Chicago Midway Airport Second Lien Revenue Bonds · 5/31/2017 · applied passenger facility charge (PFC) revenues as an offset to debt service, and customer facility charge (CFC)

May 31, 2017 Chicago Midway Airport General Airport Senior Lien Revenue Bonds

City of Chicago, IL Chicago Midway Airport Second Lien Revenue Bonds

Executive Summary Kroll Bond Rating Agency (KBRA) has affirmed the long-term rating of A with a Stable outlook on the

City of Chicago, Chicago Midway Airport Second Lien Revenue Bonds, with the exception of Series 2004C-

1 and Series 2004C-2, Series 2004D, and Series 2014 C Bonds, which are backed by direct pay letters of

credit.

This affirmation is based on KBRA’s U.S. General Airport Revenue Bond Rating Methodology. KBRA’s

rating evaluation of the long-term credit quality of general airport revenue bonds focuses on six key rating

determinants:

Management

Economics/Demographics of Service Area

Airport Utilization

Airport Debt/Capital Needs

Airport Finances

Legal Mechanics and Security Provisions

In the process of affirming the rating, KBRA reviewed multiple sources of information including audited

financial reports, Federal Aviation Administration data, and City of Chicago budget documents. Please see

the report entitled Chicago Midway Airport Second Lien Revenue and Revenue Refunding Bonds,

Series 2016A and 2016B for further credit related information.

Security The second lien bonds are secured by a pledge of revenues, payable after operation and maintenance

expenses and aggregate first lien debt service. The bonds are also payable from certain other monies and

securities held by the trustee under the provisions of the second lien indenture and any supplemental

indenture.

Key Rating Strengths

● Strong, diverse expansive air trade area supports O&D activity.

● MDW ranks as the busiest airport in its dominant carrier’s (Southwest) route system as

measured by enplanements and scheduled seat capacity.

● The Chicago Department of Aviation (CDA) has demonstrated an ability to undertake large

complex projects, most recently the O’Hare modernization program (OMP), while remaining

within budget and meeting ongoing operational needs.

● Limited additional landside and airside capital needs following projects now being undertaken.

● Moderate airline costs will rise, but not significantly, particularly on an inflation-adjusted

basis.

Key Rating Concerns

● High level of carrier concentration, as enplanements for the dominant carrier account for

more than 90% of MDW activity.

● Narrow debt service coverage, reflecting an adequate rate covenant and residual airport use

U.S. Public Finance

Airport Surveillance Report

https://www.krollbondratings.com/show_report/1174?transaction_id=0

https://www.krollbondratings.com/show_report/4324


Chicago Midway Airport General Airport Senior Lien Revenue Bonds

Page | 2 May 31, 2017

agreement.

● Non-airline revenue performance ranks among the lowest of U.S. commercial airports,

underscoring the challenges that current projects are intended to address.

Rating Summary

KBRA believes the underpinnings of Chicago Midway Airport’s (MDW or “the Airport

“) credit position stem from a strong air-service market, which features the third-largest population in the

U.S., a sizable and diverse economic base with major employers and Fortune 500 headquarters, and a

location in the center of the U.S. The presence of Southwest Airlines, which has created a niche based on

price and reservation simplicity, distinguishes MDW from O’Hare International Airport (ORD), which is

dominated by American and United hubs, for domestic and international travel.

KBRA views the CDA and MDW management team as very effective as underscored by the diverse

backgrounds, significant experience, and adopted policies and procedures that support well-maintained

operations. Debt levels are currently above average but KBRA does not expect significant debt issuance in

the medium to long term. MDW’s facilities are projected to sufficiently accommodate an additional 2.1

million enplanements over the present 11.1 million. Full capacity is not expected to be achieved until

2025. Further growth beyond that date may be constrained by terminal and airfield space limitations.

KBRA also notes the risks presented by Southwest’s dominance at MDW, but at the same time, KBRA

notes the significant growth in activity, particularly the steady increase in destinations added. It is

noteworthy that Southwest’s expansion at MDW has continued despite the expiration of the Wright

Amendment, which opened Dallas Love Field to medium- and long-haul flights. While Southwest does not

have connecting hubs per se, MDW has become a focus airport that is the most heavily trafficked in

Southwest’s system. Nevertheless, if Southwest were to cease, or sharply curtail operations, KBRA

believes there is uncertainty whether connecting traffic (approximately 40% of enplanements) would be

maintained.

MDW’s 15-county air-trade area (ATA) population of nearly 9.7 million stretches into three states, and

includes the City of Chicago (“the City”) with a population of approximately 2.7 million. The ATA’s

population has continued to grow at a compound annual rate (CAGR) of 0.6%, which is below the

comparable U.S. rate. However, per capita personal income, a key indicator of demand for air travel is

higher than that of the U.S. Access to overseas markets gives business in the region the ability to operate

internationally. Major employers represent a wide range of industries, including health care, higher

education, financial services, pharmaceuticals, insurance, and retail. The ATA has the second highest

number of Fortune 500 company headquarters in the U.S. after the New York metropolitan area. The City

and the surrounding region host a wide variety of cultural and educational institutions, and the City ranks

highly in the U.S. in the number of conventions held.

There are two other commercial service airports in the area: ORD, a large hub facility owned by the City of

Chicago and located approximately 15 miles north of MDW; and General Mitchell International Airport, a

medium hub airport situated near Milwaukee, Wisconsin, about 85 miles north of MDW. In KBRA’s opinion,

MDW has no real competition for service from these airports. ORD provides high frequency service,

including a significant number of international markets. In contrast, MDW serves a distinct market

segment as a lower-fare alternative, and is a more easily navigable airport, with better access to southern

and western portions of the City and adjoining suburbs. Mitchell Airport has a much more limited


Page | 3 May 31, 2017

frequency of non-stop service than MDW and ORD, and thus a portion of it potential traffic is diverted

from its catchment area to MDW and ORD.

MDW is a large hub facility, and ranked 24th nationally in enplaned passengers in 2015. A record 11.1

million enplaned passengers were served by MDW in 2015, of which approximately 38% were connecting

passengers. Passenger trends have been positive over the past 15 years. Declines due to the events of

9/11 were nominal, and a healthy rebound was exhibited in subsequent years. There have been only two

year-over-year declines recorded since then. In 2005, a 9.6% decline was recorded attributable to a

bankruptcy filing by American Trans Air and a reduction in service. The decline was partially offset by

expanded Southwest service during that year. In 2008, extremely high fuel prices and poor economic

conditions resulted in airline system-wide capacity reductions. These factors, along with the ATA’s second

bankruptcy filing and elimination of service, resulted in a 11.4% decrease during that year.

Notwithstanding the 2008 decline, the compound annual growth rate for MDW was 2.2% between 2006

and 2015, compared to the U.S. rate of 0.4%. Southwest has continued to add new markets, as well as

increase service to existing markets. In 2015, Southwest provided an average of 239 flights per day to 70

markets, and accounted for 93.4% of the Airport’s passenger enplanements. This compares with a MDW

total of 272 daily non-stop flights to 78 markets. Recently, Southwest has been deploying larger aircraft at

MDW, thereby further increasing seat capacity.

