Your community gets a B-: analysis of the specific and curious realm of airport bond rating

Abstract

Commercial airports are publicly-owned transportation infrastructure, usually funded with bonds. The bond rating decision for these entities thus has important ramifications for bond investors, issuers, airport managers, and even the communities the airports serve, but the rating decision process is not well understood. This paper discusses a simulation of the rating process in two decision environments, including a downgrade. The effect of information framing in an environment of incomplete data is examined using amateur evaluators. Amateur evaluators were utilized to understand how people with limited financial analysis skills would respond when presented with incomplete information and a primed scenario. The results indicate that amateur evaluators were more likely to downgrade a bond grade than a ratings agency, but this effect was moderated for amateur evaluators with more work experience. Implications for airport and supply chain infrastructure are discussed.

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

“…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).…”

“…Evaluating credit risk cannot be implemented by market participants or investors; therefore, the role of CRAs is highlighted as nationally Rate setting methods on airport bond ratings recognized statistical rating organizations (Morgan Stanley, 2014;Liu et al, 2012). High bond ratings are perceived as lower risk and lower borrowing costs; in contrast, low bond ratings mean higher risk and higher borrowing costs (Hawkins et al, 2019).…”

“…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.…”

“…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. A credit downgrade would be seen as a setback and can negatively affect the airport (Kisgen, 2006).…”

“…They do not have a profit-maximization business model; their primary sources of revenue include federal grants, passenger facility charges, airline user fees and non-aeronautical revenues. Large airports also finance their capital projects through revenue bonds (FAA, 1999; Fuhr and Beckers, 2009; Hawkins et al ., 2019).…”