CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A-' rating to the city of Chicago (the city), Midway International Airport's (Midway) approximately $326 million second lien revenue bonds series 2013ABC and $660 million series 2014A-C. In addition, Fitch has also affirmed its 'A' rating on approximately $743.9 million in outstanding first lien airport revenue bonds and its 'A-' rating on approximately $639.4 million in outstanding second lien airport revenue bonds. The Rating Outlook is Stable for all bonds.
KEY RATING DRIVERS:
--CARRIER CONCENTRATION OFFSETS SERVICE AREA STRENGTH: Midway is the second major airport serving the Chicago regional market and is well situated through a growing scale of low-cost, point-to-point domestic services benefiting from an economically strong local air trade service area in a favorable mid-continent location. The airport served 9.7 million enplanements in 2012, of which 62% were origination and destination (O&D) passengers. In recent years, traffic growth has well outpaced that of both the nation and nearby O'Hare International. Total traffic has climbed each year since 2008 and was 3.4% higher in 2012. However, Southwest Airlines/AirTran (Southwest; rated 'BBB', with a Stable Outlook by Fitch) account for over 90% of enplanements between them, and nearly 40% of total traffic is connecting traffic; as such, Midway remains susceptible to Southwest/AirTran scheduling decisions. Air service competition from O'Hare Airport also lends risks to traffic performance.
Revenue Risk- Volume: Midrange
--SOLID COST RECOVERY FRAMEWORK: Midway operates under a residual use and lease agreement (AUL) that has provided for stable financial performance in recent years. Carriers recently signed a 15-year AUL renewal running through 2027, further demonstrating their long-term commitment to the airport. Airline costs are currently competitive at less than $8 per enplanement for 2012. Cost per enplanement (CPE) has risen over the past few years, mainly due to rising debt service obligations related to debt that funded airport improvements agreed to by carriers, but has moderated of late with enplanement gains.
Revenue Risk - Price: Stronger
--DECREASED VARIABLE-RATE DEBT EXPOSURE: With the planned issuance of the 2013 and 2014 bonds, the airport's debt profile will assume a more conservative structure with only 17% variable rate debt, of which approximately half is synthetically fixed with swaps. Midway's debt service payment profile will become more levelized through the restructuring derived from the series 2013 and 2014 refundings, including the elimination of put bonds.
Debt Structure: Stronger
--ABOVE-AVERAGE LEVERAGE, BELOW-AVERAGE LIQUIDITY: Midway currently has a higher debt burden and cost profile than peers at $144 debt per enplanement ($233 debt per O&D enplanement) and 15x aggregate net debt/cashflow available for debt service. Leverage, however, is expected to fall steadily over the next few years but still remain elevated at 12x by 2018. However, liquidity in the form of unrestricted cash and operating reserves is modest at 220 days cash on hand and will likely remain so given the residual airline agreement. All-in coverage for 2012 (including the transfers from the coverage account) dropped marginally to 1.27x from 1.36x in 2010.
Debt Service: Midrange
--MANAGEABLE, DEBT-FUNDED CAPITAL PLAN: Midway's capital improvement plan (CIP) for 2013-2019 reflects works totaling $379 million. Approximately 93% of the plan is expected to be funded through new bonds with 34% of the plan being funded with the series 2014 new money bonds and another 60% from future issuances. Key airport facilities are in good condition following recent renovations to terminal and concession areas as well as parking and the completion of the consolidated rental car facility in 2013.
Infrastructure Development/Renewal: Stronger
RATING SENSITIVITIES:
--Either a material downshift or volatility in the traffic profile given the Southwest concentration could lead to negative rating action;
--Significant increases to Midway's current plans for borrowings or airline costs as a result of underperforming trends in non-aviation revenues or higher operating expenses could pressure the current ratings.
SECURITY:
The first- and second-lien bonds are secured by a pledge of the net revenues generated at the airport on a senior and subordinate basis, respectively. The series 2010C bonds are secured by airport revenues, but the city intends to pay debt service with consolidated rental car facility charges (CFCs).
TRANSACTION SUMMARY:
The series 2013 bonds are scheduled for negotiated sale on or about November 21, 2013 and the series 2014 bonds are expected to be sold within the first few weeks of 2014. The series 2013 bonds total approximately $326 million and proceeds will be used to refund outstanding first and second lien bonds. The series 2014 bonds will be a combination of approximately $190 million new money bonds for capital projects as well as approximately $470 million for refundings to support a debt service restructuring. Collectively, the two sets of transactions will enhance the capital structure risk by the reduction of variable rate debt to approximately 17% from the current 25% level, the elimination of both put bonds that were subject to 2015 and consented 2016 mandatory tender dates, and a reduction to the maximum annual debt service spike. In addition, the $190 million of new money series 2014 bonds will be used to partially fund Midway's CIP, which is primarily focused on noise mitigation projects, and final maturity of the second lien debt will extend to 2044.
Midway's traffic continues its strong growth following the sharp decline in enplaned passengers in 2008. Traffic grew for the fourth consecutive year, up 3.4% in 2012, to a new peak enplanement level of 9.7 million. Further, growth continues into 2013 as Southwest continues to add capacity and service. Enplanements are up 4.9% year-on-year over the first nine months of 2013 and are expected to end the year up 4.4% according to management.
Whereas most of the airport's recent growth has been derived from connecting traffic related to Southwest's increased hubbing operations, O&D traffic is once again showing positive trends, growing by a strong 6.2% in 2012 on the back of nearly 4% growth in 2011. The pace of connecting traffic growth since 2006 has shifted the O&D passenger mix from around 75% of total enplanements at that time to 62% in 2012. Given the expectation of the continued high market share of Southwest/AirTran (currently 91%) and the 38% connecting passenger base at the airport, Midway's future traffic performance and financial flexibility will be heavily influenced by Southwest's scheduling decisions.
Demonstrating its long-term commitment to Midway, Southwest executed a 15-year renewal of the residual AUL in 2012. This airline agreement approach has provided for stable airline costs and financial performance, and is expected to continue to do so through the forecast period.
Midway's expenses have remained stable over the past few years, growing at a modest 1% compound annual growth rate (CAGR) since 2008. However, as the costs of its capital program have come online, CPE has risen to $9.38 in 2011. Yet, as a result of Midway's continued enplanement growth and monitoring of expenses, CPE fell to under $8 in 2012. Midway's airline costs are likely to rise over the next two to three years but should remain largely under control even as rates and charges are increased to cover additional debt service obligations from new issuances. The airport estimates CPE for 2013 will be approximately $11 and Fitch's base case projections forecast CPE to remain under $14 through its forecast period. However, as the airport issues additional debt or should non-airline revenues fall short of expectations, Midway's financial profile could be pressured, resulting in higher CPE.
Taking into account the use of cash reserves and non-pledged revenue sources such as PFCs and CFCs, the airport's total debt service coverage ratio (DSCR) was 1.27x in 2012, on par with coverage the year prior. Fitch notes this is down slightly from the 1.36x in 2010, but still above the 1.10x covenant level and in line with expectations given the residual nature of the AUL. The city anticipates total coverage to remain above its 1.1x rate covenant through the projection period.
The city's 2013-2019 capital improvement program is currently manageable at $379 million. Primary investments are the recently completed consolidated rental car facility, residential sound insulation, and airfield pavement rehabilitation. The airport plans to fund the majority of its capital needs with new money bonds including approximately one-third with the series 2014 issuance and another 60% with future borrowings.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance', dated July 11, 2012;
--'Rating Criteria for Airports', dated Nov. 27, 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=695600
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=808432
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