"Lambert bond rating drops; next 90 days crucial for airport"

Monday, July 28, 2003

Bond rating drops; next 90 days crucial for airport
By Laurie Sybert
The St. Louis (MO) Business Journal


All three Wall Street-based credit rating agencies have lowered their views
on Lambert-St. Louis International Airport's long-term debt rating and may
further lower their ratings in 90 days following American Airline's
announced cuts of more than 200 flights from the airport. 
  
During the next 90 days, the city must take some action to show progress in
the airport's finances, said Ivy Neyland-Pinkston, city of St. Louis deputy
comptroller of finance and development. 

"What they will be looking for is a contingency plan put into action," she
said. "The airport needs to work to secure agreements with other carriers to
take over routes American plans to eliminate Nov. 1. In addition, the
airport should be planning to put into place cost-containment measures that
will show the rating agencies that they are serious about Lambert's future."


Jeff Rainford, spokesman for St. Louis Mayor Francis Slay, said the mayor is
aware of the 90-day clock that is ticking. 

He said the mayor has taken a three-pronged approach to the situation at
Lambert. The first step was to convince American not to pull out altogether.
The second step is to work on airport finances by encouraging other
airlines, such as Southwest and Northwest, to take over some of American's
abandoned routes as well as encouraging budget-cutting at the airport by the
director, Col. Leonard Griggs; and finally, to develop a long-term plan for
the airport. 

"Analysts sitting on sidelines with no information are saying we need to do
this or that. We need to do what's best for St. Louis to make us attractive
to carriers for the next 20 years," Rainford said. 

To that end, Slay has enlisted the support of the Regional Business Council,
Civic Progress and the Regional Chamber and Growth Association in helping
form a task force for long-term planning for the airport. 

"For the last 10 to 20 years we've lived and died with the industry in
general and our hub carrier in particular at Lambert. Now we need to decide
our future," Rainford said. 

The city of St. Louis has about $940 million in outstanding debt used to
help finance the construction project at the airport. The city is in the
first phase of a $1.09 billion expansion project to add a parallel third
runway at Lambert. 

Since American's announcement of flight cutbacks, Standard & Poor's has
downgraded the airport bonds from an A- rating to a BBB+ rating and has
placed the bonds on a 90-day watch list for further downgrades.

"While a listing (on the watch list) does not mean a change is inevitable,
it could mean that only the magnitude of the rating change has yet to be
determined," according to S&P's rating summary. 
  
An A- rated bond is generally classified as upper medium quality with strong
capacity to pay principal and interest. A BBB+ rated bond is generally
classified as medium grade with adequate capacity to pay principal and
interest. 

"The airport rating has incorporated the exposure to American (77 percent
market share), the airport's amount of connecting traffic (50 percent), and
the airport's relatively weaker position in the American system. The
downgrade reflects an expectation of financial stress over the
near-to-intermediate term and challenges to airport management and the
city," the Standard & Poor's report said. 

"We were surprised and actually wonder if they didn't act prematurely since
the other two agencies chose instead to monitor the situation at Lambert for
90 days before taking any action as drastic as Standard & Poor's did,"
Pinkston said. 

Both Moody's Investors Service and Fitch Ratings have placed the city's
bonds on a 90-day watch list, meaning that they are considering lowering
their credit ratings after that period if the airport finances do not appear
to have improved. Moody's credit rating on the bonds remains at A3 and
Fitch's credit rating remains at A-, both upper-medium quality bonds. 

Pinkston said Fitch and Moody's "gave the airport time to seek replacement
carriers for the routes American plans to eliminate and coincides with the
timing American had. That's truly what people in this office and our
financial advisers would have expected. A downgrade, we think, is
premature." 

Standard & Poor's first placed the airport bonds on the 90-day watch list on
April 30 "following an erosion in traffic levels, the weakening financial
position of American Airlines and concern by Standard & Poor's that service
cutbacks... could likely be more severe than anticipated," the credit rating
company said. 

"There's been just one downgrade at this juncture and we don't expect
anything to occur because the debt of the airport will always be paid.
Neither the city nor the airport has ever defaulted. Debt is always paid
first by the city and the airport," Pinkston said. "Our bonds are insured.
Bondholders need not worry. Our (outstanding airport) bonds are AAA rated
and insured so there is no risk on the part of the bondholders." 

Peter Czajkowski, senior vice president at Stifel Nicolaus, said credit
ratings can affect the cost of future borrowing. 

"A reduced credit rating increases the cost of funds that are required to be
borrowed for a project by directly leading to higher interest rates on the
bonds or alternatively usually leading to higher costs to have bonds
enhanced by bond insurers," Czajkowski said.


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