NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+' rating to the $48 million airport revenue bonds, 2016 series D and $4 million series E issued by the Rhode Island Commerce Corporation on behalf of the Rhode Island Airport Corporation (RIAC or the airport). Fitch has also affirmed its 'BBB+' rating on $67.1 million in outstanding airport revenue bonds previously issued by the Rhode Island Economic Development Corporation (now the Rhode Island Commerce Corporation). The Rating Outlook for all bonds is Stable. The airport also has approximately $126.5 million in the form of parity private placement loans which are not rated by Fitch.
KEY RATING DRIVERS
The 'BBB+' rating reflects a small market airport that is trending towards more stable traffic levels although historical performance includes a weakening traffic base caused by carrier route rationalization and competition in the greater New England air trade service area. The airport has maintained stable financial performance in terms of coverage and liquidity despite declining enplanements. However, the airport maintains a higher than average cost per enplanement (CPE) level as a result of its use and lease agreement, which provides extraordinary coverage protection when necessary. In addition, the rating reflects RIAC's relatively high debt levels, which are partially mitigated by healthy unrestricted reserve balances of approximately $31.4 million.
Revenue Risk - Volume: Weaker
Small Market with Competition: T.F. Green Airport serves a 99% origination & destination (O&D) traffic base of 1.8 million enplanements, as of fiscal 2016. As a result of the competitive New England airport environment, the airport has experienced enplanement declines since 2006, though declines have slowed in recent years and growth is expected for fiscal 2016. Year-to-date enplanement growth through April 2016 shows an approximate 2% growth in enplanements. Moderate concentration risk exists with Southwest Airlines (rated 'BBB+' with Stable Outlook by Fitch) representing 46% of enplanements in fiscal 2015 (ended June 2015).
Revenue Risk - Price: Midrange
Rate-Setting Flexibility Elevates Costs: The airport's hybrid use and lease agreement (expiring in fiscal 2020) includes both a revenue sharing component and extraordinary coverage protection. Fitch notes that the strong cost recovery terms have led to a rising CPE level, which is currently above $13. Price flexibility is somewhat constrained by current airline cost levels and nearby competition.
Infrastructure Development & Renewal: Midrange
Sizable Capital Plan: The airport's $247.7 million capital improvement plan (CIP) is expected to be mainly funded with a combination of grants, the series 2016D-E bonds and passenger facility charge (PFC) revenues. The majority of the capital plan and debt issuance will be used to partially fund the extension of Runway 5/23, which will allow the airport to enhance service options and thereby hedge itself against capacity discipline.
Debt Structure: Stronger
Conservative Debt Structure: All of the airport's outstanding and proposed debt is in fixed-rate mode with a level-to-declining amortization profile. Covenants and additional bond tests levels are typical for most U.S. airports although not all parity debt is supported by debt service reserves.
Healthy Liquidity, Moderate Coverage: Operations are supported by $33.6 million in available reserves as of year-end 2015, equivalent to 397 days cash on hand. The airport's indenture-based debt service coverage ratio (DSCR), which includes the rolling coverage account and fund transfers derived from net revenue sharing with the carriers, marginally declined to 1.76x in fiscal 2015 from 1.80x in fiscal 2014. Without the coverage account and general fund transfers, coverage was 1.47x, consistent with the 'BBB+' category. Leverage has remained stable in recent years but for the airport size, it is viewed to be elevated at 6.1x.
Peers: In Fitch's opinion, airports that provide secondary service or experience competition from larger nearby airports, such as Long Beach (rated 'A-' with Negative Outlook) and Dayton (rated 'BBB+' with Stable Outlook), respectively, serve as comparable peers to RIAC. Amongst these peers, RIAC's CPE level and leverage are on the higher end while its underlying service area would be viewed as stronger than Dayton.
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Negative - Traffic and Revenue Performance: A return to declining enplanement levels or a significant loss in service from RIAC's leading carrier would place greater pressure on airline costs and would lead to the consideration of a rating downgrade.
Negative - Debt Service Coverage: Cash flow coverage levels falling under the 1.2x level would likely lead to a lower rating, being mindful that coverage levels are expected to narrow somewhat with the series 2016D&E bond issuance.
Positive - Continued traffic growth, resulting in sustained enplanement levels above approximately 2.0 million could result in upward rating movement.
Positive - Strengthening cash flows and an effort to reduce outstanding debt, with leverage ratios sustained at less than 5.0x, would be viewed positively.
SUMMARY OF CREDIT
The airport intends to issue approximately $52 million in airport revenue bonds for the purpose of funding a portion of its capital program, primarily the runway extension project. The bonds are expected to be issued in fixed-rate mode with a final maturity in 2046. The series 2016 D bonds will be supported by a pledge of PFC revenues.
RIAC's financial and operational performance has remained stable despite persistent weakness in traffic levels. However, traffic levels appear to be stabilizing as evidenced by 2% growth in enplanements over the 10 months ended April 2016. The increase comes after a 3.8% decline in fiscal 2015 and annual traffic declines since fiscal 2006. In fiscal 2015, operating revenue increased 3.8%, due to an increase in passenger airline revenue as result of the inclusion of debt service related to the Deicer Management System into the airline rate base. Fiscal 2015 operating expense increased 2.6% led by increased medical costs, increases in employee wages due to snow removal overtime pay, utility costs, and advertising expense. It is expected that this expense level may be maintained in future years.
RIAC's current capital improvement program for fiscal 2017 through 2021 is somewhat sizable, totalling $247.4 million. The plan will be predominately funded by grants (65%), the series 2016 bonds (17%) and PFCs (8%). The runway extension project makes up the largest portion of the capital plan, approximately 50% when including noise mitigation and sound insulation. Runway 5/23 will be extended to the south by approximately 1,530 feet for a total length of 8,700 feet. Additionally, the project involves relocation of Main Avenue, voluntary acquisition of homes within the new Runway Protection Zone (RPZ) and the relocation of Winslow Park facilities. The extended runway will better accommodate larger planes, which may give rise to increased traffic on both the domestic (West Coast) and international front.
In Fitch's five-year base case, Fitch assumes a 2% increase in enplanements for fiscal 2016, supported by year-to-date growth, followed by modest growth thereafter, moderate airline revenue and cost growth and no additional debt issuances following the series 2016D&E bonds. In this scenario, debt service coverage per the bond indenture hovers around 1.70x with an average of 1.74x while CPE peaks at $14. Without the coverage account and general fund transfers, coverage averages 1.42x. In Fitch's five-year rating case, which assumes enplanement stress in fiscal 2017 followed by marginal enplanement recovery in fiscal years 2019 through 2021, in addition to cost escalation, debt service coverage averages 1.68x while CPE levels rise to $15.25. DSCR remains above 1.27x without the coverage account and general fund transfers. In both cases, leverage migrates down to below 5.0x within five years. These financial metrics are consistent with the current rating category.
The bonds are payable from net revenue of the airport's operations. PFCs are excluded from the definition of 'Revenue,' but have been pledged to the payment of a portion of outstanding debt service and the 2016 series D bonds.
Additional information is available on www.fitchratings.com
Rating Criteria for Airports (pub. 25 Feb 2016)
Rating Criteria for Infrastructure and Project Finance (pub. 28 Sep 2015)
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