KBRA views MDW’s position from a capital-needs perspective as mature, with the capital improvement

plan largely completed. KBRA’s expectation is that future borrowing will be limited. MDW’s terminal

development program, a seven-year capital program, was completed in 2004 and resulted in the

construction of a 1-million square foot passenger terminal with three concourses. The new facility replaced

the former outmoded terminal. Terminal projects have been completed, and there is no identified need for

airfield capacity. Available parking was also greatly enhanced by the completion of terminal and economy

parking garages. A consolidated rental-car facility opened in 2013. Approximately $1.58 billion in projects

have been completed since 1996. The 2016-2022 capital improvement program (CIP) totals $458 million,

and is largely funded from bond proceeds ($410 million from prior bond issuance and $23.7 million from

planned future issuance). The balance of CIP funding is airport improvement program entitlements ($20.4

million), and other federal funds ($3.7 million). The most prominent projects, including passenger security

checkpoint expansion and terminal parking garage expansion, are demand driven.

The second-lien bond security, which includes the current offering, represents MDW’s working lien. While

the first lien is open, the City has no intention of issuing additional debt under that lien. There is

approximately $25.7 million of first lien bonds outstanding, compared with $1.73 billion of outstanding

second lien bonds. There are currently four variable rate second lien bond series outstanding in the

current principal amount of $252.3 million with support from direct-pay letters of credit. The City has

entered into two fixed payer swaps with a notional value of $127.6 million. The swaps have termination

triggers set at below BBB1/Baa+ and Baa2/BBB ratings by other rating agencies. As of March 31, 2017,

the combined mark-to-market value for both swaps was negative $24.7 million. Presently, only the swap

providers are required to post collateral. The City has also established a commercial paper (C.P.) program,

and obtained credit support for up to $85 million in C.P. notes.

Bond maturity is in 2046, and annual debt service is ascending through 2022. The City has historically

applied passenger facility charge (PFC) revenues as an offset to debt service, and customer facility charge

(CFC) revenue for debt service associated with the consolidated rental-car facility. Approximately 49% of

all debt service is PFC-eligible, which has moderated airline operating costs at MDW considerably.


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MDW financial operations are satisfactory, although general airport revenue bond (GARB) coverage is

narrow, reflecting the residual rate-making methodology defined in the airport use agreement, and a

1.10x rate covenant that allows unlimited application of non-recurring sources of revenue. Airline

payments are a substantial component of operating revenues, and would be substantially higher without

the PFC support. Concession revenues, particularly on a per enplanement basis are relatively low with

parking representing the largest non-airline source. Concession revenues per enplanement, at $5.90, are

below the median for selected comparable airports. Nevertheless, concession revenues increased at a

CAGR of 5.48% between 2011 and 2015, and the passenger security checkpoint expansion now being

undertaken is anticipated to create an additional 18,000 square feet of retail space, which along with the

parking expansion, represent potential for revenue enhancement.

KBRA understands that the CDA is moving forward with the Midway concession redevelopment program.

According to CDA management, in February of 2017, the Chicago City Council approved a 15-year lease

agreement with Midway Partnership, LLC who will operate, manage and develop the entire concessions

program at Midway. The new agreement, which became effective on May 12, 2017, is expected to add

26,000 square feet of new concessions spaces as well as reconstruct all existing concessions facilities.

KBRA understands that CDA management expects concession sales to double once the redevelopment is

completed in 2020. KBRA also understands that the parking garage expansion project is underway and

that the City is currently seeking requests for proposals for the construction phase of the project. It is

KBRA’s understanding that the project is intended to add up to 1,500 additional premium parking spaces

at MDW.

Operation and maintenance (O&M) expenses increased at a CAGR of 4.6% between 2010 and 2014. The

increase is partially attributable to higher professional and engineering costs, as well as hikes in salaries

and wages, and increases in repair and maintenance expenses. Professional and engineering costs

increased at a CAGR of 10.1%, and repairs and maintenance expenses rose by 8.4%. In KBRA’s opinion,

O&M expenses, although rising, remain in a comfortable range, based on KBRA’s GARB Rating

Methodology. Furthermore, O&M per enplaned passenger has been flat between 2011 and 2015. O&M

expenses are forecast to rise by a CAGR of 4.1% over the nine-year period through 2025. This forecast

assumes a 3% inflation factor, no incremental O&M expenses associated with future capital projects, and

reversion to statutorily-based pension-related reimbursements to the City, following the Illinois Supreme

Court decision finding legislatively adopted pension reforms unconstitutional.

Enplanements are forecast to grow at a 1.8% CAGR, compared to the Federal Aviation Administration

2.2% nationwide forecast, and below MDW’s 2.1% projected growth over the 2016 through 2025 period.

MDW’s projected cost per enplanement (CPE) of $15.04 in 2025 is manageable in comparison with the

estimated $10.45 CPE in 2016. The $15.04 figure equates to approximately $11.53 in 2016 dollars. KBRA

undertook a stress case, under which Southwest connecting activity is reduced by 10%, with similar

reductions in concessions, and no reduction in O&M expenses. Under this scenario CPE rises to $17.47, or

$2.43 above the current forecast. However, any significant negative deviation in enplanement activity

based on Southwest corporate determination is likely to further elevate this metric.


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Based on review of the six KBRA Rating Determinants included in the KBRA Methodology for rating U.S.

General Airport Revenue Bonds, KBRA has assigned a rating to each Determinant, which is summarized as

follows:

Management: Favorable

Economics/Demographics of the

Service Area: AA

Airport Utilization: A

Airport/Debt Capital Needs: A

Airport Finances: A-

Legal Mechanics and Security Provisions: A-

Outlook: Stable

The stable outlook reflects KBRA’s expectation that Southwest Airlines will continue to maintain MDW as

an important focus airport in its route system, capital plans will proceed as proposed, and debt service

coverage will remain adequate as per the residual rate-making methodology.

In KBRA’s view, the following factors may contribute to a rating upgrade:

Diversification of the carrier mix with concurrent enplanement growth.

Successful transformation of terminal concessions, resulting in enhanced non-airline revenue

support.

In KBRA’s view, the following factors may contribute to rating downgrade:

Significant reduction in Southwest Airlines operations at MDW.

Key Rating Determinants Rating Determinant 1: Governance and Management MDW and ORD Airports are owned by the City of Chicago, operated by the Chicago Department of Aviation

(CDA), and accounted for as self-supporting enterprise funds of the City on a fiscal year basis. MDW,

located approximately 10 miles southwest of downtown, was dedicated in 1927 as Chicago’s first airport.

From the outset MDW was one of the world’s busiest airports. Yet even during this early period, City

officials recognized its footprint constraints (840 acre site) and by the early 1960s had shifted the bulk of

aviation activity to O’Hare Airport, which began commercial passenger service in 1955. Notwithstanding

the movement of activity to ORD, MDW retains its vital aviation role, with current passenger activity at its

highest levels ever.

While the CDA has not adopted explicit mission and vision statements, the CDA views its purpose as all-

encompassing, and KBRA believes the following responsibilities are generally referenced in these

statements. These include ensuring safe and efficient travel through MDW and ORD Airports; successful

implementation of the O’Hare Modernization Program (OMP); promotion of economic activity and job

creation; management of airport tenant and concession license agreements, ground transportation

facilities, financial administration, research planning and development activities; integration airport-

specific, sustainable planning and practices in design, construction, operations, maintenance, and daily

airport operations. The City aspires to a high level of customer service, with world class facilities, best-in-

class technology, and quality services and products. The City believes that global connectivity can be

attained by encouraging growth among current airlines, creating an environment for new entrants

(domestic, international, cargo), and working to increase flight frequencies and up gauging of assets. The

City is focused on improving yields for airlines, concessionaires, and other business partners, and

strengthening concession revenues on a per passenger basis and in total.


