Fitch Rates Chicago O'Hare (IL) Airport Rev Bonds 'A'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'A' rating to the city of Chicago (the city) O'Hare International Airport's (O'Hare, ORD, or the airport) approximately $1.1 billion refunding and $1.2 billion new money senior lien general airport revenue bonds (GARB). In addition, Fitch affirms its 'A' rating for the approximately $6.58 billion senior lien revenue bonds and $595.6 million passenger facility charge (PFC) revenue bonds. The Rating Outlook on both the GARBs and PFCs is Stable.

KEY RATING DRIVERS

The 'A' GARB rating reflects the strong local market, the strategic location of Chicago as a hub, and the demonstrated importance of the airport to both United and American Airlines. O'Hare has a sizable enplanement base in excess of 38 million and is the primary airport for the Chicago region as a key international gateway facility. Leverage has historically been elevated compared to most large-hub airports, currently at about 12x, but should slowly evolve lower to about 10x, consistent with the rating level. Airline costs of $14.55 per enplanement in fiscal 2015 is in line with other major city airports and will be rising to cover future costs associated with the capital program. The PFC rating reflects consistently high debt coverage levels in excess of 2x and low leverage from pledged cash flow.

Revenue Risk - Volume: Stronger

SIZABLE TRAFFIC BASE WITH CONNECTING EXPOSURES: O'Hare is the primary airport within the Chicago metropolitan area and is well positioned to serve as major domestic connecting hub and international gateway. The airport relies heavily on its two dominant carriers, United Airlines and American Airlines, with 80% combined market share, while connecting traffic captures half of the total 38.4 million enplanements. Traffic performance has trended positive for several consecutive years anchored by increasing domestic and international services.

Revenue Risk - Price: Stronger

STRONG RATE-SETTING MECHANISMS: The existing residual agreement runs through May 2018 and provides for timely recovery of airport costs including funding requirements for reserve maintenance. Airline costs per enplanement (CPE) are currently moderate for a large-hub airport at under $15 but are expected to rise above $20 over the next five years and potentially peak at over $25 in both Fitch's base and rating cases as airport capital spending is captured in the airline rate base. Strong market yields mitigate to some extent the rising CPE direction.

Debt Structure - Stronger

CONSERVATIVE CAPITAL STRUCTURE: Both the airport revenue and PFC debt are primarily issued in fixed-rate mode with conservative debt amortization. Only $240.6 million in GARBs are in variable-rate mode. Bond covenants and reserve requirements are at adequate levels for a major U.S. airport.

Infrastructure Development/Renewal - Midrange

LARGE-SCALE CAPITAL PROGRAM: Airport capital needs are largely focused on airfield improvements to enhance capacity for hubbing operations. To-date, the airport has been successful in project delivery while maintaining costs within budget. The remaining portions of the O'Hare Modernization Plan are budgeted to cost nearly $1.6 billion and this is in addition to the ongoing five-year renewal spending plan of $1.78 billion. Future requirements are still significant and rely heavily on future debt borrowings for funding.

STABLE FINANCIAL METRICS BUT HIGH LEVERAGE: Debt service coverage and liquidity metrics have historically been sound but also limited by the full residual rate-setting framework. Taking into account rollover fund balance transfers, debt service coverage was 1.1x in fiscal 2015 Liquidity from unrestricted reserves is adequate based on 213 days cash on hand. High leverage remains a concern at the current 12x-13x range and this leverage will likely remain at this level through 2020, based on Fitch's rating case, before slowly evolving closer to the 10x range.

PFC COVERAGE PROVIDES CUSHION: A sizable air traffic market supports a large annual PFC revenue level exceeding $140 million. The stand-alone PFC lien has moderate leverage of 4x and PFC debt service coverage is stable at about 2.14x, and expected to rise given the positive enplanement trends. Fitch's base case projections, taking into account an additional borrowing for the international terminal expansion, indicate coverage levels to average comfortably above 2x, placing a small level of risk on the connecting traffic segment of enplanements.

PEERS: Appropriate rated peers to Chicago O'Hare Airport include major-market hub airports with international gateway service including Dallas-Ft Worth ('A'/Stable), and Miami International Airport ('A'/Stable). Both airports have elevated leverage levels in excess of 10x; however, DFW has higher debt service coverage ratios and lower airline charges as compared to Miami and Chicago. In contrast to these peers, O'Hare has a stronger volume risk assessment, as the airport serves as a dual-hub, thus exposed to a lesser degree to one carrier's operational decisions.

FACT Tool: U.S. Airports

RATING SENSITIVITIES

Negative: Changing profile of the traffic base, influenced by hubbing operations from ORD's leading carriers;

Negative: Weak capital program management leading to significantly higher costs or reliance on more debt than currently projected.

Positive: A downward change to overall airport leverage on a long-term basis could enhance the financial flexibility of the Chicago O'Hare airport.

