Fitch Rates Raleigh-Durham Airport's (NC) Refunding Revs 'AA-'; Outlook Revised to Negative

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA-' underlying rating to Raleigh-Durham Airport Authority's (North Carolina) (the authority) $238 million airport revenue refunding bonds, series 2010A (non-AMT) and $75 million airport revenue refunding bonds, series 2010B (non-AMT). The bonds are expected to price the week of Aug. 4, 2010. Fitch also affirms the authority's outstanding airport revenue bonds at 'AA-'. The Rating Outlook is revised to Negative from Stable.

The Negative Rating Outlook reflects recent declines in enplanements, which in 2010 were in-line with 2005 levels, and an expectation of more moderate enplanement growth going forward as compared to Fitch's last review. While the airport has considerable pricing power, non-aero revenues, which represented 69% of operating revenues in 2010, are closely linked to enplanement levels, as are passenger facility charges (PFCs). Given that enplanements have declined 11% over the past two years, PFC collection levels, which serve to offset 45%-48% of annual debt service in the 2010 to 2016 period, are affected. Fiscal 2011 to date through June shows flat enplanement growth. Should enplanements stagnate, financial metrics could suffer and airport management may need to further increase rates or actively manage costs in order to stabilize net revenues and meet annual debt service requirements. Should this scenario materialize, rating action could be warranted.

The 'AA-' rating reflects the authority's strong balance sheet liquidity, with over 1,000 days cash on hand since 2006; stable operating performance, with operating margins in the 50%-60% range over the past decade despite declines in enplanements; flexible rate setting mechanisms and fiscal policies which provide the airport with financial flexibility and facilitate efficient use of airport facilities; a strong and growing service area with 96% originating and destination passengers; and a diversity of carriers serving the airport, with no one carrier accounting for more than 22% of enplanements. Fitch's rating assumes no additional revenue bond debt for the authority's capital improvement program through 2016. Offsetting credit concerns include slightly higher annual debt service requirements through maximum annual debt service (MADS) in 2013 coupled with the relatively high debt service profile of the airport's debt structure through 2030, which may pressure coverage and costs per enplanement; more moderate enplanement growth in recent years; and the airport's increasing reliance on PFCs to cover debt service, with PFC fund balances expected to drop from $70 million to $3 million by end of the forecast period.

The authority's management has served to mitigate the impacts of the recent economic downturn, containing operating costs in 2010 while achieving modest revenue growth. The airport's cost per enplanement (CPE) remains competitive at $5.92 in 2010 and $4.79 in 2009, though it is above the historical average of $4.00; the airport forecasts CPE to remain below $6.00 through 2016. Non-airline revenues have fallen, with parking revenues declining 7% and rental car revenues declining 9% in fiscal 2010 over the previous year. However, operating revenues were up 1.1% due to increased airline charges. Net revenues in fiscal 2010 equated to a 50% operating margin (down from 55%-60% in the 2002-2008 period) and generated 1.7 times (x) debt service coverage before transfers. This is in-line with coverage in fiscal 2009, and compares to an average coverage of 2.3x for the five years prior. Looking forward, the airport's consultant has forecasted total enplanement growth averaging 2.6% per year through fiscal 2016, a rate slightly lower than those anticipated at Fitch's last review. This results in coverages between 1.50x and 1.90x throughout the forecast period. Under Fitch's stress case, which anticipates enplanement growth of 1% per year and slightly higher growth in operating expenses, coverages are more pressured between 1.37x and 1.55x. These levels are lower than those seen at Fitch's last review.

The authority held $135 million in unrestricted cash and investments in fiscal 2010, up from $113 million in fiscal 2007; this equates to over 1,100 days cash on hand. The authority plans to cash-fund 60% of its $209 million capital improvement plan; however, the authority has indicated that it plans to maintain at least $99 million cash and equivalents through the forecast period (ends 2016). Following the refunding, debt service reserves will equal $50 million. The authority also maintains $71 million in PFC collections in 2010. $47 million of PFC balances will be spent on completion of the Terminal 2 project in 2011 and 2012, leaving $24 million for debt service offsets. The authority has irrevocably committed PFCs to pay a portion of the debt service on bonds related to PFC-eligible projects ($22 million-$24 million in each of 2011-2014). Given recent declines in enplanements, the authority forecasts it will not collect sufficient PFCs in 2011-2014 to meet these irrevocable commitments, and will draw upon its PFC balances to offset debt service requirements.

The region known as the Research Triangle provides the primary economic base for air transportation at the airport. This service area is characterized by high levels of per capita personal income, a large university population, and limited airport competition within a two-hour drive. Unemployment in the area has been significantly below the state of North Carolina and the U.S. over the last decade, including through the recent recession. The robust nature of the area economy is viewed as a credit strength for the airport.

The application of the following criteria was used to derive the rating of the above referenced bonds:

--'Rating Criteria for Infrastructure and Project Finance', dated Sept. 29, 2009;

--'Airports Rating Criteria Handbook for General Airport Revenue, PFC and Letter of Intent Bonds' dated March 12, 2007.

All are available on the Fitch web site at 'www.fitchratings.com' under the headers Global Infrastructure & Project Finance then Rating Criteria and U.S. Public Finance then Rating Criteria.

Additional information is available at www.fitchratings.com.

Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=468928

Airports Rating Criteria Handbook for General Airport Revenue, PFC and Letter of Intent Bonds

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=264948

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