NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A+' rating to Milwaukee County, Wisconsin's approximately $24.4 million series 2014A general airport revenue refunding bonds issued on behalf General Mitchell International Airport (GMIA). In addition, Fitch has affirmed the approximately $225.9 million in outstanding general airport revenue bonds (GARBs) at 'A+'. Fitch has also revised the Rating Outlook on GMIA to Stable from Negative.
The rating reflects the airport's modest leverage, strong airline use and lease agreement (AUL) that provides for sound financial performance, and limited capital needs in the near future. Adequate liquidity provides additional financial flexibility, supporting the current rating. The Stable Outlook reflects Fitch's view that Frontier's dehubbing at the airport is now largely complete and that passenger traffic at the airport is stabilizing earlier and at a higher level than previously expected.
KEY RATING DRIVERS
Revenue Risk - Volume: Midrange
ENPLANEMENT BASE VOLATILITY SHOULD EASE: The loss of Frontier's hubbing service means GMIA now serves an almost entirely origin and destination (O&D) passenger base, expected to remain stable at around 3.4 million annual enplanements, consistent with historical performance prior to Frontier's expansion. Modest carrier concentration exists with Southwest/Airtran now accounting for nearly 50% of enplanements; furthermore, the airport faces some competition from nearby Chicago O'Hare and Midway airports.
Revenue Risk - Price: Stronger
STRONG COST RECOVERY FRAMEWORK: The airport operates under a fully residual agreement through 2015 providing for stable operating results despite recent enplanement volatility. Further, GMIA's strong non-airline revenue stream has historically allowed the airport to maintain a competitive CPE of $5-$6. Fitch notes that CPE rose to the $9 range in 2013 and, given additional operating expenses and debt service obligations, is likely to stabilize in the $10-$11 range. The current AUL provides for 10% revenue sharing from concessions, providing a modest liquidity benefit to the airport.
Infrastructure Development and Renewal: Stronger (Revised from Midrange)
MANAGEABLE CAPITAL PROGRAM: GMIA's current five-year capital improvement program (CIP) (through 2015) totals $272 million funded from a mix of sources, with little coming directly from the airport and no additional bonds needed. The 2016-2020 CIP is scaled down, with non-essential projects removed, to an estimated $134 million, with only 28% coming from new money bonds. Focus will primarily be on maintenance of existing facilities and the creation of operational efficiencies, suggesting the application of capital discipline and rationalization of CIP to maintain a healthy balance sheet and competitive CPE. Airport facilities are in very good condition and have capacity to accommodate traffic growth without expansion.
Debt Structure: Stronger
CONSERVATIVE DEBT STRUCTURE: GMIA maintains a fixed-rate, fully amortizing debt service (DS) structure with a decreasing DS profile beyond maximum annual debt service (MADS) in 2018. Reserves are fully cash-funded and more than 50% of the total outstanding debt will amortize over the next 10 years. Further, management is proactive in seeking out opportunities to lower the DS burden which should incrementally improve airline costs further suggesting their focus on heightening the attractiveness of the airport to its carrier base.
Financial Metrics
MODEST LEVERAGE WITH AMPLE COVERAGE: The debt service coverage ratio (DSCR), including support in the form of a 25% coverage account, is sound and has averaged more than 1.6x over the last five years. Coverage is also forecasted to remain at or near this level through the five-year forecast period, which includes approximately $43 million in proposed new debt and reflects modest 1%-2% enplanement growth. The recent declining enplanement profile and 2013 issuance have resulted in the airport's GARB debt-per-enplanement rising to $69, although Fitch expects this to decline going forward. The airport's balance sheet liquidity of $68 million, comprising unrestricted cash and operating reserves, is considered strong, equating to 423 days cash on hand (DCOH). GARB leverage rose to 5.0x net debt-to-cash flow available for debt service (CFADS) in 2013 with the new issuance, but still remains competitive relative to similarly rated airports.
Peers
Indianapolis (rated 'A'/Stable) and San Antonio (rated 'A+'/Stable) are among Milwaukee's closest peer airports. All serve an enplanement base in excess of 3 million with Southwest as the dominant carrier. Milwaukee has fewer enplanements and greater concentration, but the strongest DSCR profile. Indianapolis has the most liquidity, but also has the highest leverage.