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City of Chicago Governmental Structure KBRA views the City’s management structure and policies as providing a strong framework for managing

debt, financial operations, and service delivery. The City’s management team is highly experienced, and

comes from a wide variety of disciplines, supplementing traditional management skills and adding new

perspectives. Financial responsibilities are domiciled under the leadership of the chief financial officer,

budget director, and city comptroller. City government is divided into executive and legislative branches.

The mayor is the chief executive and is responsible for administration of various city departments, while

the City Council, elected from 50 wards (municipal districts), is the legislative body. Elections are held

every four years, with no term limits. Official action is taken through the passage of ordinances and

resolutions. In addition to the mayor, Chicago’s two other city-wide elected officials are the clerk and

treasurer, whose role is to invest city funds.

CDA Organizational Structure The CDA operates under the direction of a commissioner of aviation, appointed by the mayor and

approved by the City Council. The commissioner of CDA is the primary contact with the mayor’s office.

Providing support to the Commissioner is a first deputy commissioner, chief of staff, general counsel, chief

of safety and security, chief operating officer, chief financial officer, one managing deputy commissioner,

five deputy commissioners, director of media relations, and director of marketing. The deputy

commissioners have responsibilities in concessions, finance, information technology and communications.

The managing deputy commissioner and one of the deputy commissioners are focused on MDW Airport.

The CDA oversees planning, operations, safety and security, and finance and administration at MDW. The

CDA employs approximately 1,400 people, of which approximately 160 positions are budgeted for MDW,

with an additional 50 employees for the winter season. There are roughly 7,435 employees at MDW, which

include airline, concession, tenant, custodial, and contracted personnel. MDW employees participate in one

of four single-employer defined benefit pension plans for City employees. The City’s contributions to these

plans are funded by user fees and charges and other revenues assessed at MDW. The City’s general fund

is reimbursed for pension costs applicable to employees at MDW, and those reimbursements are recorded

as operating expenses. Federal regulations prevent airport revenues from being used to fund pension

costs for any employees not working directly at or allocated to the Airport.

Management Experience Ginger S. Evans joined the CDA in June 2015 as commissioner of the Department of Aviation. She has

more than 30 years of aviation experience, and joined after serving as vice president of engineering for

the Metropolitan Washington Airports Authority (MWAA) in Washington, D.C. She has overseen major

projects at Reagan National and Dulles Airports, as well as the Silver Line Metrorail extension. Prior to her

role at MWAA, Evans worked in private consulting on major aviation projects in Europe, the Middle East,

and Latin America, as well as rail projects in New York and Washington, and also served as director of

aviation for Denver International Airport. Susan Warner Dooley, first deputy commissioner, oversees the

business, financial and administrative functions of MDW and ORD, and has 25 years of airport-related

experience. She previously served as a senior executive of the Port Authority of New York and New Jersey,

Minneapolis-St. Paul Metropolitan Airports Commission, Miami-Dade Aviation Department, and Columbus

Regional Airport Authority. Reshma Soni is the chief financial officer for CDA. Erin O’Donnell, managing

deputy commissioner, is responsible for the management of MDW, including airfield and landside

operation, facilities, finances, stakeholder relationships, and community outreach.


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Budget Process The CDA submits an annual budget for MDW to the signatory airlines to the airport use agreement for

review. The budget includes airport rates and charges calculated using the residual rate-setting

methodology set forth in the airport use agreement, based on budgeted O&M expenses, revenues,

required fund deposits, and debt service. CDA then submits its proposed budget for MDW to the City’s

budget director for inclusion in the proposed city budget. The budget director includes a proposed budget

for CDA in the City’s budget proposal for approval by the mayor, who submits the budget to the City

Council for approval. MDW’s budget, as proposed by CDA, may be modified by the budget director, mayor,

or City Council. The final budget recommendation is submitted to the City Council for consideration by the

Council’s committee on the budget and government operations by October 15 of each year. The

committee on the budget and government operations and then the full City Council vote on the budget

and any amendments. The budget must be adopted before the end of the calendar year, as the fiscal year

begins on January 1 and ends December 31. The City Council voted to approve the fiscal year 2017

budget on November 16, 2016 by a vote of 48 to 0.

The budget director requires departments to submit quarterly allotment budgets, which the budget

director in turn monitors. In the event any department’s expenditures exceed its receipt of revenues, the

budget director through the quarterly budget allotment procedure is authorized to institute measures to

ensure that the department’s expenses do not exceed its revenue collection. The airport use agreement

requires a mid-year projection of operation and maintenance (O&M) expenses, which may require upward

adjustments in O&M deposits, and a related increased deposit into the O&M reserve fund.

Capital Improvement Program (CIP) Development A Facilities Review and Inspection Report is annually prepared by an independent consultant in

conjunction with airport management that evaluates airport facilities and operating systems. The report

prioritizes any facility issues and prepares cost estimates. Every other year a pavement evaluation report

is completed, as well as a bridge inspection report. In addition, the City works with the carriers, the FAA

and the Transportation Security Administration to coordinate projects that those groups require based on

federal regulations, carrier demand, and customer service. These reports are evaluated by the Design and

Construction division of the CDA, which prepares a list of projects, costs, and schedules that will be used

to update the CIP each year. Individual departments must prepare multi-year capital plans. Plans are for

five-year periods, and must be updated annually.

Airline-Airport Relations KBRA recognizes a high level of cooperation between the City and the airlines. The City and airlines work

closely in the process of developing capital programs, including the OMP and the CIP. Representatives of

both the City and the airlines participate in the executive working group, which was established in the

ORD OMP majority-in-interest (MII) to create a structure for continued City and airline-decision making.

The City and airlines have monthly meetings to review a variety of topics, both financial and operational.

In addition, the City and airlines meet twice a year to review the proposed airline rates and charges for

the next six-month period. These meetings afford the airlines the opportunity to have input into the O&M

expense budget for the Airport.

Key Policies and Procedures The City has adopted various policies and procedures, which KBRA believes effectively maintain

operations, account for attendant risks, and demonstrate foresight in dealing with critical issues. KBRA

views management as highly effective, as demonstrated by its administration of the massive and highly

complex OMP, which since its inception in 2005 has achieved its milestones on time and under budget.


Page | 8 May 31, 2017

OMP has involved the acquisition of approximately 126 acres of land, the relocation of 2,800 residents and

a cemetery with almost 1,500 graves, as well as significant associated litigation. Notably, the City was

able to convince the airlines to buy into an extensive program that increases airline rates and charges

significantly, but produces efficiencies that result in airline operational cost savings, that more than offset

these incremental costs.

Risk Management, Business Continuity & Debt Management The City has a comprehensive program that focuses on a continuous and sustainable process for the

identification, measurement, mitigation, and control of risk. Prevention and safety is an integral part of the

program as well as mitigation through risk transfer mechanisms. Risks are either transferred contractually

to the airlines or contractors working at the airport or transferred through the procurement of insurance to

insurers.

In accordance with Federal Emergency Management Agency (FEMA) standards, the CDA has practices in

place for business continuity in emergency situations. The CDA has developed the Disaster Preparedness

Plan in conjunction with the Federal Aviation Administration which prioritizes critical operations, staff, and

procedures to remain in business, or recover from a disaster that may impact the aviation business.

