Fitch Rates Greater Orlando Aviation Authority 2016 Subs 'A+'; Affirms Senior Debt at 'AA-'

NEW YORK--()--Fitch Ratings has assigned an 'A+' rating to the Greater Orlando Aviation Authority (GOAA, or the authority), Florida's $79 million in Priority Subordinated Airport Facilities Refunding Revenue Bonds, Series 2016. Fitch has also affirmed the 'AA-' rating on $878 million in outstanding senior lien Airport Facilities Revenue Bonds. The Rating Outlook on all bonds is Stable.

GOAA also has $69 million in outstanding senior parity bank loans series 2013A and 2013B; $205 million of parity subordinate LOCs ($90 million expected to be repaid with proceeds from the 2016 subordinate lien bonds) and a $53 million Florida Department of Transportation Joint Participation Agreement that is on parity with the Series 2016 bonds. These parity obligations are not rated by Fitch.

KEY RATING DRIVERS

The rating reflects the airport's position as a leading origination and destination (O&D) market, with a strong traffic base of nearly 19 million enplanements and a diverse carrier mix. GOAA benefits from a conservative debt structure, low airline costs, a strong liquidity position and low leverage of 2x, and healthy debt service coverage ratios. GOAA's capital program and financial plan through 2023 is substantial in size at an estimated $3 billion with partial funding from anticipated additional borrowings on two lien levels. The lower rating for the subordinate lien reflects its junior claim to airport revenues, coupled with lower covenant levels. However, both liens compare favourably with Florida airport peers including Tampa and Fort Lauderdale.

Revenue Risk - Volume: Stronger

Stable Traffic Levels With Diverse Carrier Mix: The airport's high level of O&D traffic at 95% of 18.8 million enplanements has provided stable performance in recent years. Enplanements are influenced by tourism and leisure, showing modest growth over the last five years. However, recent traffic data is notably positive, increasing 7.4% in fiscal 2015 and up an additional 11.6% for the first six months of fiscal 2016 (fiscal year ends in September). The airport benefits from a well-diversified mix of carriers, with the largest carrier (Southwest, rated 'BBB+'/Stable Outlook) representing approximately 27% of enplanements. International enplanements have recently shown strong growth, increasing 16.7% in fiscal 2015, and up an additional 18.2% through March 2016.

Revenue Risk - Price: Stronger

Competitive Cost Structure: The airport has historically maintained a relatively low airline cost structure, with cost per enplaned passenger (CPE) at $4.50 in fiscal 2015. The authority's CPE will rise as borrowings come online for capital improvements, but levels are expected to remain competitive for a large hub airport. Since 2013, GOAA has been setting rates by resolution but applying a hybrid compensatory rate-making methodology for use of terminal facilities and a residual rate-making methodology for the airfield. Participating carriers (representing approximately 95% of passenger traffic) are entitled to net revenue sharing via a three-year agreement expiring in September 2016. A new 3 year agreement is expected to be signed in the coming months.

Infrastructure Development/Renewal: Midrange

Capital Program Expanded: The 2016 - 2023 capital improvement plan (CIP) currently totals $3 billion. Major projects include improvements to the north terminal complex and airfield; the South APM Project; and the $1.8 billion South Terminal Project (previously treated as a separate project), which seeks to meet long-term domestic and international passenger growth for the airport. The full CIP through 2023 is expected to be 67% debt-funded (includes senior and subordinate lien general airport revenues bonds and debt paid with passenger facility charges (PFCs)), while grants, pay-go PFCs, and airport funds will cover remaining costs.

Debt Structure: Stronger (Sr); Midrange (Sub)

Conservative Debt Structure: Senior lien debt benefits from all fixed rate debt and a manageable amortization profile; the subordinate lien debt also amortizes, though has a junior claim to airport revenues. Debt service on existing obligations declines after 2021, with new debt for capital improvements expected to be layered on resulting in a relatively flat debt service. Both senior and subordinate lien covenants and reserve requirements are typical for an airport credit; however, GOAA intends to make amendments to its bond resolution including revising the PFC use to become a direct offset to debt service versus pledged revenue at 125% of annual PFC-applied debt service. These amendments do not impact the credit of the GOAA bonds.

