LAX retains AA Fitch rating despite people mover project delays

Bonds

Fitch Ratings affirmed Los Angeles International Airport’s AA rating and stable outlook despite ongoing delays on its automated people mover.

The airport’s AA issuer rating reflects “LAX’s superior credit characteristics, including a strong underlying air trade service area, significant operational activity supported by a diverse mix of domestic and foreign-flag carriers, favorable rate agreements with airlines and very strong financial metrics,” Fitch analysts wrote in a July 1 report.

Fitch affirmed its AA rating on $3.8 billion in senior revenue bonds, the AA-minus rating on $6.6 billion in subordinate revenue bonds and $500 million of subordinate revenue commercial paper notes.

Fitch analysts “considered all the potential positive and negative developments to the APM project, including delays or cost overruns, as we assigned the LAX payment obligation rating,” said Seth Lehman, a Fitch senior director.

Fitch Ratings

It also assigned an A rating to the payment obligations related to the $1.2 billion in LAX Integrated Express Solutions automated people mover project senior lien revenue bonds. The bonds were issued by the California Municipal Authority on behalf of LAX Integrated Express Solutions, or LINXS, the private team developing the project.

The A payment obligation rating on the automated people mover considers “only the financial obligation taken by LAX to support the contractual payments paid to the project company based on the legal security and pledge linked to those payments,” said Seth Lehman, a Fitch senior director. “Thus, it’s a specific assessment for LAX as a revenue counterparty to the whole public-private partnership arrangement and is a subset to the broader risk that is retained by the separately issued LINXS project bonds.”

LAX had the private-activity bonds funding its people mover train downgraded to a junk BB-plus rating from BBB-minus on Jan. 19, with Fitch citing continuous and ongoing delays and a strained relationship between the developer and the airport.

The 2.5-mile guided rail system is the centerpiece of LAX’s $5.5 billion Landside Access Modernization Program (LAMP), which will “give guests time-certain access to terminals and provide the long-awaited connection to the regional transportation system,” according to the airport’s website.

Fitch analysts “considered all the potential positive and negative developments to the APM project, including delays or cost overruns, as we assigned the LAX payment obligation rating,” Lehman said.

“We currently view LAX/LAWA [as having] strong revenue and balance sheet resources to cover the costs even if [the cost] is revised upward due to claim settlements,” Lehman said.

While physical construction on the project is nearly complete, the project still needs to undergo a rigorous testing and commissioning process before it opens for operations. The project, originally slated to open in 2023, isn’t expected to begin operating until 2025.

The parties are in settlement discussions on a number of claims “that may include both a rescheduling of the final completion date and additional funds to be paid by LAX for costs above the original budget,” Lehman said.

LAX continues to recover from the pandemic’s operational impact, Fitch analysts wrote in the rating report, but the airport’s fiscal profile has been supported by ongoing revenue and cost initiatives, as well as LAX’s sound liquidity position, which has been bolstered in part by federal assistance grant funds.

Enplanements, expected to hit 38 million in 2024, are still down 14% compared to 2019 pre-pandemic numbers, according to Fitch.

The airport also has $15 billion in projects planned in its Next Capital Program through 2029, and additional borrowing is planned, but Fitch analysts wrote the airport’s intermediate-term leverage and coverage metrics remain strong and consistent with the AA rating category.

The primary focus in the next program will be on terminal improvements, providing new gates and also replacing the outdated American Eagle terminal and most of the remote gates, and improving the passenger experience at LAX. Fitch’s analysis assumes an additional $11.4 billion of bonds to fund the program.

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