The City maintains general policies for debt, swaps, and investments. The debt policy’s objectives include

achieving the lowest cost of capital, preserving future financial flexibility, and maintaining a prudent level

of financial risk. The final maturity of the debt is required to be less than the remaining useful life of the

assets being financed, and the average life of the financing must not exceed 120%. Principal and interest

requirements will generally be structured to have approximately level debt service requirements over the

life of the bonds. Exceptions will occur for refunding bonds that have varying principal repayments

structured to fill gaps created by refunding specific principal maturities. A present value analysis is

required to be prepared for any refunding. The target savings is expected to be at least 3% of the

refunded par amount, except in cases where refunding was not undertaken to achieve cost savings (e.g.

restructuring repayment, changing the type of debt instruments used, eliminating undesirable covenants).

Based on the foregoing, KBRA views the Governance and Management of MDW as consistent with a

Favorable rating determinant rating.

Rating Determinant 2: Economics/Demographics of the Service Area MDW is located in the City of Chicago. The Air Trade

Area (ATA) is vast and supported by an economy

that spans three states, Illinois, Indiana, and

Wisconsin. The ATA includes 15 counties (Cook,

DuPage, Grundy, Kane, Kankakee, Kendall, Lake,

McHenry, and Will in Illinois; Jasper, Lake, Newton,

and Porter in Indiana; and Kenosha in Wisconsin).

We note that each of the 15 with the exception of

Kankakee (1.1% of ATA population) are

coterminous with the Chicago-Naperville-Elgin MSA.

Demographic characteristics are generally favorable

and lend support to air travel in the region. The City

of Chicago is the largest city in the Midwest and the

third largest city in the U.S. The population of the


Page | 9 May 31, 2017

ATA continues its pattern of slow growth, with just over 9.6 million people in 2016, reflecting a 4.6%

increase since 2000. The relatively low age dependency ratio and high 18-64 cohort characterize a

population likely to spend on air travel. The population in the ATA is highly educated, as reflected by

34.7% of the working age population having a bachelors or advanced degree. This is above comparable

state and national levels and reflects the nature and quality of the employment base in the area.

KBRA views the ATA’s wealth levels and employment base as strong, driven by the extensive economy of

the greater Chicago area. As of February 2017, ATA unemployment rate was 5.3% versus the state and

nation at 5.5% and 4.9% respectively. We note that this level of unemployment is markedly improved

from a cyclical high of 10.6% in 2010 but that unemployment has been somewhat higher than the

domestic average throughout the last decade. Wealth levels nevertheless are high with ATA per capita

personal income of $53,796 in 2015, which was 1.07x for the state and 1.12x for the nation. The poverty

level was also below average at 14.0% in 2015 versus the state and nation at 14. 3% and 15.5%,

respectively.

MSA home values declined

precipitously during the Great

Recession and recent recessionary

period and recovery has been below

the national trend. According to Zillow,

the median housing value in the MSA

was $244,675 in 2006 versus

$167,508 in 2012. As of 2016, the

MSA’s median housing value has

recovered to $198,167, which

represents a recovery of 81.0%. Over

the same period, the statewide and

nationwide recovery rates were 79.6%

and 95.3%, respectively.


Page | 10 May 31, 2017

Deep and Diverse Business Environment Supports Air Travel A substantial portion of the ATA’s economy is driven by the City of Chicago. The City is the second largest

financial center in the U.S., and its commodities exchanges account for 17.0% of the world’s trading

activity for futures, options, and derivatives. The ATA is home to over 400 corporate headquarters,

including 34 Fortune 500 companies in 2016, nine of which are located in the City. Due to its attractive

business climate, Chicago was chosen as the “Top Metro for Corporate Expansions and Relocations” by

Site Selection Magazine in 2016 for the third consecutive year. According to City management, downtown

office vacancy rates are at a 15-year record low. In 2015, the A.T. Kearney Global Cities Index rated

Chicago among the top 10 cities worldwide in attracting global capital and business.

The ATA has 42 colleges and universities, with an approximate enrollment of 292,000 as of 2016. The City

is a significant convention and tourist destination, recently improving in rank to second in the U.S. for

number of conventions hosted, and ninth for visitors from overseas. Chicago is well known for its

architecture, abundance of museums, and sporting events. Support for tourism and conventions is a high

priority of the business community, civic organizations, and government officials. Tourism and convention

activities in the ATA continue to thrive. Reflecting an improving economy, the City recorded 54.1 million

visitors in 2016, which is an increase of approximately 2.9% from 2015. Tourism generated approximately

$14.9 billion in direct spending and $935 million in state and local tax revenues. KBRA recognizes the

importance of the City’s tourism and convention activity as a generator of air travel demand.

The employment base of the ATA is well diversified among industry sectors, with no one sector

representing a disproportionate share of total employment. In 2015 the ATA had greater percentages of

employment in services, finance, insurance, and real estate, and transportation and utilities compared

with the Midwest and U.S. The top 25 employers in the ATA reflect this diverse mix of employment, which

KBRA views as a stabilizing factor for the local economy.

Geographically Competing Facilities There are two other commercial service airports located within MDW’s ATA. Chicago O’Hare International

Airport is a large-hub airport located 15 miles northeast of MDW. General Mitchell International Airport is a

medium-hub airport located 85 miles north of MDW in Milwaukee, Wisconsin.

The City of Chicago owns MDW and ORD and both airports are operated by the CDA. MDW is the largest

hub for Southwest Airlines system-wide by enplanements. ORD is a hub for both American Airlines and

United Airlines. As a result, three major airlines have hubbing operations located in the ATA. Although

MDW is located within the ORD ATA, it is not a direct competitor of ORD; it serves mainly as a lower fare

alternative for discretionary travelers. International flight services at MDW are also limited due to the

constrained length of its runways.

Mitchell Airport’s service area overlaps three counties in MDW’s ATA. General Mitchell’s enplanements in

2015 were less than one-third of MDW’s. The airport has a much lower level of non-stop service, and as a

result, a portion of potential air traffic demand is diverted from General Mitchell’s catchment area to

MDW.We note that a fourth airport, Gary-Chicago International Airport in Indiana, is also located within

the ATA, but there is no scheduled passenger airline service at that airport.


Page | 11 May 31, 2017

Based on the foregoing, KBRA views the economics/demographics of MDW’s Air Trade Area as consistent

with an AA Rating Determinant rating.

Rating Determinant 3: Airport Utilization MDW’s Role in the Air Trade Area ORD is the dominant airport within the air-trade area and regularly qualifies as one of the world’s busiest

airports as ranked by annual enplanements, cargo landed, and total aircraft operations. MDW has

historically accounted for about 20% of the annual enplanements within the ATA and General Mitchell has

historically accounted for about 8%. MDW and ORD are both located within the Chicago city limits and

have historically provided the majority of service within the ATA due to their proximity to the center of the

Chicago economic base, which is the center point for Chicago area business activity and residential wealth.

MDW and ORD are two very different airports and they serve the ATA in different ways. Unlike ORD, MDW

has generally been utilized as a base of operations for low-cost airlines that focus on providing passenger

air service to a smaller number of mostly domestic locations. MDW’s smaller and more manageable size

fits well with the low-cost carrier’s focus on speed and efficiency versus route availability. Competitive

pressures from Mitchell Airport are limited by long travel distances from Chicago and comparatively more

expensive fares relative to Chicago area airports.


