Standard & Poor's Downgrades MCI Terminal Debt, Has Concerns About Travel Industry

Oct. 7, 2020

Standard & Poor’s, one of the major rating agencies that assigns scores for public bonds, has downgraded its rating for debt issued at Kansas City International Airport as it builds a new terminal.

On Sept. 30, Standard & Poor’s lowered the rating for KCI debt from “A” to “A-” and assigned it a negative outlook. An analyst said that the effects of the coronavirus pandemic on air travel was behind the downgrade.

An A- rating suggests that KCI can still meet its obligations but can be affected by economic conditions.

Debt rating scores, much like personal credit scores, can affect the cost to borrow money. A lower rating usually is accompanied by higher interest rates to hedge against risk.

“The rating action and negative outlook reflect our expectation that activity levels at (KCI) will be depressed or unpredictable, or demonstrate anemic growth due to the COVID-19 pandemic and associated effects outside of management’s control,” Ken Archer, a senior analyst with S&P, said in a statement.

S&P’s evaluation was the most pessimistic of the three major rating agencies. S&P has expressed concern for most airport debt, given how the pandemic has slowed air travel.

Another ratings agency, Fitch, did not change KCI’s credit rating but assigned it a negative outlook. Fitch said KCI has a good risk profile but the uncertainty in the travel industry was reflected in the negative outlook. Moody’s assigned a stable outlook.

John Green, the chief financial officer for KCI, said he believed the Kansas City Aviation Department’s strong cash position, coupled with $43 million in grant funding from the Coronavirus Aid, Relief and Economic Security (CARES) Act, put the financing for the terminal project on good footing, particularly for the next two years.

“I’m real good with what’s happening in the next two years,” Green told The Star in an interview. “I don’t have a crystal ball for what’s happening beyond that.”

KCI issued bond debt to help pay for the $1.6 billion new terminal project, which voters approved in 2017 to replace the airport’s aging, three-terminal design. Bond buyers will be repaid over time largely through revenues generated by the airport and the airlines that use KCI.

With fewer people flying and economic pressures bearing down on commercial airlines, ratings agencies share the view that airport debt has become somewhat riskier for investors. Airport debt is generally viewed as one of the safer investments in the bond market.

S&P, however, is less hopeful about how quickly the industry will recover.

“We view this precipitous decline not as a temporary disruption with a relatively rapid recovery, but as a backdrop for what we believe will be a period of sluggish air travel demand that could extend beyond our rating outlook horizon,” Archer said in a statement.

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