Financial Profile: The airport currently has stable financial operations drawing from diverse sources of operating revenues, adequate senior lien debt coverage at 2.15x in 2015, and relatively low overall leverage at approximately 2.0x net debt to CFADS. To the extent the full financing plan moves forward, with issuance of senior and subordinate bonds, overall leverage may rise to the 7x range and total debt coverage may narrow down to the 1.2x level. These weaker metrics could pressure the authority's ratings. Strong liquidity is noted with 681 days cash on hand based on cash reserves through March 2016 and 2016 budgeted expenses.

Peer Analysis: GOAA's peers include other south Florida airports with similar market characteristics, such as Tampa Hillsborough County (rated 'A+', Positive by Fitch) and Broward County Fort Lauderdale (rated 'A', Positive by Fitch), with GOAA's higher rating reflecting a stronger liquidity position, lower leverage, and stronger all-in coverage metrics.

RATING SENSITIVITIES

Negative: Unexpected downturns or volatility in airport traffic operations.

Negative: Erosion of the airport's current strong financial position and rate-setting flexibility.

Negative: Upward modifications to the capital and financing plans that elevate borrowing requirements.

Positive: Given the airport's strong rating and underlying leisure market, upward rating movement is unlikely.

SUMMARY OF CREDIT

The Series 2016 Priority Subordinated Airport Facilities Refunding Revenue Bonds are subordinate to existing senior lien obligations of GOAA, and are on parity with other parity indebtedness, including LOCs and the FDOT Joint Participation Agreement. Together with other Authority funds, proceeds from the Series 2016 bonds will be used to (1) Refinance certain prior draws on existing bank Lines of Credit made to defease the 1997B Gulf Breeze Bonds and make related swap termination payments; (2) Make a deposit to the Pooled Subordinated Reserve Account of the Priority Subordinated Debt Service Reserve Fund; and (3) Pay certain costs of issuance. The proposed bonds are expected to be issued in fixed rate mode and will amortize over 12 years, with final maturity in October 2027.

Orlando is the nation's fifth busiest O&D airport, serving 18.8 million enplaned passengers in fiscal 2015. O&D traffic makes up the bulk of the airport's enplanements at about 95%, benefiting from demand for local tourist destinations and convention business as well as the expanding local economy. Fiscal 2015 enplanements were up 7.4% over the prior year, and were 3.2% above prior peak levels of 18.2 million seen in 2008. For the first six months of fiscal 2016, traffic has continued to show robust growth, increasing 11.6% over the same period in fiscal 2015. International enplanements continue to show strong growth, driven by new services to Dubai, South America, Europe, and Canada. International enplanements reached 2.4 million in 2015, or 16.7% over the year prior (follows increases of 5.1% in 2014 and 5.2% in 2013). International enplanements have increased a further 18.2% year to date. Service is now offered to 48 international destinations (31 year-round, 17 seasonal).

Total operating revenues increased by 7.9% to $427.9 million in fiscal 2015, building on 4.9% growth in fiscal 2014 and 3.8% revenue growth in fiscal 2013. Participating Airline Revenue increased 9.3%, reflecting the first full year of increased baggage system fees under the new rate resolution. Overall nonairline revenues increased 7.6%, with concession revenues growing more modestly at 1.5%. Food and beverage and general merchandise concession revenues increased proportionally with traffic levels (up 7.1%), but were offset by decreases in service concession and other terminal area revenues. Operating expenses increased by 12.5% in 2015 due to increases in operations and facilities and safety/security, largely linked to increased international traffic. Year to date operating revenues are up 8.8% for the first six months of 2016 through March, while operating expenses are up 7.2%.

Debt service coverage levels for fiscal 2015 were strong at 2.15x for senior debt and 2.02x on all obligations, outperforming both 2014 results and Fitch's base case expectations. For fiscal 2016 year to date through March, operating revenues are up 8.8% over the same period a year prior and 7.5% ahead of budget, while year to date operating expenses are up 7.2% over the same period a year prior, and 2.8% better than budget. GOAA forecasts anticipate debt service coverage levels for fiscal 2016 will be 1.97x on the senior lien and 1.76x for all obligations.