Page | 12 May 31, 2017

Midway Features MDW is located on the southwest side of Chicago,

approximately 10 miles from Chicago’s downtown

business district and 15 miles southeast of ORD.

MDW is accessible via the extensive interstate

highway systems and high-frequency traffic routes

located throughout the ATA. Passengers can also

access MDW on the Chicago Transit Authority’s rapid

transit system, which provides rail service from the

central business district to MDW via the Orange Line.

The CTA began rapid transit Orange Line rail service

to MDW in 1993 as part of an effort to revitalize MDW

by making the commute to the airport fast, easy and

inexpensive.

MDW is classified as a large hub airport. In calendar

year 2015 it was ranked the 24th busiest U.S airport

by total passenger activity. The airport has approximately 1 million square feet of terminal space and a

total of 43 aircraft gates. Its total square-shaped land area of about 840 acres is constrained on all sides

by developed property, which limits the possibility for future runway extension or reconfiguration.

The airfield has a total of five runways, arranged in patterns of crisscrossing parallel groups. Two of the

runways are capable of serving aircraft up to the equivalent of a Boeing 757 and are long enough to easily

accommodate the Boeing 737 aircraft that make of up most of the airport’s airline operations. The two

largest runways have been equipped with instrument landing systems designed to enable operation in

adverse weather conditions. The three other runways are generally used to serve general-aviation aircraft.

Airfield space constraints are mitigated by the smaller aircraft typically used by low-cost carriers. These

planes generally do not require runways that are longer than those currently at MDW.

The CDA reports that MDW’s terminal capacity can continue to accommodate additional flights until it

achieves an annual enplaned passenger count of 13.2 million, which is not expected until 2025.

Airline Market Share and Aircraft Operations

Five airlines currently provide service at MDW. In addition to Southwest, the airport is served by Delta,

Porter Airlines, Volaris, and North Country Sky. Porter Airlines provides international service to Toronto,

Canada, and Volaris provides service to MDW’s Latin American markets. North Country Sky provides

service to underserved domestic markets. Historically, the number of airlines serving MDW has ranged

from a low of four in 2009 to a high of eight in 2014 and 2015. Southwest has historically been the

dominant airline at MDW regardless of the total number of airlines operating there.

Southwest Airlines, which is the largest low-cost carrier in the United States, began offering service at

MDW in 1985. It now accounts for 90% of landed weight and 93% of all enplanements there, up from

64% in 2005. Southwest’s commitment to providing low-cost service at MDW has been consistent. Over

time it has gradually enlarged its presence at MDW by replacing or acquiring the routes of other low-cost

carriers. Additional low-cost airlines currently serving MDW includes Volaris, which is based in Mexico City,

Mexico.

The low-cost business model works well at MDW due in part to MDW’s proximity to Chicago’s central

business district and the airport’s favorable geographic location. MDW’s location at the geographic center

of the US flight network facilitates higher levels of short and medium haul point-to-point service between


Page | 13 May 31, 2017

MDW and other top U.S. O&D markets, such as New York, Orlando, Las Vegas, Denver, and Atlanta.

MDW’s smaller more manageable size also facilitates ease of connection and more rapid gate turns.

Southwest’s Focus on MDW Operations at MDW are a critical feature of Southwest’s route network. MDW is Southwest’s leading airport

based on the number of enplaned passengers, destinations served and total available seat capacity. It is

also Southwest’s primary airport for connections. Approximately 7.1% of Southwest’s system-wide

passenger flights deployed at MDW in 2015. The second largest seat allocation was at McCarran Airport in

Las Vegas which accounted for approximately 6.1% of total seats that year. Southwest was scheduled to

operate an average of 256 daily flights with 38,529 daily seats to 64 domestic destinations and 3

international destinations from MDW in 2016. Southwest’s entire network consists of approximately 101

destinations in 40 states, the District of Columbia, the Commonwealth of Puerto Rico, and eight near-

international countries, of which 85% of the domestic destinations are currently served from MDW.

Growth in number of total available seats at MDW has consistently outpaced national trends.

Southwest achieves good load factors at MDW that have historically been in the 80% to 85% range since

2010, which is slightly higher than its system-wide average. In 2015 the load factor was approximately

3.2% above average, which is consistent with ten year average of 2.7% in excess of the system-wide

average. Southwest has been able to enhance load factors through increased hub activity at MDW. An

outsized amount of enplanement growth at MDW between 2006 and 2015 was the result of additional

passengers connecting between Southwest flights at MDW. Load factors are likely to remain at their

current level or improve as Southwest progresses with its stated plans to replace its Boeing 737-300s and

500s with newer more efficient Boeing 737 Max-7 and 737 Max-8 aircraft, which offer greater per-plane

seating capacity.

Considerable Service Concentration Levels Southwest’s growth at MDW has resulted in considerable levels of carrier concentration. O&D traffic

between 2006 and 2015 was largely stable at MDW with a compounded annual growth rate of 0.3%. Over

the same time period, the volume of connecting passengers grew at a CAGR of 6.1%. The more

normalized period after the great recession between 2010 and 2015 showed a CAGR of 4.7% for O&D

traffic while connecting passenger traffic levels were still showing a CAGR of 4.6%. Most of the total

enplanement growth over both periods was the result of additional operational activity as Southwest

replaced American Trans Airlines, acquired AirTran, and added additional routes at MDW.

Historical Airport Activity Enplanement Trends MDW served an annual average of 6.4 million O&D passengers and 3.9 million connecting passengers over

the past five years, including a total of 11.1 million passengers in 2015. The ten-year CAGR for total

enplanements was 2.1%. There were declines in both O&D and connecting passengers resulting from the

Great Recession but overall growth resulted from Southwest’s increased operations at the airport through

additional connecting flights and O&D service.


Page | 14 May 31, 2017

It is KBRA’s view that the low-cost carrier model works well at MDW and KBRA notes the positive aspects

of Southwest’s enhanced utilization of MDW. However, these positive aspects do not offset the level of

service concentration risk at the airport, which is a limiting factor for this Rating Determinant.

Based on the foregoing KBRA views the Airport Utilization of MDW International as consistent with an A

rating determinant rating.

Rating Determinant 4: Airport Debt/Capital Needs Given that the infrastructure is relatively new, MDW’s near to medium term capital needs are largely

related to ongoing repair, maintenance, and various minor capital projects. In 2004, CDA completed the

airport’s Terminal Development Program (TDP), which included the construction of a new one million

square foot passenger terminal with three concourses and 43 passenger gates. The new terminal replaced

the previous 29-gate terminal facility. The CDA also completed the construction of a new parking garage

adjacent to the terminal, development of an economy parking garage, and the construction of a

Consolidated Rental Car Facility (CRCF). The airport’s 2016-2022 Capital Improvement Program (CIP)


Page | 15 May 31, 2017

addresses a variety of upgrades to MDW’s terminal, airfield, and landside facilities, which will improve

capacity to accommodate forecasted growth in passenger volume and airline traffic.

Capital Improvement Program (2016-2022) & CIP Funding Sources The Airport maintains a multi-year CIP that extends from calendar year 2016 to 2022. The CDA estimates

that the CIP’s total costs amount to approximately $458.3 million. Proceeds of the Series 2016 Bonds will

be used to finance approximately $308.0 million of the current CIP.

