CHICAGO -- Rating agency officials are breathing sighs of relief after a controversial provision was dropped from a recently passed federal aviation bill, but they warn that the legislation still contains elements that could be harmful to airports.

The Airport Improvement Program authorization bill, which is expected to be signed by President Clinton by next Tuesday, does not contain a provision that would have required any airport fees disputed by airlines to be placed in an escrow account for 120 days or until the dispute was resolved.

The provision, which was amended onto the Senate version of the bill in June, was removed by House and Senate conferees after it raised red flags with the rating agencies and airports.

Some rating agency officials warned that the provision could lead to technical bond defaults. The elimination of the provision as well as the inclusion of grandfathering for existing airport fee agreements and bond indentures alleviates much of the concern, they say.

"Overall what has passed is extremely favorable and it protects outstanding bonds," said Ernie Perez, a director at Standard & Poor's Corp.

Perez said, however, that the rate-setting ability of airports has been "limited somewhat" by the fee dispute process, which allows airlines to appeal an airport fee to the U.S. secretary of transportation, who then must decide whether or not the fee is reasonable.

Perez said that the rating agency would have to examine how that process would affect airports' issuance of parity debt in the future.

Moody's Investors Service, in a credit report released Friday, said that the fee appeal process would add "another layer" between an airport and its bondholders and "gives control of the revenue stream to a third party."

"The inability to impose fee increases could strain an airport's financial position and may hamper its ability to make timely debt payments," Moody's said.

Instead of the escrow provision, the bill requires airlines to continue to pay disputed fees, while requiring airports to obtain a letter of credit or other credit facility to ensure repayment of the money to the airlines if the fees should be found to be unreasonable.

Moody's report also raised concerns about the credit facility requirement for airports. The "cost and structure of the [letter of credit] or other type of credit facility and the strain it may impose on an airport's financial and debt position may present further risk for bondholders," the rating agency said.

Charles Emrich, a senior analyst at Moody's, said that the airport improvement bill does not address how the credit facility should be structured.

"The letter of credit may have to be reimbursed right away or over a period of time, and that may hurt revenues of an airport in the future," Emrich said.

Moody's raised the possibility that a credit facility may have a lien on an airport's revenues, potentially jeopardizing the airport's ability to meet debt service payments. The rating agency said that if the lien is subordinate to debt service, "the credit quality would be less affected than if [the lien] was senior."

The inability of an airport to obtain a credit facility for securing the disputed fees and an airline's recourse in that situation are not addressed in the bill, Moody's said.

Duff & Phelps Credit Rating Co. also raised concerns about the Senate version of the bill. Michael Ross, a group vice president at Duff & Phelps, said yesterday that the conference bill "relieves some credit concerns."

Fitch Investors Service, meanwhile, has taken a wait-and-see attitude. Andrea Bozzo, a senior vice president at Fitch, said yesterday that the rating agency is pleased that the escrow provision was dropped from the bill and is comfortable with the grandfathering aspect. She said that the requirement of a credit facility on the part of airports would not be a big enough factor "to take into account for a rating."

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