Effects of the COVID-19 crisis on airport investment grades and implications for debt financing

Abstract

While a rich body of literature on airport performance has been established during the last three decades, significantly less attention has been given to related financing aspects — although these are directly influencing the cost structure of an airport, thus affecting financial performance. This paper discusses bond financing as one of the funding options of an airport company and how it is impacted on by the COVID-19 pandemic. According to the law of risk and return, the price (interest) which the issuer needs to pay to raise money in the capital markets correlates to its risk profile as reflected by an investment grade. Such bond ratings are opinions assigned by credit rating agencies of the creditworthiness of the issuer’s debt. Globally reputable examples are Fitch Ratings, Moody’s Investor Service and Standard & Poor’s. The black swan COVID-19 brought air transportation to a standstill and keeps eroding credit metrics of airlines and airports. This study is compares the credit ratings of 113 airports per year end 2019 vs investment grades assigned during the first semester 2020 (1H20). Comparable to the global financial crisis 2008/09, the number of downgrades has been limited, with most actions resulting in a one notch decrease. Privately owned airport operators have been concerned higher-than-average. The negative outlook, however, almost affected the entire sector. Investment grades appear to be more stable than share prices, which seem to be more volatile and to trigger rating actions. Nevertheless, the cost of capital for the bond financed share of debt tends to go up according to the risk and return trade-off.