The majority of the airport’s $458.3 million CIP is funded with bond proceeds. Other funding sources

include Airport Improvement Plan (AIP) Entitlements from the FAA ($20.4 million), other federal funds

($3.7 million), and future bonds/commercial paper ($23.6 million).

MDW Debt Obligations Historically, the City of Chicago has financed MDW’s capital improvements through the issuance of first

lien revenue bonds, second lien revenue bonds, commercial paper notes, and to a lesser degree, with

federal grants, and other MDW funds.

MDW has approximately $1.75 billion of debt outstanding. Approximately $1.73 billion of MDW’s

indebtedness is in the form of second lien bonds. The remaining $25.7 million consists of one Series of

outstanding first lien obligations that mature in 2026.

Since 2003, the City has maintained a commercial paper (CP) program providing for the issuance of CP

notes on behalf of MDW in an authorized amount not to exceed $250 million. However, only $85 million of

the City’s CP authorization is credit supported. Any outstanding CP notes are subordinate to all other

Airport obligations, including the second lien bonds, with respect to a claim on revenues.

Approximately $252.3 million, or 14.4%, of MDW’s outstanding debt is in the form of variable rate

demand obligations. These obligations are supported by letters of credit (LOC) agreements with various

banks, which are outlined below. The LOC agreements include termination events driven by downgrades

below the BBB- rating threshold. The Series 2014C letter of credit agreement expires on November 25,

2017. KBRA expects that the City will renew or extend the current agreements at that time. Alternatively,

the City could choose to convert outstanding VRDO’s to fixed rate to minimize future interest rate risk.


Page | 16 May 31, 2017

The City entered into qualified swap agreements related to the Series 2004C and 2004D VRDO’s as a

means of managing long-term interest rate costs. Currently, the City maintains floating-to-fixed swap

agreements with Goldman Sachs and Wells Fargo. The Goldman Sachs agreement requires the City to pay

4.174% on a notional amount of $76.6 million of the outstanding Series 2004C and Series 2004D Bonds.

The Wells Fargo agreement requires the City to pay 4.247% on a notional amount of $51.1million of the

outstanding Series 2004C and Series 2004D Bonds. As of March 31, 2017, the mark-to-market

termination value allocable to the City, in the event that the swaps were terminated, would be negative

$24.7 million. The City has not entered into a qualified swap agreement related to the Series 2014C

Bonds, which leaves approximately $124.7 million of MDW’s outstanding variable rate debt unhedged. This

represents approximately 7.1% of the airport’s outstanding debt.

Debt Service Requirements Increase Sharply Net annual debt service, which is net of capitalized interest, will steadily increase from a budgeted $86.8

million in 2016 to approximately $136.6 million in 2023. Annual requirements decline in succeeding years,

until the Series 2016 Bonds’ scheduled maturity in 2046. The CDA’s current debt service projections do

not factor in the issuance of $23.6 million of additional debt.

The Airport’s debt per enplaned passenger is estimated at $158, which KBRA views as high. Relative to

O&D enplanements, the Airport’s debt is estimated at $255, which is also high compared to similar large

hub airports. Annual debt service per enplanement is estimated to rise from $8.42 in FY 2016 to $13.25,

assuming no change in total enplanements. However, the use of PFC revenues to meet approximately

50% of debt service requirements is a moderating factor. MDW is virtually landlocked, which KBRA

believes, in the absence of technological advances, will limit activity growth beyond 2025. In KBRA’s view,

MDW’s relatively high leverage is mitigated by limited future capital needs. As outlined in the 2016-2022

CIP, the airport has modest future bond issuance plans.

Majority-In-Interest (MII) Provisions Procedures established under the Airport Use Agreement provide for airline review of proposed capital

projects. An MII approval from the airlines is required for all bond-funded capital projects and refundings.

The City is required to give at least 30 days’ notice in writing before making most capital expenditures or

issuing debt obligations. A capital project and financing is considered approved if an MII approves it, or if

the City is not notified in writing of MII disapproval with 30 days of the submission of the proposal. Under

the Airport Use Agreement, a majority-in-interest (MII) is defined in any fiscal year as either: (a) any five

or more Airline Parties, which in the aggregate paid 60% or more of Airport fees and charges paid by all

airline parties for the preceding fiscal year; or (b) any numerical majority of airline parties, which in the

aggregate paid 50% or more of Airport fees and charges paid by all airline parties for the preceding fiscal

year.

Based on the foregoing discussion of debt and capital planning metrics, KBRA has assigned an A rating

determinant rating.


Page | 17 May 31, 2017

Rating Determinant 5: Airport Finances The Airport Use Agreement

Most aspects of the MDW’s financial

operations are governed by the Airport Use

Agreement, effective January 1, 2013 and

expiring at year-end 2027. The signatory

airlines that are party to this agreement

represented approximately 97.3% of airline

operations in 2015 with Southwest

representing approximately 93%. The use

agreement sets forth a residual rate-setting

methodology in which the net cost of

operating, maintaining and developing the airport are allocated by cost-center. The net cost incorporates

offsets for concessions, non-signatory airline and other non-airline revenues that are generated at the

airport. It also includes debt service and other deposit requirements of the Bond Ordinance and the Bond

Indentures.

The named cost centers include the airfield area, the terminal area, the terminal ramp area, equipment

and the fueling system. Parking and roadway area and support facilities area revenues and expenses are

allocated between the airfield, terminal and terminal ramp cost centers. Each signatory airline is

responsible for the net costs associated with their proportional use of the cost centers, as determined by

total landed weight.

The airport use agreement establishes a set of accounts and flow of funds that governs how airport

revenues are held and dispersed after they are collected by CDA. The agreement also requires the

preparation of Airport financial statements that are in conformity with generally accepted accounting

principles. The airport use agreement does not permit airport funds to be used for purposes not related to

the airport.

Historic Financial Performance

The debt service coverage ratio inclusive of both the first and second lien bonds has historically

approximated the rate covenant of 1.10x and is projected to do so through the 2025 forecast period.

Coverage trends reflect the residual nature of the use agreement and the 1.10x debt service coverage

requirement. Operating and maintenance expenses have increased at a CAGR of 3.6% between 2010 and

2015. Growth was primarily driven by increases in professional and engineering costs as well as increases

in salaries and wages for repair and maintenance. Management is focused on controlling expense growth

and has maintained operating expense growth levels that are consistent with enplanement growth trends.

Airline Revenues have consistently been in the range of 63% to 67% of total airport revenues. The CDA

has discussed amending parking fee rates at existing parking facilities and expanding concession revenues

opportunities, which could lead to greater overall revenue diversity. KBRA understands that the CDA is

moving forward with the Midway concession redevelopment program and that CDA management expects

concession sales to double once the redevelopment is completed in 2020.


Page | 18 May 31, 2017

According to CDA management, in February of 2017, the Chicago City Council approved a 15-year lease

agreement with Midway Partnership, LLC who will operate, manage and develop the entire concessions

program at Midway. The new agreement, which became effective on May 12, 2017, is expected to add

26,000 square feet of new concessions spaces as well as reconstruct all existing concessions facilities.

Parking has historically accounted for slightly more than 50% of concessions revenues. This trend will

likely continue as additional parking garage space is added from the expansion project. KBRA understands

that the parking garage expansion project is underway and that the City is currently seeking requests for

proposals for the construction phase of the project, which is intended to add up to 1,500 additional

premium parking spaces at MDW.

