CHICAGO -- Standard & Poor's Corp. will not rate airport revenue bonds secured solely by passenger facility charge revenues, according to new rating criteria published today by the agency.

In its Credit Week Municipal publication, the agency said it will not rate the bonds mainly because of the U.S. secretary of transportation's authority to terminate an airport's ability to levy the charges due to improper use. The agency pointed out that while the termination process takes long, "this does not completely protect a passenger facility charge bondholder, who has nowhere else to turn if the revenue stream is terminated."

Standard & Poor's rejection of bond issues backed only by the charges is the strongest statement so far by the rating agencies. In June, Moody's Investors Service released a policy statement that said such debt would be unlikely to achieve an investment-grade rating of Baa or above. An official at Fitch Investors Service has said that agency would review passenger facility charge-backed bonds on a case-by-case basis.

Tom Devine, an attorney for Hopkins & Sutter, a bond counsel firm that has handled various airport bond deals, said the Standard & Poor's statement will be "no great shock" to airports considering the use of passenger facility charge revenues for bond issues.

He said that earlier concerns voiced by rating agencies about the fees have given airports ample warning about the fate of bonds backed solely by the charges. He added that he was not aware of any airports that are considering issuing bonds backed solely by the passenger fees.

The Standard & Poor's "statement may be more concrete, but it is not inconsistent with what they said before. Airports are aware of the skepticism [of bond issues backed solely by the fees] by rating agencies," Mr. Devine said.

"In the past, Standard & Poor's has said it does not consider revenues from the charges "a viable stand-alone security for ultimate debt service repayment." However, the agency will rate issues that include a double-barreled pledge of both passenger charge revenues and net airport revenues. The agency said it is possible that bonds backed by both sources could "achieve a rating as high as the rating of bonds backed by airport net revenues alone."

Ernest Perez, a director at Standard & Poor's, pointed out that the addition of revenues from the passenger fees to a bond issue, however, will not provide more credit strength to the issue "no matter how well the issue is structured."

Rating criteria developed by the agency call for strong legal covenants governing the revenue stream from the charges "above and beyond" covenants for typical general airport revenue bonds. The agency listed requirements such as a first lien on the charges for debt service and between 1.5 and 2 times of recommended debt service coverage on the bonds. The criteria also calls for a debt service reserve fully funded at the maximum level of annual debt service.

Mr. Perez said the new criteria were used to rate the first airport issue to include a passenger facility charge component. That issue was priced Aug. 21 by the McCarran International Airport in Las Vegas. The $296 million of revenue bonds had been rated A-minus by Standard & Poor's and A by Moody's, based on the pledge of the airport systems net revenues and not on passenger fee revenues alone.

Parts of the issue were subsequently insured by AMBAC Indemnity Corp. prior to pricing.

Meanwhile, Stapleton International Airport in Denver will be the next airport that assesses passenger facility charges to issue revenue bonds.

Janet Ross, an analyst at the airport, said yesterday that the airport is expected to price $390 million of revenue bonds on Sept. 9 to finance the construction of a new airport. Passenger facility charges will only be used as an ancillary source, she added.

"Because of the rating agencies' concerns toward [passenger facility charge] bonds, the airport decided that this is the best course -- to consider them as a secondary source," Ms. Ross explained.

In 1990, Congress approved the charges of $1 to $3 per enplaned passenger and the airports' ability to leverage the revenues for bonds. Dozens of airports are collecting the fees or are awaiting approval from the Federal Aviation Administration to levy a fee to finance capital projects, according to the Airports Association Council International.

Airport association officials have said that possible changes may be sought in the legislation to eradicate rating agency concerns.

Mr. Devine said he was not aware of any movement in Congress to change the law, adding that he believes Congress would want to give the current program more time to work before considering amending the law.

Standard & Poor's also reported that continued turmoil in the airline industry and economic weakness could lead to some airport downgrades. The agency pointed out that in the past year the rating outlook for five airports was changed to negative. It also said that major hubs that depend on one or two airline carriers and that have large capital programs are most vulnerable to difficulties in the airline industry.

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