NEW YORK--()--Fitch rates Susquehanna Area Regional Airport Authority's (SARAA; the airport or authority) approximately $103.1 million of series 2012A&B senior lien airport system revenue bonds at 'BBB-' and $15.3 million of series 2012C subordinate lien airport system revenue bonds at 'BB+'. Fitch also affirms all of the authority's outstanding senior and subordinate lien bonds. The Rating Outlook remains Stable.
KEY RATING DRIVERS
SMALL ENPLANEMENT BASE WITH SIGNIFICANT COMPETITION: Harrisburg International Airport serves primarily as an Origination and Destination (O&D) airport in the state capital region. Traffic base has historically been stable supported by the state government, corporations, and universities. However, traffic base of 650 thousand is small and faces significant regional competition for air service, particularly from Baltimore-Washington International Airport and Philadelphia International Airport.
Revenue Risk- Volume: Weaker
HIGH COST STRUCTURE: The airport operates under a hybrid use & lease agreement which allows the authority to raise rates and charges to meet bondholder covenants. However, pricing flexibility is limited by a high cost per enplanement (CPE) of $14.17.
Revenue Risk- Price: Weaker
CONSERVATIVE DEBT STRUCTURE: All of the authority's senior and subordinate lien bonds are fixed rate. Aggregate annual debt service is flat through 2032. However, Fitch notes that debt service on senior lien bonds will jump in 2017 from $8.1 million to $12.4 million once the subordinate lien bonds mature. No additional debt issuance is expected in the near term.
Debt Structure: Stronger
THIN COVERAGE AND HIGH LEVERAGE: Coverage per indenture is 2.35 times (x) for senior lien and 1.31x including subordinate lien debt in 2011. Fitch's coverage calculation which considers PFC as revenues rather than an offset to debt service and excludes coverage account is 1.76x for senior lien and 1.14x including subordinate lien debt. The authority has a high debt burden driven by capital spending earlier in the decade. Debt per enplanement is high at $265 and is also highly leveraged at 10.4x net debt to CFADS. The authority has unrestricted cash position $1.47 million as of September 2012. When including maintenance & operation reserve and capital improvement reserve days cash on hand is equal to approximately 115 days.
Debt Service and Counterparty Risk: Weaker
MODERN FACILITY WITH LIMITED CAPITAL NEEDS: Modern facilities allow the authority to maintain an internally funded capital plan absent of additional debt. The authority's capital program for 2012-2017 totals $41.2 million and is expected to be funded primarily by federal and state grants.
Infrastructure Development and Renewal: Stronger
WHAT COULD TRIGGER A RATING ACTION
--Absent a significant increase in cash flow for debt service and liquidity the senior lien bonds will experience tighter coverage as debt service requirements ramp-up in 2017 resulting in negative rating pressure.
--Service reductions or enplanement declines could impact the airport's competitive profile given an already high cost structure.
The senior lien bonds, which are secured by a pledge of airport system net revenues and an irrevocable commitment of PFC receipts. The subordinate lien bonds are secured by a subordinate pledge of airport system net revenues and receipts under a Federal Aviation Administration Airport Improvement Program (AIP) Letter of Intent (LOI) grant, all of which monies have been received.
Proceeds of the series 2012 refunding bonds will be used to refund $121.1 million of series 2003A,B,&D bonds. Net present value savings of the refunding are estimated to be $5.8 million or 4.82% of refunded bonds. Debt service reserve fund (DSRF) requirements will be fully funded using bond proceeds and the DSRF letter of credit will be eliminated.
Financial performance at the airport has been stable since Fitch's last review in June 2012. January to September 2012 financial statements show operating revenues increasing by 3% compared to the same period in prior year due to a 6.1% increase in non-airline revenues. Operating expenses has decreased by 1.1% due to a mild winter. Traffic has improved by 2.7% for year to date 2012 and has historically been stable.
In Fitch's view, there have been some positive developments at the airport in recent years, however, many challenges still remain and are unlikely to be resolved in the near term. All-in coverage is thin and the authority has limited flexibility to pass cost to airline carriers due to a high CPE of $14.17. In addition, senior lien debt service will spike in 2017 after the maturity of the subordinate lien bonds. Without meaningful enplanement growth, the authority will need to rely on strategic cost management and additional non-airline revenues to maintain investment grade debt service coverage in 2017 and beyond. The authority is also highly leveraged with a net debt to CFADS of 10.4x and is expected to remain elevated for some time given that the principal on senior lien debt will not begin to amortize until 2017.
Under Fitch's base case scenario which assumes slight enplanement declines followed by flat growth and annual expense growth of 3.5%, CPE is expected to increase to $16 by 2018. In Fitch's stress case scenario which assumes 7% and 2% enplanement decline in 2013 and 2014 due to a change in air carrier service followed by a recovery. CPE is expected to rise above $17 by 2018, a level that would be unreasonably high for an airport of its size.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (July 12, 2012);
--'Rating Criteria for Airports' (Nov. 27, 2012).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
Rating Criteria for Airports