Fitch Affirms Minneapolis-St Paul Airport Sr Rev Bonds at 'AA-' & Sub Rev Bonds at 'A'

CHICAGO--()--Fitch Ratings has affirmed the 'AA-' rating on $746.2 million Metropolitan Airport Commission's (MAC; Minneapolis, MN) senior airport revenue bonds. Fitch has also affirmed the 'A' rating on MAC's $756.5 million subordinate revenue bonds. The Rating Outlook on all bonds is Stable.

KEY RATING DRIVERS:

STRONG O&D BASE WITH HIGH DEPENDENCE ON DOMINANT CARRIER: The Minneapolis-St. Paul metropolitan statistical area (MSA) is a well-established commercial center for the upper Midwest with no competing airport facility in the vicinity. Considerable demand for air service generated from a broad-based local economy with an origination and destination (O&D) base of 8.7 million enplaned passengers. Delta maintains a dominant market share representing 76% of enplanements with connecting traffic representing approximately 46% of total traffic which leaves Minneapolis St-Paul International Airport (MSP) susceptible to realignment of hubbing service. Enplanements have increased modestly after several years of declines. Revenue Risk-Volume: Midrange.

HYBRID USE AND LEASE AGREEMENT RESULTING IN COMPETITIVE AIRLINE COST: Carriers operate under a hybrid operating agreement with a compensatory methodology for Terminal 1 Lindbergh terminal costs and residual for the airfield. Airline charges for Terminal 2 (Humphrey Terminal) are set under an ordinance. The airport's cost per enplaned passenger (CPE) was $6.42 in 2012 and is expected to remain competitive despite an expected increase to approximately $6.90 over the next five years as debt service ramps up. Revenue Risk-Price: Stronger.

CONSERVATIVE DEBT STRUCTURE: Comparable to other airports of its size, MSP has a moderate amount of leverage with $1.5 billion of debt outstanding (including $9.2 million of general obligation bonds). All of MAC's debt is fully amortizing and fixed rate. Additional senior bonds are subject to more restrictive conditions as parity obligations can be issued only with a backward looking test based on maximum annual debt service coverage. Debt Structure: Stronger.

STABLE PERFORMANCE WITH MODERATE LEVERAGE: MSP has maintained strong and stable financial performance as traffic has been recovering from the economic downturn. The airport maintains a diverse revenue stream consisting of aero-nautical and other non-airline revenues, with concession revenue contributing nearly half of the airport's revenue. MSP's healthy balance sheet helps to manage the financial metrics given the size of its operations including net debt/CFADS of 6.7 times (x); Debt per O&D enplanement of $175, and days cash on hand (DCOH) of 606 days. Overall coverage metrics remain favorable while Fitch notes that senior lien coverage ratios improved to 3.3x in 2012 from 2.4x in 2011 due to improved financial performance and pre-payment of general obligation debt. Debt Service Counterparty Risk: Midrange.

MODEST CAPITAL NEEDS WITH NO FUTURE BORROWING EXPECTED: Having recently completed an approximately $3.2 billion capital program, the airport's future capital plans are modest, focused on airfield and routine terminal work. The capital program will be funded from a combination of PFCs, proceeds from previous and current bond issuance, a short-term bank loan, grants, and available cash. No new money long-term borrowing is currently anticipated. Infrastructure Development Renewal: Stronger.

RATING SENSITIVITIES

Reduction in the Delta hub resulting in 50% or greater loss of connecting traffic could pose downward pressure on the rating.

Additional new borrowings that would materially increase leverage would be viewed as a credit negative.

SECURITY:

The senior lien bonds are secured by a first lien pledge of general airport revenue and subordinate bonds are secured by a second lien pledge of general airport revenue.

CREDIT UPDATE:

Passenger demand at the airport is sizable at over 16 million enplanements with approximately 46% of traffic derived from connecting passengers. Enplanements have shown three years of modest growth following the 2008 - 2009 recession. In 2012, enplanements were up 0.3%. For year-to-date 2013, enplanements are up 1.8% through April. Both origin/destination and connecting enplanements have been growing at approximately the same rate since 2010.

Delta Airlines (Fitch Issuer Default Rating 'B+'; Outlook Stable) is the airport's largest carrier, accounting for 76% of total enplanements in 2012. Under the terms of Delta's lease agreement, which runs through 2020, Delta covenants that it and its affiliate airlines will maintain an annual average of 360 daily flights at the airport (no less than 250 of such flights will be aircraft with more than 70 seats). Delta currently averages over 400 flights per day. While Delta has been shifting capacity from mainline to regional jets, connecting enplanements have grown in 2011 and 2012. Since 2012, Delta has added six new routes from MSP.

Southwest/AirTran, Spirit and Sun Country, all of which operate at MSP's Terminal 2 (Humphrey Terminal), have been the fastest growing carriers. Southwest/AirTran has grown to be MSP's second largest carrier, with 6% of enplanements.

As traffic performance has improved, the airport has improved its sound financial position in 2012, with net revenues providing 3.32x coverage of senior lien debt service and 1.76x coverage of total debt service, including the airport's $9.2 million of general obligation revenue bonds. When PFCs are treated as revenue instead of an offset to debt service, senior lien coverage was 2.86x with total coverage of 1.58x in 2012. Senior coverage levels improved markedly in 2012 due to the pre-payment of $229 million of Series 15 general obligation bonds in October 2011. Delta Airlines elected to pre-pay its lease obligations associated with the Series 15 bonds in order to be released from the employment covenant that required Delta to maintain 10,000 jobs in the Minneapolis-St. Paul Metropolitan Area.

The airport's cost per enplanement remains favorable compared to similar sized connecting hub facilities at $6.42 in fiscal 2012 and is expected to rise to $6.90 over the next five years as debt service increases. Cash reserves are strong with unrestricted balances of $227 million, translating to 606 days cash/securities on hand.

The airport's future capital needs are modest, having already completed a $3.2 billion capital program in 2010, the principal component of which was the construction of a new runway. Through 2015, the airport's capital program will total $257 million. Most of the projects relate to routine terminal improvements. The airport expects to fund its capital program with a combination of proceeds from previously issued senior bonds, PFCs, federal and state grants, as well as other available revenues of the commission.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (July 12, 2012);

--'Rating Criteria for Airports' (Nov. 28, 2012).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Rating Criteria for Airports

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=656970

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=793049

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com

Primary Analyst

Reed Singer

Director

+1-312-368-3120

Fitch Ratings, Inc.

70 W. Madison Street

Chicago, IL 60602

Secondary Analyst

Daniel Adelman

Analyst

+1-312-368-2082

Committee Chairperson

Seth Lehman

Senior Director

+1-212-908-0755

Fitch Ratings

Sharing

Contacts

Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com

Primary Analyst

Reed Singer

Director

+1-312-368-3120

Fitch Ratings, Inc.

70 W. Madison Street

Chicago, IL 60602

Secondary Analyst

Daniel Adelman

Analyst

+1-312-368-2082

Committee Chairperson

Seth Lehman

Senior Director

+1-212-908-0755

Fitch Ratings