Say Versus Do: Analysis of Fitch Ratings and Bond Grades for a Regional Airport

Abstract

In this short article, we examine the airport bond rating system by Fitch Ratings, including what Fitch documents “say” are important versus the level of analysis that is actually “done.” One thing that is apparently not done is construction of a travel model for measuring competition between airports. We do this for the Pensacola, Florida, airport. Results indicate the Fort Walton Beach facility is the largest threat and the staff at Fitch Ratings have, to some degree, focused on the wrong airport. We also found that, while ratings affect interest rates, the relationship to risk is less clear.

The effect of United States commercial airport rate-setting methods on airport bond ratings

“…The ratings affect bond issuers' borrowing costs and investors' decisions (LeMay et al, 2016;Hawkins et al, 2019), but the bond grading procedure is opaque, and the judgments behind the ratings are multi-layered and not well known. When examining the airport bond ratings for a regional airport, LeMay et al (2016) write that a change in airport ratings has an impact on the attitudes of resident airlines regarding the services they offer at airports. Hawkins et al (2019) suggest that airports' decisions on capital structure are also influenced by their bond ratings.…”

“…Investors who decide to invest in bonds are likely to turn to creditworthiness advisory services or CRAs (White, 2013). Moody’s, Standard and Poor’s (S&P) and Fitch Ratings are three prominent CRAs operating in a limited, oligopolistic market that issues 97% of the general obligation bonds in the United States (LeMay et al ., 2016). Ratings, in general, act as an indicator of a company’s creditworthiness (Kisgen, 2006).…”

“…The ratings affect bond issuers' borrowing costs and investors' decisions (LeMay et al ., 2016; Hawkins et al ., 2019), but the bond grading procedure is opaque, and the judgments behind the ratings are multi-layered and not well known. When examining the airport bond ratings for a regional airport, LeMay et al . (2016) write that a change in airport ratings has an impact on the attitudes of resident airlines regarding the services they offer at airports.…”

“…Bond’s grades are assigned by CRAs after reviewing the issuer’s creditworthiness using both public and proprietary information (Hawkins et al ., 2019). Three prominent global CRA’s, Moody’s, Fitch and Standard and Poor’s (S&P), jointly rate 97% of the general obligation bonds in the United States (LeMay et al ., 2016; Hawkins et al ., 2019). The rest of the industry belongs to around 200 local or regional CRAs offering services worldwide or in their domestic markets (Marandola, 2021).…”

“…The rest of the industry belongs to around 200 local or regional CRAs offering services worldwide or in their domestic markets (Marandola, 2021). There is no significant competition between these big three CRAs (LeMay et al ., 2016).…”