NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A' rating on the state of Connecticut's (the state) approximately $129.4 million of outstanding 2011 series A&B general airport revenue refunding bonds.
The rating affirmation reflects the airport's favorable traffic performance and expectations to enter into a new hybrid airline use and lease agreement which will provide a stronger cost recovery framework. The 'A' rating also considers the airport's moderately sized origination and destination (O&D) enplanement base, low leverage and competitive CPE levels.
KEY RATING DRIVERS
Medium O&D Hub with High Competition but Diversified Carrier Base: The airport's traffic base is almost entirely O&D, although this is offset by the highly competitive New England air travel market and historical enplanement volatility at Bradley. The airport holds a well-diversified air carrier mix, led by American Airlines at 28.8% of enplanements in fiscal year 2014 (fiscal year end June 30). (Revenue Risk-Volume: Mid-range)
New Hybrid Use and Lease Agreement: The airport's commercial compensatory use and lease agreement expired in June 30, 2013 and has since been operating on a month-to-month basis. The airport is close to finalizing a new hybrid five-year agreement (cost center residual for landing fees and compensatory for terminal rental) for fiscal 2016. Bradley's airline costs are comparatively low with a CPE at $9.25 in fiscal 2014. (Revenue Risk-Price: Mid-range)
Manageable Capital Program: The airport's five-year $337.1 million capital plan includes a $250 million rental car facility project that is expected to be funded with rental car facility charge (CFC) revenues. Management has indicated that no additional parity borrowing is envisaged as part of the current five-year capital program. (Infrastructure Renewal and Replacement: Stronger)
All Variable-Rate Debt: The current capital structure exposes the airport to counterparty performance through swaps, as well as basis and refinance risks associated with series 2011 bonds. All of the airport's debt is structured to be synthetically fixed through two interest rate swaps, although if underlying bonds are called earlier than swap maturity, swap termination fees may be payable by the airport. Furthermore, the 2011 bonds do not benefit from a dedicated debt service reserve fund. (Debt Structure: Weaker)
Low Levels of Financial Leverage: Debt service coverage ratio improved to 2.61 times (x) in fiscal 2014 when including revenue enhancement reserves from 2.35x in fiscal 2013. Fitch's unenhanced DSCR calculation which excludes the rolling coverage and PFC coverage account is 2.29x. Leverage is low with net debt to cash flow available for debt service at 2.4x and debt per enplaned passenger at $47.68. Bradley has an adequate liquidity position with $68.6 million of unrestricted cash and investments equivalent to 525 days cash on hand based on 2014 expenses.
Peer Analysis: Peers for Bradley Airport include nearby airports T.F. Green Airport ('BBB+'/Outlook Stable) and Albany Airport ('A-'/Outlook Stable) both with a smaller enplanement base. In comparison to its peers, Bradley Airport has shown significant improvement in traffic for 2014 and has stronger coverage ratios and lower leverage.
RATING SENSITIVITIES
Traffic declines leading to failure to maintain improved coverage levels may place downward pressure on the rating.
Strategic cost management is critical to avoid increases in CPE and deterioration of financial flexibility.
Significant erosion in the airport's strong liquidity balances may erode flexibility and place negative pressure on the rating.
Additional leverage that would increase the net debt/CFADS metrics and dilute DSCR below the 1.7x range may result in negative rating action.
Given the highly competitive nature of the region and projected metrics, positive rating action is unlikely in the near term.
SUMMARY OF CREDIT
The airport experienced a 7.2% increase in enplanements in fiscal 2014 after two consecutive years of declines. The increase in traffic is a result of management's efforts to grow new airline routes and improved economy. Almost all airlines operating at the airport recorded higher enplanement levels with the exception of United Continental. The positive traffic performance continues into fiscal 2015 with year-to-date enplanements through April up 4.7% than the same period in prior year. Despite recent airline mergers, the airport is serviced by a diverse set of air carriers with no one carrier representing more than 30% traffic.
Operating revenues for fiscal 2014 increased 7.3% to $62.3 million from $58.1 million. Airlines revenues increased 6% and non-airlines revenues increased 8.4%. Almost half of the airport's total operating revenues are supported by the airlines. Operating expenses increased 9.3% to $47.7 million driven largely by added personnel and fringe benefits. Actual year to date performance is better than budgeted. Year-to-date total operating revenue of $47.7 million is 1.3% above budget while operating expenses are 3.2% below budget.
The strong performance in fiscal 2014 resulted in debt service coverage of 2.61x with revenue enhancement accounts and 2.29x based on Fitch calculation excluding the effect of the rolling coverage and passenger facility charge (PFC) coverage enhancements. This is a significant improvement on prior years with coverage in fiscal 2012 of 1.96x with enhancements and 1.74x without and fiscal 2013 of 2.35x with enhancements and 2.05x without.
The airport will enter into a new five-year airline use and lease beginning fiscal 2016. The agreement will use a cost center residual methodology for calculating landing fees and compensatory for the terminal rentals allowing for greater cost recovery than the prior commercial compensatory agreement. The agreement will also provide extraordinary coverage protection. Net revenue sharing beyond the first $2 million will be split 20% to airlines and 80% to the airport.
Based on Fitch's base case estimates which forecast a slight increase in traffic and inflationary expense increases, Fitch's unenhanced coverage will remain above the 2.2x range through fiscal 2016, when it will likely reduce to the 1.7x range. These ratios assume the exclusion of CFC revenues from pledged revenues starting in fiscal 2016 when CFC revenues are expected to be reallocated to a CFC-supported project. Under the Fitch rating case, which reflects a 10% reduction in enplanements over the next two years, the minimum unenhanced coverage is estimated at 1.50x in fiscal 2016.
Additional information is available on www.fitchratings.com
Applicable Criteria
Rating Criteria for Airports (pub. 13 Dec 2013)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725296
Rating Criteria for Infrastructure and Project Finance (pub. 12 Jul 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867
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