SUMMARY OF CREDIT

The city of Chicago plans to issue fixed-rate, senior lien revenue bonds for new money and refunding purposes. The new money portion is expected to be approximately $1.2 billion in par size to fund O'Hare's final new runway project and other projects associated with the OMP. Final maturity for the new money bonds is expected to be in 2052. The refunding issue size may be up to $1.1 billion in order to refund outstanding bonds for debt service savings. Several of the series of proposed bonds will have additional pledges of PFCs or federal grant receipts, in addition to general airport revenues.

The underlying strength of the airport comes from the passenger base which ranks among the nation's largest for both origination and destination (O&D) traffic as well as international services. Over 50 domestic and foreign-flag carriers operate out of O'Hare to 166 domestic and 60 international non-stop destinations. In 2015, the airport handled 38.4 million enplaned passengers with about half being connecting traffic. After several years of stalled traffic growth, O'Hare experienced a favorable 10% increase in passenger volume in 2015 followed up by a year-to-date increase of 2.5% for the first eight months in 2016. Both domestic and international segments realized increases over the past year-and-a-half, as well as increasing service from low-cost carriers.

Both United (IDR 'BB-', Positive Outlook) and American (IDR 'BB-', Stable Outlook) still remain the dominant carriers, contributing 80% of O'Hare's enplanements. For both carriers, O'Hare serves an important role in both their hubbing networks and international gateway roles. American emerged from bankruptcy in late 2013 and has successfully completed its merger with US Airways and maintained a strong operational presence. The stability of United and American is important, as their presence and hubbing operations are highly influential in O'Hare's future capital investment and leveraging commitments.

O'Hare has made significant progress in its entire multi-phase OMP upgrades and more than half of the costs have been incurred. With the recent new runway opening of 10R-28L in October 2015, three of the four new runways have been completed along with one of the two planned runway extensions. Remaining costs related to the completion phases of the OMP, which will cover the additional airfield projects such as another new runway and runway extension project, are also anticipated to be close to $1.6 billion. Airline approvals are secured to move forward with the most critical airfield projects. Latest financial plans to support the remaining elements of the capital program show overall GARB debt levels rising to about $8.5 billion in total over the next five years. Fitch estimates that net debt-to-CFADS is currently 12.5x for the GARBs and will remain flat over the next five years before moderating slowly to lower levels.

The overall airline cost and financial profile reflects both the residual operating agreement and growing fixed costs associated with debt issuances that supported past capital programs. Historically, O'Hare's financial operations have produced stable debt service coverage, at or near 1.10x, (including fund balances) and the CPE was a competitive $14.55 in 2015. Given the recent large increases in passenger traffic, O'Hare's CPE is lower than had been previously projected for fiscal 2015. Going forward, coverage levels on overall airport debt are expected to remain largely at the minimum required 1.10x (including fund balances) specified under bond documents, but will require substantial increases in airline fees to cover higher debt costs.

The latest sponsor traffic and financial forecasts developed for the series 2016 bond issue assumes full leveraging under the OMP and ongoing capital programs. Fitch reviewed the underlying assumptions, including for moderate traffic growth that averages at 0.7% through 2025 coupled with revenues and expenses growing at 3.9% and 5.4%, respectively. We find these traffic and financial assumptions reasonable for the Fitch base case. Under this scenario, CPE is expected to be around $20 in 2018 and increase further to $25 by 2025 as debt costs are incorporated into the airline rate base. Leverage is expected to be elevated in the near term, averaging 12x through 2020, but falling to 10x from fiscal 2022 on as revenues increase under the methodology of the current airline agreement.

Fitch's rating case assumes a 0.3% average traffic growth rate. The results indicate that CPE levels will be $2-$3 higher in each year while debt service coverage levels remain unchanged. Under this scenario, leverage is marginally above Fitch's base case of 12x-13x through 2020 and then reducing below 10x. The residual agreement provides similar leverage results by increasing airline payments to maintain stable overall cashflows despite volume changes.

The PFC credit has historically maintained healthy coverage cushions. In 2015, debt service coverage derived from $143.3 million in pledged PFC revenues was 2.14x, while leverage, at 4x, remains in a declining trend. Fiscal 2016 is expected to see a slight improvement in the PFC coverage ratio given the traffic increases, followed by only limited dilution from a $150 million parity bond issue for the international terminal project.

SECURITY

The airport general revenue bonds are secured by a first lien on airport net revenues. The PFC bonds are secured by a first lien on the PFC receipts.

Additional information is available on www.fitchratings.com

Applicable Criteria

Rating Criteria for Airports (pub. 25 Feb 2016)
https://www.fitchratings.com/site/re/877676

Rating Criteria for Infrastructure and Project Finance (pub. 08 Jul 2016)
https://www.fitchratings.com/site/re/882594

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Contacts

Fitch Ratings
Primary Analyst:
Seth Lehman, +1-212-908-0755
Senior Director
Fitch Ratings, Inc.
33 Whitehall St
New York NY 10033
or
Secondary Analyst:
Jeffrey Lack, +1-312-368-3171
Director
or
Committee Chairperson:
Scott Zuchorski, +1-212-908-0659
Senior Director
or
Media Relations:
Sandro Scenga, +1-212-908-0278
New York
sandro.scenga@fitchratings.com