DENVER -- Citing Denver's "managerial deficiency," Moody's Investors Service yesterday downgraded $3 billion worth of Denver International Airport system revenue debt to conditional Baa from conditional Baa1.

The decision came two days after the city announced that it was delaying indefinitely the opening of the airport. It was the airport's fourth delay.

The downgrade was already built into the municipal bond market and came as no surprise, as the prices for Denver Airport bonds remained steady after crashing late last week and on Monday. For the moment, most institutional investors are holding onto their inventories, while other players are bottom-feeding, looking for buys.

The rating change affected $2.7 billion in debt issued to build Denver International Airport and another $310 million in 1984 and 1985 debt associated with Stapleton International Airport. The rating change did not affect approximately $435 million in shorter term variable-rate debt that is backed by bank letters of credit.

The city's decision Monday to postpone the airport opening indefinitely, prompted by problems with the baggage system, spurred the three major rating agencies to threaten rating actions. Mayor Wellington Webb said a new opening date will not be set until BAE Automated Systems Inc. gets its baggage system working.

City officials said yesterday they were relieved that Moody's did not downgrade the bonds to Ba1, the agency's top speculative rating.

Standard & Poor's Corp., which rates the airport debt BBB and has it on CreditWatch with negative implications, said yesterday that it is considering downgrading Denver airport debt to non-investment grade pending a meeting next Tuesday with the city. Fitch Investors Service, which rates the debt BBB, placed the bonds on Fitch Alert with negative implications.

The Moody's downgrade followed a statement on Monday that it was placing the debt on review with negative implications and that it might lower the rating on the bonds. The action came in response to Denver's announcement.

"The latest delay brings into focus management's recent inability to set and achieve realistic goals and to develop a feasible strategy for opening the airport," Moody's said in a statement. "While the difficulties of bringing the technologically complex baggage system on line is understandable, a managerial problem is also evident."

For example, Moody's said, as recently as two weeks ago airport officials assured the rating agency that a temporary tug-and-cart system was a viable alternative to the automated bag system. But last week project engineer Ginger Evans and Denver public works manager Mike Musgrave admitted that the airport needed an automated system on its two largest concourses.

"The strong management resolve that had been clearly evident during the early years of the project, and was an important factor supporting the rating, must clearly re-emerge with a sustained focused effort toward project completion," Moody's said.

In a telephone interview yesterday, Moody's vice president Adam Whiteman made it clear that despite the problems with the baggage system, construction risk did not play a part in the downgrade. The airport is built and any construction risk was reflected in the prior rating, Whiteman said.

Whiteman fielded questions yesterday from bondholders about the conditional part of the new rating. He said that the conditional aspect only speaks to "requirements for the new airport to open prior to the legal availability of airport system revenues to pay debt service and is not intended to reflect construction risk."

Whiteman said he approved of the city's decision to hire a consulting engineer to oversee BAE's efforts during the next few months.

"It's clearly they need a fresh pair of eyes to find out what's actually happening there," Whiteman said.

He said that the city can still tap the bond market for anywhere from $300 million to $1 billion in additional debt for Denver International before triggering the cost cap outlined in the city's contract with the airlines that use the airport. The range of debt depends on the passenger forecast used.

Yesterday, trading on the bonds was quiet as bondholders waited for news updates.

The bonds have actually strengthened since a veritable bloodbath last week, when prices dropped up to five points to the 89 level and yields rose to 7.70% on a 6 3/4 airport bond maturing in 2022. The 6 3/4 bond has strengthened this week with the yield dropping 7.55% at a price above 90, traders said.

While some investors sold bonds Monday in anticipation of a downgrade, many are still holding on.

Despite the latest opening delay, many investors still believe that the airport will be a viable project in the long term; the cost of failure would be too great to both the airlines and Denver, they say.

One portfolio manager said that his firm remains neutral on the bonds.

"It's not a big surprise. A year from now, we will look back on this and say ~no big deal,'" another portfolio manager said.

However, a credit downgrade to below investment grade by Standard & Poor's could cause selling pressure on the bonds to resurface, the fund executive said. "It's the Standard & Poor's downgrade that's really important. If the rating drops below investment grade, some funds that can't hold such bonds could liquidate."

But "I would consider it a buying opportunity," the fund manager said.

"When we get some real facts, then we can start trading," said Phil Lankford, vice president of municipal trading with Dain Bosworth Inc. in Denver, who noted that bids on the 6 3/4% coupon bonds were nibbling at a 7.50% offer in late trading yesterday, but there were no takers among bondholders.

"There's not a lot of bids out there. Whatever bids there were, were fairly strong," said Mark Tenenhaus, analyst and first vice president at Dean Witter Reynolds Inc. in New York.

Tenenhaus predicted that within six months, "everybody forgets the baggage system. You have an airport out there that's 99.9% complete. The bag system's more of a headache than a concern. The bricks and mortar are in."

Even if Standard & Poor's downgrades the bond to non-investment grade, Tenenhaus said it won't cause a stampede for the exits among institutional investors. "All that would have been done already. You would have seen a tremendous exodus out of the bonds sometime during the winter," Tenenhaus said.

Moody's said it still believes there is adequate security to debt holders because of "strong credit fundamentals and the projections of sufficient coverage of debt service and operating costs for both Stapleton and Denver International airports, even under fairly dire delay scenarios."

Denver said it has $100 million in airport system reserves and another $315 million in reserves related to the Denver International issues.

Updated figures from the city show the delay will cost $33 million a month, less $17 million in monthly profits from Stapleton. United Airlines has pledged to pay $8 million a month for three months to offset the cost of the delay.

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