NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed New Orleans Aviation Board's (NOAB) $649 million general airport revenue bonds (GARBs) at 'A-'. Fitch has also affirmed $119 million of outstanding NOAB revenue bonds (passenger facility charge projects), series 2010 and 2007 at 'A-'. The Rating Outlook is Stable.
The 'A-'affirmation reflects the airport's continued strong traffic growth trends, which have surpassed the pre-Hurricane Katrina peak, full airline cost recovery structure with an extension of the airline use and lease agreement (AUL) through 2023, and early but steady progress on a new terminal. However, the airport is exposed to the service area's dependence on tourism and convention center business, terminal construction risk, and a combination of increased near-term leverage (near 13x in 2015), and tighter coverage levels.
KEY RATING DRIVERS
Revenue Risk - Volume: Stronger
Solid Regional Airport: NOAB is not exposed to material air service competition. Over 90% of its more than 5.3 million enplanement base is origin and destination (O&D), and the airport benefits from relatively low carrier concentration with Southwest ('BBB+'/Stable) providing 37.4% of the market. Offsetting low competition is traffic highly dependent on the strength of the tourism industry, as well as exposure to force majeure risk.
Revenue Risk - Price: Midrange
Solid Cost Recovery Structure: NOAB's residual AUL now extends through December 2023 and allows the airport to fully recover its operational and debt costs. The AUL considers increased capital costs associated with the new terminal with a revised budget of $807 million. Additionally, NOAB targets to maintain cost per enplanement (CPE) at or below the $10 level but this will depend in part on traffic performance, costs, and non-airline revenue generation. Major airlines are supportive of the new terminal construction and, in Fitch's view, the airport has economic capacity to absorb CPE increases from the current $6.58 in 2015.
Infrastructure Development and Renewal: Midrange
Substantial New Capital Program: The budget for the new 30-gate terminal, expected in 2018, has been revised to $807 million from $650 million, following an increase in project scope to fulfill the operational needs of air carriers. Construction is currently funded approximately 72% by bonds. Due to strong recent traffic growth, an additional five-gate modification has been proposed. NOAB is expected to issue new debt of up to $130 million in 2017 to finance the revised project scope and new debt is also anticipated in 2018 in connection with expansion modifications. Besides the new terminal, the capital program also includes some taxiway and runway rehabilitation.
Debt Structure: Stronger
Conservative Debt Structure: All outstanding GARB and PFC lien debt amortizes fully and at a fixed rate of interest. Covenants for rates, additional borrowings and reserves are similar to many airport credits. The debt service profile is relatively flat, following the capitalized interest period, which coincides with the expected completion of the new terminal in 2018.
Increased Leverage: Following the $565 million 2015 issuance leverage has increased considerably to almost 13x net debt-to-CFADs in 2015, from under 2x in 2014, to fund the new terminal. Additional debt issuances in 2017 could result in a peak net leverage but moderating to below 10x after 2019 under the Fitch rating case. While leverage is initially high, NOAB has historically maintained a very strong balance sheet, which grew to 700 days cash on hand in 2015. Coverage on GARBs is currently 2.59x debt service coverage ratio (DSCR); however, it is expected to be diluted to 1.40x, including the rollover coverage account, following the end of the capitalized interest period in 2018.
Peer Analysis: Jacksonville, Lee County (FL) ('A'/Outlook Stable) and Palm Beach County (FL) ('A+'/Outlook Stable) are medium-sized hub, regional airports that serve as adequate comparisons in terms of exposure to leisure lines of business and airline cost. NOAB has a larger enplanement base with stronger traffic growth and significantly higher leverage due to terminal construction.
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Negative - Project Setbacks: Inability to complete the new terminal within budgeted costs or a late delivery from the estimated schedule would likely place downward pressure on the rating.
Negative - Leverage remaining above 10x on a sustained basis or CPE not being managed at or below the $10 level. Fitch expects leverage to devolve to the 8x-10x range following project completion.
Positive - Despite the airport's large capital plan, positive rating action may be warranted upon successful project completion within budget and allowing the airport to meet its target CPE of at or below $10.
Construction on the 30-gate new terminal is currently on budget and on schedule to reach commercial operation by October 2018. The total project budget increased to $807 million from $650 million due to an expansion of scope to 760,000 square feet from 648,000 sf to meet the operational needs of air carriers. NOAB also approved supplemental project components which include, among other things, a redundant bag drop in the baggage make-up area and additional generators, loading bridges, and surface parking lots. NOAB is expected to issue additional debt in connection with the revised project scope as well as to finance a five-gate expansion modification so that the airport can meet its future capacity needs through 2025. NOAB is currently in a transition of management leadership at the same time it is undertaking a large-scale capital project. While the budget and timing for the project appears to be carefully managed, Fitch will monitor ongoing program developments and the leadership transition.
Airport traffic has continued a positive growth trend with a five-year CAGR of 5.7%. In 2015, enplanements grew by a strong 9.2% to 5.3 million, exceeding the base case, following 6.4% growth in 2014. Strong passenger growth is a function of new carriers entering the market, new non-stop destinations (five international), expansion of domestic service within the low-cost carrier space, and the health of the New Orleans tourism market. In 2016 YTD (nine months), traffic has grown by 4.2% over the same period last year. Traffic volume is now 114% of the 2004 pre-Hurricane Katrina peak. Carrier diversity is consistently maintained with Southwest Airline's having a leading market share of 37%.
Operating revenue growth has been in line with the enplanement growth reaching $73.5 million in 2015, while operating expenses have been subject to strong cost containment with a flat five-year CAGR and just 2% inflation growth to $40.7 million in 2015. With the airport now servicing its largest enplanement base to-date, NOAB is budgeting a slight operating expense increase in 2016 and 2017; however, cost efficiency savings are expected to be generated by the new terminal opening in 2018.
Fitch's base case scenario assumes sponsor traffic growth assumptions with a five-year CAGR of 2%. Costs are budgeted to grow by 5.4% in 2017 and are then stressed at 1% annually, despite management's demonstrated ability to contain costs. Fitch assumes additional debt issuances and a capitalized interest period on debt service through 2018. Under this scenario, CPE averages $9.20 through 2021. GARB debt service falls to the 1.40x level following completion of the new terminal in 2018 and to just 1.15x without the rolling coverage account. Net debt-to-CFADS peaks at 14.5x before steadily deleveraging.
Fitch's rating case scenario assumes a 6% cumulative traffic growth stress in 2017 and 2018, modelling the underlying economic volatility of the tourism industry. Following the traffic stress years, costs are assumed to grow by 3% annually. Under this scenario, CPE peaks at $11.15 as additional costs are passed through to the airlines. Fitch views CPE levels, even if modestly above the $10 target, to be reasonable in light of the strong traffic profile and lack of competition in the region. Starting in 2018, GARB debt service, including rolling coverage, is diluted to the 1.25x level, utilizing the residual agreement with the airlines. Net leverage climbs upwards of 15x.
Coverage on the standalone PFC bonds was 2.16x in 2015 and is forecast to remain over 2.0x even under the Fitch rating case scenario. Pursuant to the second supplemental bond resolution, additional PFC bonds for new projects are no longer allowed and this should protect coverage levels from further dilution. Long-term uses of residual PFCs are anticipated to offset a sizable portion of the incremental GARB debt service.
The GARBs are secured by a first lien pledge of general airport net revenues. The 2010 PFC bonds are solely secured by a first lien on PFC revenues collected at the airport with no recourse to other revenues and funds of the airport. Only excess PFC revenues following payment to the outstanding PFC bonds can be available and pledged to the GARBs.
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)
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