RATING SENSITIVITIES
Negative:
--A return to material traffic losses or continued volatility, impacting net revenue generation;
--Airline costs substantially exceeding forecast levels;
--Increasing the size of, or shifting CIP funding toward, additional GARB debt;
--Failure to renew the AUL with a similarly favorable cost recovery framework.
Positive:
--Given the airport's modest and recently volatile traffic base, coupled with a slightly elevated CPE for its operating profile, upward mobility is not likely at this time.
TRANSACTION SUMMARY
GMIA is issuing approximately $24.4M of series 2014A refunding bonds to refund the 2015-2029 maturities of the series 2004A GARBs ($27.2 million) for debt service savings. The average life of the refunding bonds will be shorter than the average life of the 2004As and the final maturity will not be extended. The bonds are expected to price the week of October 20th.
Following three straight years of enplanement losses totaling nearly 40% of GMIA's peak enplanements, traffic appears to have stabilized, modestly up 2.6% through seven months of 2014. The losses arose as a result of Frontier's dehubbing from the airport coupled with rationalization as a result of the Southwest/Airtran merger. Both effects appear to have washed out, and enplanements have grown in every month since December 2013 except January 2014, when harsh winter weather conditions affected air travel.
Furthermore, both Southwest and Frontier announced new services in 2014. The result is a more stable enplanement base that is nearly 95% O&D. Some carrier concentration exists with Southwest/Airtran accounting for half of all enplanements, although remaining carriers are relatively diverse and have maintained stable service levels.
The airport's cost-center residual AUL remains in place through 2015. A new agreement is expected to provide for a continuation of the airport's stable financial position and moderate airline cost levels. To the extent a weaker agreement is executed or financial metrics weaken and CPE becomes less competitive, downward rating pressure could result. Despite a 14% enplanement loss for 2013, operating revenues grew over 4% to $76.4 million and management contained operating expenses to less than 1% growth yielding a 3% increase to operating margin and 7% growth in net revenues. Operating expenses were budgeted to increase 8.7% in 2014 and are expected to rise another 6.3% in 2015 as an additional $2.6 million in fringe benefits comes online, however Fitch notes that management has taken strides to mitigate these increased costs by requesting another $0.50 parking rate increase, scaling back its capital program, and prudently managing other operating expenses.
DSCR, including fund balances of up to 25% of annual DS, was 1.78x in 2013, up from 1.67x in the prior year. Airline CPE grew to $8.90, as expected, due to enplanement losses and additional debt, remaining regionally competitive. CPE is estimated to rise to the $10 - $11 in Fitch's base case through 2018, which reflects $43 million planned debt issuance over 2016 - 2017. DSCR is projected to remain healthy over the same forecast period, averaging 1.6x, in line with historical levels.
Fitch views airport leverage to be moderate as the $225.9 million in outstanding GARBs results in a $69 debt per enplanement. Total net debt-to-CFADS of 5.0x is also viewed by Fitch to be moderate. These metrics, which have trended upward over the last few years, should begin to subside as enplanements continue to rebound and debt is paid down. The airport maintains a strong cash position of 423 DCOH (including unrestricted cash and operating reserves).
The current five-year capital program totals $212 million and runs through 2015 with no additional debt required. In response to enplanement volatility and increasing debt service and operating expense obligations, management has scaled back its proposed five-year CIP for 2016 - 2020 to $134 million. The airport's capital program seeks to create operational efficiencies to reduce costs and to upgrade and improve the existing facility, with several of the projects to be undertaken on an as-needed basis and deferrable. The airport remains in very good condition with renovations to the terminal as recently as 2006.
SECURITY
The bonds are secured by the net revenues of the airport's operations. PFC revenues are not considered net revenues in the Bond Resolution, unless pledged in a supplemental resolution. PFC revenues are not included in the revenues pledged to the series 2009B, 2010B, and 2013B bonds.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (July 11, 2012);
--'Rating Criteria for Airports' (Dec. 13, 2013).
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=725296
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=894055
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