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Friday, July 04, 2003

By Mark Belko and Frank Reeves, Post-Gazette Staff Writers

US Airways rejection of its leases at Pittsburgh International Airport has prompted another New York rating agency to downgrade Allegheny County Airport Authority bonds.

In a statement released yesterday, Moody's Investors Service dropped the authority's rating on $676 million in bonds from Baa1 to Baa2, citing in part the uncertainty surrounding negotiations aimed at keeping the airline in Pittsburgh and the future viability of the carrier itself.

In a separate action, the authority filed papers in U.S. Bankruptcy Court yesterday objecting to US Airways' decision to value the worth of its Pittsburgh International operating agreement at zero.

The authority maintains the value of the operating agreement the airline rejected shortly before it emerged from bankruptcy in March is $1.4 billion and has filed claims for that amount.

In its latest filing, the authority asked U.S. Bankruptcy Judge Stephen Mitchell to bar US Airways from valuing its claims at zero before there can be a court-supervised hearing to determine their worth. It also wants the court to ensure that the amount of stock set aside for unsecured creditors is large enough "to account for the reasonable value of the [authority's] claims."

A hearing on the issue is scheduled for July 17, unless the two sides can resolve the dispute before then. US Airways spokesman David Castelveter said the company would have no comment on the dispute.

US Airways is obligated to settle the claims of unsecured creditors like the airport authority. Under a reorganization plan approved by U.S. Bankruptcy Court, the unsecured creditors would receive in total a 10.5 percent stake in US Airways. The plan follows a typical bankruptcy reorganization pattern in which creditors are allowed to swap their claims for a stake in the reorganized company.

Moody's is the second rating agency to drop the authority's bond rating because of the US Airways lease rejection. In April, Fitch Ratings lowered its rating two notches, from A minus to BBB.

Airport authority Executive Director Kent George said he was not pleased with the Moody's downgrade, but added it was not unexpected, given the situation with US Airways and the state of the airline industry in general. Moody's began a review of the authority's rating in April, shortly after US Airways rejected its Pittsburgh leases.

"Over the last few days we have worked with Moody's in attempting to mitigate the downgrade but, unfortunately, we were unable to keep it from occurring," he said.

George said he does not expect the downgrade to have any immediate impact because the authority is not considering any borrowing. It could lead to higher interest costs should the authority borrow money. George said he is hopeful the rating will improve once a deal is reached with US Airways.

In its statement, Moody's said the uncertainty surrounding the negotiations between state and local leaders and the airline was one of the key factors leading to the downgrade.

Gov. Ed Rendell has offered the airline a $263.9 million package of cost-savings concessions and airport improvements to keep its Pittsburgh hub and to at least maintain current operations in Philadelphia.

Still uncertain, Moody's said, was what financial impact any agreement would have on the airport and how that would affect bondholders.

"Moody's also believes that the future of US Airways is uncertain, given its recent emergence from bankruptcy, and that while other carriers would likely be interested in serving the stable Pittsburgh metropolitan area's [local] base, it would take time to attract low-cost carriers and expand service of existing airlines," the statement said.

While other airlines are obligated under the airport's operating agreement to pay off bonds should US Airways cease to exist or pull out of Pittsburgh, the dominance of US Airways, which is responsible for paying off most of the debt, "makes that an economically difficult scenario," Moody's stated.

It also said the authority's recent 3.4 percent budget cut and 10 percent work force reduction wouldn't be enough in the event of a "severe retrenchment" by US Airways.