NEW YORK--(BUSINESS WIRE)--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.
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.
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
Rating Criteria for Airports (pub. 25 Feb 2016)
Rating Criteria for Infrastructure and Project Finance (pub. 08 Jul 2016)
Dodd-Frank Rating Information Disclosure Form
Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third-party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001