Non-airline revenues are below average when measured on a per-enplanement basis and have been

increased from $5.58 to $5.90 between 2010 and 2015. Officials expect to enhance non-airline revenues

going forward through a planned concessions revamping program.

Passenger Airline Cost Per

Enplanement (CPE)

Airline cost per enplanement levels have been

favorable and were $9.94 in 2015. They are

expected to remain below $15.50 between

2016 and 2025, as MDW is a mature airport

that has completed its major capital projects.

Debt service costs are also offset by PFC and

CFC revenues, which offset total debt service

paid in 2015 by 57%. The additional

incremental expenses associated with the

2016 capital projects are expected to be

minimal and are mainly related to additional

energy costs.

System Liquidity

MDW reports favorable levels of cash on hand

that provide approximately 211 days cash

when factoring in available cash balances as of

December 31, 2015. MDW also has a

commercial paper line of credit that can be

drawn in an amount up to $85 million, which

can provide additional liquidity support if

necessary.

Retirement Benefits

The CDA reimburses the City’s General Fund for the estimated pension costs attributable to the covered

payroll of employees of the Airport. Those reimbursements are then included in Airport O&M Expenses.

Pension fund obligations of the Airport are limited to the share of City employees working directly at the

Airport and those from other City departments that support Airport operations such as Purchasing,

Finance, and Corporation Counsel. The budgeted 2016 pension expense is approximately $8.0 million. This

amount excludes the impact of Public Act 98-641, which was ruled unconstitutional in March of 2016.


Page | 19 May 31, 2017

MDW’s pension expenses are estimated to increase to approximately $10.8 million in 2023 with significant

increases to $15.7 million and $20.2 million in 2024 and 2025, assuming there is no change in the current

statutory funding formula.


Page | 20 May 31, 2017

Based on KBRA’s review of the documents governing the CDA financial operations and financial

performance, KBRA has assigned a rating determinant rating of A- to Airport Finances.

Rating Determinant 6: Legal Mechanics and Security Provisions Bond Security The 2016 Bonds are secured solely by a second lien pledge of revenues, which are subordinate and junior

to the pledge of net revenues for the payment of first lien bonds. Under the second lien indenture,

revenues are defined as all amounts received or receivable, directly or indirectly, by the City for any fiscal

year for the use and operation of, or with respect to MDW. Revenues exclude passenger facility charges

(PFC), or any similar charges levied by or on behalf of the City such as customer facility charges (CFC),

grants, gifts, bequests, contributions or donations, proceeds from the sale or transfer by the City of title to

all or any part of MDW, proceeds of any taxes collected at MDW, or any revenues that are restricted as to

their use or not deemed to be revenues in accordance with generally accepted accounting principles

(GAAP).

As determined by the chief financial officer (CFO), the City may transfer other available moneys or excess

funds other than revenues to the first lien revenue fund, the first lien debt service fund or any debt service

fund for second lien obligations for second lien obligations. Such excess funds may include PFC revenues.

However, the City, is under no obligation to make such transfer.

Rate Coverage Covenant Under the second lien indenture, the City covenants to fix and establish rentals, rates and other charges

for the use and operation of the Airport to provide for all operating and maintenance expenses in order

that revenues together with excess funds not required to be deposited in any fund or account under the

first lien indenture or the second lien indenture will be sufficient to provide for the greater of A or B as

follows:

A) 125% of the aggregate first lien debt service reduced by any amount in the capitalized interest

account to pay interest on first lien bonds; or

B) 110% of the sum of the aggregate first lien debt service and aggregate second lien debt service

reduced by any amount held in any capitalized interest account to pay interest on first lien bonds

and second lien obligations.

Within 60 days after the end of the fiscal year, the City is required to submit a rate covenant certificate to

the second lien trustee. If the rate covenant is not met, the City covenants to employ an airport

consultant within 60 days to make recommendations as to a revision in rates, fees and charges,

alterations of methods of operation or other action that will result in the rate covenant being met in the

current fiscal year. As long as the City complies with the provisions of the second lien indenture relating to

revising rentals, fees and charges and taking necessary action to return to compliance, the City’s failure to

satisfy the rate covenant will not constitute an event of default.

Additional Bonds Test Additional second lien obligations may be issued if one of the following conditions is met:

A) Independent airport consultant certifies that revenues and other available moneys are

projected to be not less than the coverage requirement for each of the three fiscal years

following the issuance of additional second lien bonds or for each fiscal year from the issuance

of second lien bonds through the two fiscal years immediately following project completion;


Page | 21 May 31, 2017

B) City certifies that revenues and other available moneys in the most recent completed fiscal year

for which audited financial statements have been prepared satisfies maximum annual debt

service (MADS) on all outstanding second lien obligations and the second lien obligations to be

issued.

Revenue computations for both tests incorporate adjustments for PFC revenue but under test A, the

consultant includes as other available moneys only moneys that have been paid over to the first lien and

second lien trustee and are deposited in the revenues fund or moneys that have been irrevocably pledged

to the payment of debt service on first lien or second lien obligations.

Debt Service Reserve Fund The required funding level for the common debt service reserve sub-fund is the lesser of MADS on the

second lien debt service on common reserve bonds in any fiscal year, or 125% of the average of annual

debt service on the second lien debt service on common reserve bonds or 10% of the original principal

amount of the common reserve bonds. However, if upon issuance of a series of common reserve bonds,

the amount to be paid into the common debt service reserve sub-fund from bond proceeds exceeds the

maximum amount permitted under the IRS code, the required amount will be sum of the funding level

pre-issuance and the maximum amount permitted under the Code to be deposited from the proceeds of

the bonds, as certified by the CFO. The reserve requirement may be satisfied with qualified credit

instruments established under the second lien indenture. The common debt service reserve sub-fund does

not secure any second lien obligations that are not common reserve bonds. Non-common debt service

reserve second lien bonds are secured by separate debt service reserve accounts.

Required Reserves and Flow of Funds All revenues are collected by the City. After monthly deposits by the City to the O&M Fund of an amount

equal to one-twelfth of the O&M expense, the City transfers the remainder to the first lien trustee for

deposit in the first lien revenue fund to be transferred as follows: (1) to the first lien debt service fund, an

amount equal to the accrued and unpaid principal and interest due on the first lien bonds; (2) to the City,

for deposit into the O&M reserve account an amount equal to one-sixth of the required deposit; and (3) to

the City for deposit in the working capital account (currently not applicable, as no funding is required

under the airline use agreement).

Semiannually, the first lien trustee is authorized to do the following: (1) deposit the amount, if required,

to make up any deficiency in the first lien debt service fund requirement for first lien bonds; (2) deposit to

the junior lien obligation debt service fund for the second lien trustee to transfer to the second lien

dedicated sub-fund for deposit in the principal and interest account, the amount projected to be required

on the next payment date for principal and interest; (3) deposit into the debt service reserve account, to

restore the amount in the common debt service reserve fund to the reserve requirement, if any.

Following these transfers four other reserve funds receive transfers; repair and replacement fund,

emergency reserve fund, special project fund and airport development fund. At the end of the fiscal year,

excess funds beyond the required amounts on deposit in the O&M fund, the first lien debt service fund,

the first lien debt service reserve fund and the junior lien obligation debt service fund will be transferred to

the first lien revenue fund.


