I was struck by the good news last week that KCI’s debt rating has been upgraded. As reported in the Star:
Moody’s cited the airport’s “continued improvement” in key financial measurements, including its ability to service its interest and debt payments and maintain needed cash on hand. A higher rating can lower the airport’s costs to borrow. The new rating of A1 applies to senior liens and a new rating of A2 applies to subordinate liens covered by the ratings update.
While Moody’s cited KC’s ability to work with airlines on a solution, they also cautioned those with big eyes and “build it and they will come” mindsets. The Star’s story ends with:
Moody’s also said ratings could suffer should the city adopt a terminal redevelopment plan that “involves significant operational impacts” at the airport, increases airline costs above other airports without having a long-term agreement with airlines, or fails to use “best management practices for construction management.
These last two items are concerns that have been raised before and it’s good to see the concerns validated. So just like someone with good credit who runs out and buys more than he should (or loses his job) and watches his credit score go down and rates go up, the same could happen at KCI with the wrong plan, no guarantees, and poor accountability.
But could KCI’s rating go back down BEFORE bonds are issued in anticipation of higher risk to the lenders?
“Yes,” replied Joey McLiney, President and Chief Compliance Officer at McLiney And Company, a company specializing in municipal finance instruments for over 50 years. Mr. McLiney added, “If KCI has solid agreements, where the airlines are truly on the hook, we should be okay. Were I the financial advisor, I’d recommend financing only with a good agreement in place. Without one, the rating may suffer BEFORE the issuance of debt, which would raise interest rates and increase borrowing costs now and in the future.”