NEW YORK--()--Fitch Ratings has affirmed the 'A' rating on the State of Connecticut's (the state) approximately $16.7 million 2001 series B general airport revenue bonds. The state operates Bradley International Airport (Bradley, the airport).
The Rating Outlook is Negative.
RATING RATIONALE:
--The economic strength of the air service area that supports the airport's nearly all origin and destination (O&D) traffic base in conjunction with the highly competitive New England airport environment. Traffic performance has deteriorated in recent years as the airport experienced four consecutive years of enplanement declines starting in fiscal 2007 (ended June 30). Enplanements were 2.6 million in fiscal 2010 as compared to more than 3.6 million in fiscal 2006. Exhibiting some traffic recovery, the airport's enplanements are up 9.3% fiscal year to date (through March 2011).
--A well diversified air carrier mix led by Delta Airlines (Delta, rated 'B-', Positive Outlook) at 29% of enplanements and Southwest Airlines (Southwest, rated 'BBB', Stable Outlook) at 25% of enplanements in fiscal 2010.
--The potential for changes in debt interest costs as well as refinance risk associated with the airport's debt. The airport issued $152.4 million of parity variable rate notes (not rated by Fitch) under a direct purchase refunding transaction with two banks in 2011. The notes are subject to an April 2014 tender date and the debt interest costs are initially structured to be synthetically fixed through interest rate swaps. The swap counterparties are Goldman Sachs and Bank of America (both rated 'A+'/Stable Outlook by Fitch).
--Relatively healthy liquidity position (more than 320 days cash on hand in fiscal 2011) and moderate levels of financial leverage (debt burden of $65.7 per enplaned passenger and 4 times [x] net debt/cash flows available for debt service) in conjunction with a declining debt service profile starting in fiscal 2012. The airport's capital plan is demand driven in nature with no planned additional leverage for the next several years.
--Expected ongoing improvement in the airport's debt service coverage levels following the levy of a pledged customer facility charge (CFC) that the airport began collecting in December 2009. In fiscal 2010, coverage improved to 1.46x, including the revenue enhancement reserves, as compared to just 1.30x the prior year. An updated airline use agreement, effective July 2011, should indefinitely continue to provide adequate cost recovery from the signatory carriers given recent state regulation, although the latest agreement is a shorter two-year term.
--Developing uncertainty with regards to the governance and strategic direction of the airport enterprise. The recent passage of new legislation may lead to a transfer of the management and operation of the airport, along with five other general aviation airports from the Department of Transportation (DOT) to a newly formed Connecticut Airport Authority (CAA). As a result, Fitch will monitor the affect on the airport's overall strength and financial flexibility.
WHAT COULD TRIGGER A RATING DOWNGRADE:
--Lack of sustainable traffic recovery.
--Failure to maintain improved coverage levels given the new airline use and lease agreement and the levy of the CFC.
--The airport's inability to manage its operating expenses which could lead to a less competitive cost per enplanement (CPE; approximately $9 in fiscal 2010) and deterioration of financial flexibility.
--Additional leverage that would increase the debt metrics and dilute coverage levels.
SECURITY:
All airport revenue bonds are secured by a parity senior lien on the authority's net operating revenues. The series 2011 A and B bonds (not rated by Fitch) are additionally secured by the amounts deposited into the passenger facility charge (PFC) coverage account, limited to no greater than 1.25x of the PFC-eligible debt service. Holders of the series 2001B bonds (rated by Fitch) do not have a claim on deposits in the PFC coverage account.
CREDIT SUMMARY:
In fiscal 2010, the airport enplaned a total of 2.6 million passengers, representing the lowest traffic level experienced since fiscal 1995. Enplanements have declined for four consecutive years, down 9.2%, 2%, 13.1% and 8.3% in fiscal years 2007, 2008, 2009 and 2010, respectively. The airport's proximity to competing facilities in Boston, Albany, and New York City has also limited growth at the airport. However, the first nine months of fiscal 2011 have shown some signs of enplanement recovery, up 9.3% over the same period in fiscal 2010. This growth is attributed to the entry of JetBlue in November 2010 offering nonstop service to Fort Lauderdale and Orlando, as well as increased service by other carriers. Management anticipates these traffic patterns to continue through the end of fiscal 2011 and projects 3% to 4% growth in fiscal 2012. Fitch will continue to monitor the enplanement trends at Bradley.
In fiscal 2010, nearly half (49%) of the airport's total operating revenues were supported by the airlines. Bradley's operating revenues increased 0.4% in fiscal 2010 to $52.5 million and are expected to be 5.1% higher in fiscal 2011 based on the airport's fiscal year to date (through March) results. Operating expenses decreased 4.7% in fiscal 2010 to $38.4 million, an improvement over the 2% growth rate in 2009 and well below the historical average. Operating expense reductions included lower salaries due to an early retirement incentive program and increased vacancies, as well as reduced natural gas expenses to operate the airport's energy center. Bradley generated a 27% operating margin in fiscal 2010, up from 23% the prior year. In fiscal 2011, the airport's expenses are estimated to increase by more than 9% to approximately $42.2 million due to increased snow related expenses. Should expense growth return to higher historical rates, debt service coverage may be pressured.
The airport's 30-year use and lease agreement, which established a compensatory rate-setting structure, is set to expire on June 30, 2011. Bradley and its six major airlines have agreed to a new agreement to be effective by the end of July 2011; management expects the carriers to sign in the next few weeks. The new two-year agreement will maintain the existing compensatory structure. The airport's CPE increased to $9 in fiscal 2010 from $8 in fiscal 2009, and it is expected to remain at this level for fiscal 2011.
The airport has maintained net revenues sufficient to provide 1.35x coverage of annual debt service in fiscal 2010 (1.46x with the revenue enhancement account). This is higher than fiscal 2009 at 1.19x/1.30x. For fiscal 2011, coverage is expected to increase to 1.46x/1.56x based on positive improvement in traffic performance as well as the inclusion of CFC revenues.
Bradley's outstanding debt consists of $16.7 million series 2001B fixed rate bonds (rated by Fitch) and $152 million series 2011 A and B floating rate notes (not rated by Fitch) that have been synthetically fixed through interest rate swaps. The series 2011 A and B direct purchase bonds were issued to refund the airport's outstanding series 2001A bonds, reducing debt service obligations beginning in fiscal 2012 and generating approximately $1.4 million in annual savings. Bradley's debt service profile jumps from $19.9 million in fiscal 2011 to $20.8 million fiscal 2013, and then declines to $12 million when series 2001B bonds mature in October 2012.
The airport's fiscal 2012-2016 capital improvement program (CIP) totals $565 million. The largest projects involve the demolition of the existing Murphy Terminal and design and construction of a new Terminal B. This accounts for approximately 70% of the CIP. The airport plans to finance this program through PFC receipts (70%), internal sources (24%) and grant funding (4%). Management has indicated that no additional borrowing is envisaged as a part of the current CIP and major projects are demand driven and may be postponed. However, should additional leverage be added, this may negatively impact credit quality.
Bradley International Airport is currently owned and operated by the state DOT through its Bureau of Aviation and Ports.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance', dated Aug. 16, 2010,
--'Rating Criteria for Airports' dated Nov. 29, 2010.
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548345
Rating Criteria for Airports
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=578745
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