Page | 22 May 31, 2017

Based on KBRA’s review of the documents governing the legal mechanics and security provisions, KBRA

has assigned an A- rating determinant rating.

Bankruptcy Assessment The Airport is owned and operated by the City, under the CDA. As a department of the City, the Airport

cannot itself file for bankruptcy protection. In addition, because it is not a separate entity from the City,

the Airport would be involved in a bankruptcy proceeding of the City. KBRA has consulted outside counsel

and it is KBRA’s understanding that the City is a municipality under Illinois State law. KBRA understands

that the State law does not currently permit municipalities in the State to file for protection under the U.S.

Bankruptcy Code, except in accordance with the provisions of the Local Government Financial Planning

and Supervision Act (the “Act”), 50 ILCS 320/1. Under the Act, applicable only to units of local

government which have a population under 25,000, a financial planning and supervision commission has

the power to recommend to a unit of local government that the unit file a petition under Chapter 9 of the

U.S. Bankruptcy Code and submit this recommendation to the State. 50 ILCS 320/9(b)(4). State law,

however, does not currently include any provisions specifically authorizing any municipal entity other than

the Illinois Power Agency to file a bankruptcy petition. Further, it is KBRA's understanding that it is

unlikely that the existing broad grant of home rule powers to home rule municipalities like Chicago under

the Illinois Constitution and other Illinois law would satisfy the specific authorization required in order to

permit the City to file for protection under Chapter 9. However, no assurance can be provided as to

whether or not the State of Illinois may adopt in the future a law that would permit municipalities such as

the City of Chicago to file for bankruptcy relief, and a bill that would grant such authority has been

introduced in the General Assembly.


Page | 23 May 31, 2017

KBRA understands that the grant of the lien on and security interest in second lien revenues appears to be

susceptible to an argument that the grant of the lien and security interest only attaches to second lien

revenues once those net revenues have been actually deposited into the second lien revenue fund or other

the applicable accounts. Accordingly, there is a risk that, in a Chapter 9 bankruptcy case of the City, a

bankruptcy court might hold that the lien and security interest in second lien revenues is limited to only

the funds that have actually been deposited as of the date of the filing of the bankruptcy case, and that

the lien and security interest will not apply to second lien revenues collected thereafter should the City fail

or refuse to deposit those post-petition net revenues into the appropriate accounts. The likelihood that the

City would fail or refuse to deposit the required amounts is diminished, however, by the fact that any

diversion by the City of revenues generated at MDW, including the revenues, in violation of federal law or

the City’s grant assurances, would subject the City to potential enforcement actions by the FAA.

Because the second lien revenues are generated by MDW, KBRA understands that the second lien

revenues will qualify as special revenues as that term is defined in the Bankruptcy Code. Therefore,

assuming the lien and security interest does apply to post-petition second lien revenues without any

requirement that those net revenues be deposited into the designated accounts, and also assuming the

sufficiency of the pledged revenues after the payment of necessary operating expenses, it is also KBRA's

understanding that even if the City were permitted to file for protection under Chapter 9, a filing by the

City should have little to no effect on the payment of the bonds during the bankruptcy case, since the

bonds are secured by a pledge of special revenues. However, in determining necessary operating

expenses, the bankruptcy court may not be limited to the definition of operation and maintenance

expenses of the airport as set forth in the first and second lien indentures. In addition, while there is no

case law from which to make a definitive judgment, it is possible that in the context of confirming a plan

of adjustment in a Chapter 9 case of the City, where the plan has not received the requisite consent the

holders of the Bonds, a bankruptcy court may confirm a plan that adjusts the timing of payments on the

bonds or the interest rate or other terms of the bonds, provided that the bondholders retain their lien on

the special revenues and that the payment stream has a present value equal to the value of the special

revenues subject to the lien.

Given that a substantial portion of the revenues to be deposited in accordance with the second lien

indenture is derived from rentals, fees and charges imposed upon the signatory airlines pursuant to the

airport use agreements, the bankruptcy of a signatory airline, particularly Southwest, could have an effect

on the ability of the Airport to make debt service. In the event a bankruptcy case is filed with respect to

an airline operating at the Airport, the lease or permit governing such airline’s use of Airport space would

constitute an executory contract or unexpired lease pursuant to the United States Bankruptcy Code. In

Chapter 11 cases, the debtor in possession or a trustee, if one is appointed, has 120 days from the date of

filing of the bankruptcy petition to decide whether to keep (“assume”) or jettison (“reject”) a

nonresidential lease, such as an airport use agreement. The 120-day period may be extended by court

order for an additional 90 days for cause. Any additional extensions are prohibited unless the debtor

airline or trustee obtains the Airport’s consent and a court order.

Under the Bankruptcy Code, were a bankruptcy trustee or the airline as debtor in possession to elect to

reject an executory contract or unexpired lease of non-residential real property, the rejection is deemed to

be a default immediately before the date of the filing of the bankruptcy petition. Under the Bankruptcy

Code, upon rejection of an unexpired lease the airline debtor must surrender the relevant non-residential

real property to the lessor. As a result, rejection of an unexpired lease by an airline debtor may result in

the Airport regaining control of the applicable facilities (including gates and boarding areas). The Airport

could then lease or permit such facilities to other airlines. The Airport’s ability to lease such facilities to

other airlines may depend on the state of the airline industry in general, on the nature and extent of the


Page | 24 May 31, 2017

increased capacity at the Airport resulting from the departure of the debtor airline, and on the need for

such facilities.

Under the Bankruptcy Code, any rejection of a lease or other agreement could also result in a claim by the

Airport for rejection damages against the debtor airline. Such claim would be in addition to all pre-

bankruptcy amounts owed by the debtor airline. With respect to leases, a rejection damages claim for the

rent due under a lease is capped under the Bankruptcy Code at the greater of one year, or 15%, not to

exceed three years, of the remaining term of the lease. Rejection damages claims are generally treated as

a general unsecured claim of the airline debtor. However, the Airport may have rights against any faithful

performance bond or letter of credit required of an airline to secure its obligations under the Airport

agreements and/or the right to set off against credits owed to the airline under relevant agreements.

Alternatively, under the Bankruptcy Code an airline debtor can “assume” its executory contracts and

unexpired leases. The Bankruptcy Code further provides for an airline debtor to assume and assign its

executory contracts and leases to a third party, subject to certain conditions. If the bankruptcy trustee or

the airline assumes its executory contracts or unexpired leases as part of reorganization, the airline debtor

must “cure” or provide adequate assurance that the airline debtor will promptly cure its prepetition

defaults, including arrearages in amounts owed. Even if all such amounts owed are eventually paid, the

Airport could experience delays of many months or more in collecting them.

Conclusion Overall, KBRA has affirmed the long-term rating of A with a Stable Outlook on the City of Chicago,

Chicago Midway Airport Second Lien Revenue Bonds.

Analytical Contacts:

Andrew Clarke, Senior Director

[email protected], 646-731-2380

Peter Scherer, Associate

[email protected], 646-731-2325

Related Publications:

Chicago Midway Airport Second Lien Revenue Bonds, Series 2016

© Copyright 2017, Kroll Bond Rating Agency, Inc., and/or its licensors and affiliates (together, "KBRA”). All rights reserved. All

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Documents

Chicago Midway Airport Second Lien Revenue Bonds · 5/31/2017 · applied passenger facility charge (PFC) revenues as an offset to debt service, and customer facility charge (CFC)