.0x, on a sustained basis
FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS
- Significant reduction in FedEx's activity at the airport or sustained deterioration in air travel demand in the Memphis market
- Any developments that materially increase passenger enplanement costs and reduce airport competitiveness on a sustained basis
- Further increases in capital plan or other developments that would lead to debt to operating revenue remaining above 5.0x for a sustained period
- Liquidity declines to below 400 days cash on hand for a sustained period
LEGAL SECURITY
The authority's outstanding revenue bonds are secured by a pledge on net revenues. The authority's rate covenant requires net revenues to equal at least 125% of debt service, including a 25% rolling coverage account and ability to include last year's surplus when calculating DSCR. The debt service reserve fund is series specific and is set at the lesser of maximum annual debt service (MADS), 10% of proceeds or 125% of average annual debt service. An additional bonds test also requires that projected net revenues be sufficient to cover debt service during construction and then meet the 125% rate covenant (including rolling coverage) for three years on a prospective basis, including new debt service.
USE OF PROCEEDS
The Series 2020A and 2020B Bonds will be used to refund all or a portion of the Series 2010A and 2010B Bonds, to fund a debt service reserve account, and pay related issuance costs.
PROFILE
The Memphis-Shelby County Airport Authority is a body politic and corporate of the State of Tennessee, created in 1969 pursuant to the Metropolitan Airport Authority Act. The authority owns and operates the Memphis International Airport (MEM) and two general aviation reliever airports - Charles W. Baker Airport and General DeWitt Spain Airport. MEM has four runways. MEM is undergoing a terminal modernization that will consolidate and optimize capacity at the airport.
The airport is an O&D airport with annual enplanements of 2.26 million for year-end fiscal year 2019. Memphis frequently ranks as the busiest cargo airport in the US and the second-busiest cargo airport in the world behind Hong Kong. FedEx facilities contain approximately 3.5 million square feet and occupy 520 developed acres.
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.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
David Kamran Lead Analyst Project Finance Moody's Investors Service, Inc. 7 World Trade Center 250 Greenwich Street New York 10007 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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