Since November 2013, the Authority has set its rates and charges by resolution. The resolution, which has no expiration date, provides for a compensatory rate-making methodology for use of the terminal facilities, including certain activity based charges for use of the baggage system, and a residual rate-making methodology to establish landing fees for the use of the airfield. A rate agreement is also in effect which entitles signatories to share in certain revenues remaining after the payment of Authority debt service and operating expenses. The current rate agreement runs through September 2016, and GOAA is currently negotiating with participating airlines for a new agreement to extend through 2019. GOAA proposes to increase the amount of net remaining revenues it receives prior to revenue sharing and share the balance with participating carriers based on a formula. The Rate Resolution and associated ratemaking methodology would remain essentially unchanged; the only substantive change is to eliminate the low volume carrier discount for bag fees. In Fitch's view the airline cost recovery mechanisms together with non-airline revenue contributions provide solid operating cashflows with robust coverage levels.

The authority continues to maintain strong balance sheet flexibility with $478 million of unencumbered fund balances as of March 2016, equating to 681 days cash on hand based on fiscal 2016 budgeted operating expenses. CPE was low at $4.50 in 2015, in-line with $4.59 a year prior and reflecting lower terminal area rents and higher revenue sharing under the new agreement. During the five year projection period, the Authority expects CPE to rise to the $10 level as more revenues are retained for use towards the CIP. Due to the desirability of Orlando's service area, Fitch does not view this increase as a material concern. Furthermore Fitch notes that cash reserves and CPE levels have been well managed historically, with the airport generating significant revenues from non-airline sources including concessions and PFCs.

GOAA's 2016 - 2023 capital improvement plan (CIP) totals $3.084 billion. Major projects include $427 million for the South APM Project; $751 million for the north terminal complex and airfield; $1.8 billion for the South Terminal Complex (previously planned for separately and not included in CIP); and $106 million for other projects. The plan is expected to be 67% debt funded (including 24% funded with senior GARBs (prior and future); 16% with sub GARBs; and 28% with PFC backed debt (prior and future)); 12% with PFC paygo, and 20% other funds (grants, GOAA funds, and other funds).

GOAA's forecast incorporates the effects of the full capital program, including an additional $611 million in senior GARBs, $647 million in PFC backed debt, and $479 in additional subordinate GARBs. The forecast assumes average enplanement growth of 2.8% for the 2015 - 2022 period. Resulting senior coverage is 1.8x or better, and all in coverage of 1.4x or better; leverage rises to 6x net debt/CFADS. Fitch's base case considers low and steady enplanement growth of 1.2% from 2016 onwards, consistent with historical averages, while the rating case models a recessionary enplanement drop of 8% in the 2019 - 2020 period as the South Terminal comes online. Even with the inclusion of substantial CIP-related borrowing, Fitch views the financial profile as stable, with senior coverage remaining above 1.6x in the base case and above 1.5x in the rating case, and all in coverages remaining 1.2x or better. Leverage increases to 7x in the base case and reaches 8x in the rating case, but would be expected to decrease as the new debt amortizes. Depending on the traffic and revenue outlook, the lower metrics under the rating case, if realized, could pressure the authority ratings.

Additional information is available on www.fitchratings.com

Applicable Criteria

Rating Criteria for Airports (pub. 25 Feb 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=877676

Rating Criteria for Infrastructure and Project Finance (pub. 28 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=870967

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Contacts

Fitch Ratings
Primary Analyst
Emma Griffith
Director
+1-212-908-9124
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Tanya Langman
Director
+1-212-908-0716
or
Committee Chairperson
Scott Zuchorski
Senior Director
+1-212-908-0659
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Emma Griffith
Director
+1-212-908-9124
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Tanya Langman
Director
+1-212-908-0716
or
Committee Chairperson
Scott Zuchorski
Senior Director
+1-212-908-0659
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com