Tourism-Linked Issuers Prove Resilient | Lord Abbett

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Fixed-Income Insights

How an airport and an electric utility serving two iconic travel destinations successfully navigated pandemic-related disruptions.

Read time: 3 minutes

[This article is from the forthcoming edition of the Lord Abbett Muni Quarterly.]

The travel sector was quickly upended by the COVID-19 pandemic. At the end of February 2020, travel patterns in the United States were still normal, based on Transportation Security Administration (TSA) checkpoint data. However, by the end of March 2020, TSA checkpoint data showed travel volumes declining 94% from one year earlier.

Fears over travel demand affected investor perceptions of certain issuers in the normally stable municipal bond space. However, almost all tourism-linked names in the municipal market have not only survived what seemed like worst-case scenarios during the low points of 2020 but did so with very little impact on their public credit ratings. This resiliency was observed in McCarran International Airport, which serves tourism-dependent Las Vegas, and Anaheim Electric, which serves Disneyland.

McCarran International Airport

In a previous Muni Quarterly article, we discussed how the U.S. airport sector, in general, held steady through the pandemic. We noted tremendous resilience because (1) airport revenues are not directly linked to passenger volume; (2) federal aid has been very significant; (3) liquidity positions were strong going into the pandemic; and (4) airports provide essential services, often as monopolies within a specific geographic area.

However, out of all U.S. airports, some viewed McCarran as especially vulnerable to the pandemic, given Las Vegas’ significant tourism traffic and dependency on indoor activities, like shows, conventions, and clubs. Despite these fears, the airport successfully navigated through the worst of the pandemic, given strong liquidity and federal support. Per Moody’s Investors Service, McCarran had 759 days cash on hand at the end of fiscal year 2019, and still had 661 days cash on hand at the end of fiscal year 2020. Federal support from the CARES Act and the American Rescue Plan Act could represent, in aggregate, close to a normal year’s worth of operating revenues.

On April 22, 2021, S&P Global Ratings revised the credit outlook on essentially all U.S. airports back to a stable outlook, from negative, given ongoing economic and travel recovery catalyzed by widespread vaccine distribution. A very small number of airports remained on negative outlook, including McCarran. However, on August 23, 2021, S&P revised McCarran senior bonds from an A+ rating with a negative outlook to A+ with a positive outlook, notably bypassing the “stable” designation. McCarran became just the second airport revised to positive by S&P since the onset of the pandemic. S&P noted that July 2021 monthly enplanements at the airport were 92% of July 2019 levels, which is close to normalcy; this level of recovery is outperforming nationwide trends.

At this point, McCarran is not only showing more resilience than many had previously expected, but it may be one of the better-performing airports from a credit standpoint.

Anaheim Electric

In March 2020, Disneyland closed indefinitely amid pandemic concerns. A few days after the Anaheim-based theme park was shuttered, Anaheim Electric fully drew on its $100 million revolving loan, which is typically a sign of financial distress. Some investors instinctively concluded that Anaheim Electric was in trouble, but we believed the credit was fundamentally strong and eventually the unfavorable headlines and negative market sentiment would subside.

First, the revolver borrowing was preemptive in nature; Anaheim Electric’s liquidity was sound at the time, in our view, and has continued to be sound throughout the pandemic. Per S&P, liquidity exceeded 170 days cash on hand throughout 2020 and is projected to reach 280 days cash on hand in 2021. Secondly, the utility’s service area is broader than just Disneyland, with 85% of its customers being residential, based on May 2021 data. While most revenues do come from commercial and industrial customers, like Disneyland and hotels, declines in commercial and industrial demand in 2020 were partially offset by increases in residential demand (given a greater number of customers staying at home and favorable weather conditions).

The key strength of Anaheim Electric, though, is its unregulated and monopolistic rate-setting authority. The utility has consistently raised rates as needed and prudently cut expenditures in 2020, as well, to help offset revenue declines.

When Disneyland reopened at the end of April 2021, the negative headlines and sentiment subsided, and despite the theme park’s long closure, credit-rating impacts on Anaheim Electric were ultimately minimal. Moody’s and Fitch Ratings have not moved their ratings or outlooks at all during the pandemic. At the beginning of the pandemic, S&P revised the rating to AA- with a negative outlook, from AA- with a stable outlook, but in May 2021 the agency revised Anaheim Electric’s outlook back to stable.

There are not many worse scenarios for Anaheim Electric than a prolonged Disneyland closure. Nevertheless, the utility was able to navigate this environment well, with only slight impacts to its financial profile and essentially no long-term impact on its public credit ratings. This resilience underscores the utility’s fundamental strengths.

A Final Word
After a difficult 2020, the U.S. economy has largely reopened, and it seems like society is unwilling to close again. This bodes well for travel-linked names in the municipal bond market. There are no absolutes, of course; some tourism-dependent borrowers in the municipal market, like certain single-site hotels, are still struggling. However, these credits are backed by a narrow revenue stream, not a broad enterprise. Throughout the pandemic, we have generally preferred more resilient credits in this relatively challenged sector.



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