Moody’s Upgrades PHL Bond Rating to A1

Oct. 29, 2024
Moody’s is the third major rating agency to publish an upgraded rating action for the Department of Aviation since 2023

Moody's Investors Service has upgraded Philadelphia (City of) PA Airport Enterprise's revenue bonds to A1 from A2, with a stable outlook. This upgrade applies to about $1.4 billion in outstanding revenue bonds.

Date of Action: October 28, 2024.

Ratings Rationale

The rating upgrade to A1 is supported by several factors:

  1. Improved Financial Position: Philadelphia International Airport (PHL) acquired its parking assets from the City of Philadelphia (which also has an A1 rating with a stable outlook), enhancing its financial stability.

  2. Lease Agreement with Airlines: A newly structured lease agreement with signatory airlines allows PHL to significantly boost its operating reserves. Under this agreement, PHL can allocate between $1 million and $10 million annually to its Operations & Maintenance (O&M) account.

  3. Debt Amortization and Leverage: PHL’s leverage, measured by adjusted debt per origin & destination enplaned passenger, is expected to decline due to the rapid amortization of prior debt. This amortization strategy will help avoid net debt increases, providing borrowing headroom for future capital projects.

  4. Market Position and Growth Potential: PHL holds a strong market position as a travel hub for the Philadelphia metropolitan area, serving as a connecting traffic hub and a transatlantic gateway for American Airlines. Enplanements for fiscal year 2025 (ending June 30) are expected to exceed 2019 levels, driven by American Airlines’ expansion at the airport.

  5. Competitive Considerations: PHL faces competition from Newark Liberty International Airport (EWR), which is located 90 miles away and serves as a major hub under the Port Authority of New York and New Jersey (rated Aa3 with a stable outlook). However, EWR’s service capacity is limited by slot restrictions, partially mitigating competition risks for PHL.

Rating Outlook

Moody’s has issued a stable outlook, reflecting expectations of:

  • Continued Recovery in Enplanements: PHL's ongoing enplanement recovery is expected to enhance liquidity.
  • Capital Improvement Program: The airport's capital improvement program is anticipated to avoid further increases in leverage and coverage pressures.

Potential Factors for Future Rating Change

  1. Upgrade Factors:

    • Sustained growth in PHL's origin and destination (O&D) enplanement base.
    • Adjusted debt per O&D enplaned passenger remains below $150.
  2. Downgrade Factors:

    • Long-term decline in enplanements, impacting market position.
    • Unexpected expenses that significantly reduce liquidity.
    • Increased debt levels from the capital plan, exceeding peer levels.

Legal Security and Covenants

PHL's bonds are secured by a pledge of net revenues, benefiting from specific covenants:

  • Rate Covenant: Guarantees 100% of net O&M expenses and 150% of debt service on General Airport Revenue Bonds (GARBs) in a given year, or full coverage for O&M and debt service on GARBs, GO bonds for airport improvements, and other subordinate obligations.
  • Debt Service Reserve Fund: Funded to a standard three-prong test, providing further security for bondholders.

Airport System Profile

  • Ownership and Operation: The Philadelphia Airport System, owned by the City of Philadelphia and managed by the Department of Aviation, includes Philadelphia International Airport (PHL) and Northeast Philadelphia Airport (PNE).
  • Classification: PHL is classified by the Federal Aviation Administration (FAA) as a large hub airport.
  • American Airlines Hub: PHL has served as a major hub for American Airlines since its 2015 merger with US Airways.

Methodology

The rating is based on Moody’s methodology for publicly managed airports, which was updated in February 2023. Further methodology details can be found at Moody's website under their rating methodologies section.