NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the underlying rating on the Massachusetts Port Authority's (MassPort) approximately $88.9 million special facilities revenue bonds (BosFuel Project), series 2007 at 'A-'. The bonds are payable solely from facilities rent derived from a lease between MassPort and BosFuel, a consortium of member carriers serving at Boston Logan International Airport (Boston Logan). The BosFuel project consists of a consolidated fuel storage and distribution system at the airport to meet the fuelling needs of all aircraft operators. The Rating Outlook is Stable.
The 'A-' rating reflects BosFuel's monopolistic position in providing an essential storage and distribution fuelling service to airlines at strong, international gateway airport, Boston Logan (BOS, the airport), which largely mitigates against demand elasticity as costs rise. The rating further reflects BosFuel's strong Interline Agreement which hedges against carrier delinquencies and defaults and provides the consortium with unlimited rate-making flexibility to fully recoup operating expenses and debt service costs. The rating is constrained by the weaker financial profile of the bonds, evidenced by a narrow revenue pledge, high leverage levels of roughly 11x and cash-flow sufficient coverage levels. BosFuel's coverage and leverage levels would indicate compatibility with a 'BBB' category rating in comparison to large hub guidance under Fitch's airport criteria; however, given the uniqueness of the asset, essentiality of BosFuel's service at BOS and strong contractual provisions serve as uplifting features to credit quality, making the rating commensurate with an 'A-' rating.
KEY RATING DRIVERS
ESSENTIAL SERVICE, LIMITED CONCENTRATION: BosFuel's Interline Agreement insulates the bonds from volume risk, as operating expenses and debt service costs must be paid regardless of volatility in fuel volumes. Fitch views positively the agreement's step-up provision, which provides for full step-up payments by member carriers in the event of default or delinquencies from non-performing carriers. Boston Logan's well-diversified carrier mix, with no one greater holding greater than 22% of fuel market share, also hedges the potential step-up responsibility from becoming financially debilitating to the remaining carriers. BosFuel benefits from being the sole provider of essential storage and distribution fuelling service to the airport, resulting in low demand elasticity even as costs rise. Cost-per-gallon, at 3.92 cents (3.14 cents including non-member subsidization) in 2015, is currently slightly higher than peers though still considered competitive.
UNLIMITED RATE FLEXIBILITY, NARROW REVENUES: BosFuel benefits from unlimited rate-making flexibility as a result of its strong contractual framework which allows for full recoup of costs through the airlines. The narrow revenue stream does, however, provide less protection to bondholders, as the bonds are solely supported by BosFuel facilities rental payments and do not have any recourse to Massport's general revenues or fund balances.
ADEQUATE FACILITIES, MODEST CAPEX NEEDS: Fitch considers BosFuel's fuel storage and distribution assets as adequate to meet projected needs. Near-term capital expenditure needs are considered modest at roughly $20 million, with airlines currently financing improvements.
SUITABLE DEBT STRUCTURE: BosFuel's debt structure is conservative, with fully amortizing, fixed-rate, senior debt. A cash flow sufficient rate covenant coupled with the absence of an additional bonds test (ABT) are considered weaker in comparison to other asset classes, albeit adequate for BosFuel's bonds given the strong contractual agreements in place. Adequate structural features are further mitigated by ample liquidity via a fully cash-funded 12-month debt service reserve fund (DSRF), airline reserve deposits, and growing unrestricted cash balances.
PEERS: BosFuel's closest Fitch-rated peer is SFO Fuel Co. (rated 'A-'/Outlook Stable), as both facilities support strong, international gateway airports with substantial fuel demand, though are constrained by cash-flow sufficient coverage levels and high leverage levels. BosFuel benefits from lower carrier concentration and a cash-funded DSRF, though SFO Fuel Co. has a greater number of carrier members and higher consequent fuel gallonage.
--Significant shifts in airport operations which adversely affect fuel demand, making costs uncompetitive over a prolonged period could pressure the rating.
--Carrier defaults or delinquencies in lease payments to BosFuel which cause significant draws on available reserves could cause negative rating migration.
--Additional debt for capital needs which significantly boosts leverage which is not offset by commensurate fuel demand could lead to negative rating action.
--Given the narrow revenue stream and cash flow sufficient financial profile, the rating is constrained at this time.
SUMMARY OF CREDIT
The project continues to demonstrate healthy growth, with a 4.8% increase in total gallonage in calendar year (CY) 2015, roughly in line with enplanement performance at the airport in fiscal year 2015 (ended June 30). Member costs per gallon also grew roughly 5% to 3.92 cents, which is mostly attributed to member costs growing at a faster rate than member volume as a result of Cathay Pacific Airlines and El Al Airlines joining in May-June 2015. Though airlines across the United States benefitted from lower jet fuel prices in 2015, BosFuel's member costs per gallon do not reflect these savings as BosFuel is solely responsible for transporting and storing fuel; the airlines pay for their own fuel outside of their agreement with BosFuel.
For the seven months of CY2016 through July, fuel volume has increased roughly 20% as a result of additional international carriers using the BOS fuel facility. Over the same period, enplanements grew 8.6% at Boston Logan. For conservatism, Fitch has assumed member gallonage and costs increase by 10% and 13% in 2016, respectively, reflecting flat growth in fuel usage during the remainder of the year coupled with 3% cost growth. Member cost-per-gallon (excluding non-member airline subsidization) would grow roughly 1% to 3.95 cents under this scenario, though Fitch does not consider marginally rising costs a material concern given the essentiality of the fuelling system to the airport. Fitch believes volumes could continue to increase in the upcoming years should the airport's international enplanement base continue on its upward trajectory, growing at 7.5% on average annually since 2010; however, unless volumes grow faster than costs, which has not been the case historically, member airlines are unlikely to see declines in member costs per gallon (excluding non-member airline subsidization) .
Fitch's rating case assumes a volume decline in 2018 that simulates the pull-out of a member carrier, which Fitch assumes would be accompanied by a slight decline in costs as a result of lower volumes of fuel to transport and store. Under this scenario, the cost per gallon increases to 4.9 cents by 2020 in order for net member costs to be fully covered. Fitch believes the adequacy of the legal terms and financial framework of BosFuel would provide for all costs to be recouped under this scenario, and the well-diversified carrier mix would hedge against costs becoming too burdensome for the remaining carriers to share.
Given the essentiality of the service supporting a sizable traffic base with low carrier concentration, limited fuelling competition and strong contractual provisions, the credit is viewed as commensurate with an 'A' category rating, though constrained to 'A-' as a result of cash-flow sufficient coverage levels, high leverage, and a narrow security pledge. In the event the facility supported a more limited traffic base with higher levels of carrier concentration, more fuelling competition and weaker contractual cost recovery provisions, the credit could be considered commensurate with a lower rating.
The series 2007 bonds are secured by a limited revenue stream of facilities rent payments made by BosFuel, a consortium of member carriers serving at Boston Logan International Airport, under a fuel system lease with MassPort. BosFuel collects revenues to support the required lease payments primarily from jet fuel to its member passenger and cargo carriers. The bonds are not secured by the general credit of MassPort.
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