CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA-' rating to the approximately $225 million of Minneapolis-St. Paul Metropolitan Airport Commission's (MAC) series 2016C senior revenue bonds. Fitch has also assigned an 'A+' rating to MAC's approximately $212.7 million series 2016D and 2016E subordinate revenue bonds. The Rating Outlook is Stable.
Fitch currently rates MAC's outstanding $534 million senior revenue bonds 'AA-' and $563.3 million subordinate revenue bonds 'A+', both with a Stable Outlook.
The ratings reflect Minneapolis St-Paul International Airport's (MSP) stable and increasing enplanement base, serving a large metropolitan area of the Midwest, with stronger growth coming from the majority origination and destination (O&D) traffic. Although some carrier concentration risk exists with Delta maintaining a dominant enplanement market share (73%), this is partially mitigated by their heavy investment in MSP (second-largest hub behind Atlanta), the hubbing covenant, and a hybrid use and lease agreement through 2020. The 'A+' rating on the subordinate lien reflects the structural subordination of the cash flow while recognizing the financial strength of the airport that results in competitive metrics on a total system basis when compared with other similarly rated airports in Fitch's portfolio. With sustained positive operational and financial performance, the airport is forecast to maintain total leverage within the 4x-6x range as well as total coverage levels of no less than 1.40x over the next seven years.
KEY RATING DRIVERS
Strong O&D Base; Dependence on Dominant Carrier: Revenue Risk-Volume: Midrange:
The Minneapolis-St. Paul metropolitan statistical area (MSA) is a well-established commercial center for the upper Midwest with no competing airport facility in the vicinity. Considerable demand for air service is generated from a diversified local economy with an O&D base of 9.6 million enplaned passengers out of 17.7 million total enplanements. Even so, Delta maintains a dominant market share representing 73% of enplanements and connecting traffic represents 46% of total traffic, leaving MSP susceptible to realignment of hubbing service. Enplanements have shown strong growth over the past six years, recovering almost to their pre-recession peak.
Hybrid Use and Lease Agreement; Competitive CPE: Revenue Risk-Price: Stronger:
Carriers operate under a hybrid operating agreement with a compensatory methodology for Terminal 1 (Lindbergh Terminal) costs and residual for the airfield. Airline charges for Terminal 2 (Humphrey Terminal) are set under an ordinance. The airport's CPE remained competitive at $6.44 in 2015, below Fitch's prior base case projection of $6.67 for that year. CPE is expected to remain below $7.50 in Fitch's base case should enplanement trends continue. This range is competitive relative to MSP's ratings and peers.
Large Capital Plan: Infrastructure Development & Renewal: Stronger:
The airport's future $1.47 billion capital plan primarily focuses on the repair and upgrade of Terminal 1 and the construction of its new parking garage. Routine airfield and terminal work as well as noise mitigation will continue to be part of the new capital plan. The capital program will be funded from a combination of passenger facility charges (PFCs), proceeds from new bond issuances, grants, and available cash. Approximately 45% of the capital plan will be funded with new bond issuances over the next five years.
Conservative Debt Structure: Debt Structure (Senior/Subordinate): Stronger/Midrange:
All of the existing senior and subordinated long-term airport debt is fixed-rate and fully amortizing, thus minimizing the risk of fluctuations in debt interest costs. The midrange score for the subordinate lien reflects its junior claim to revenues. A combination of senior and subordinate lien debt issuances totalling approximately $803 million over the next five years is expected to remain in similar form.
Financial Metrics: Stable Performance with Moderate Leverage:
MSP has maintained strong and stable financial performance, as traffic has recovered from the economic downturn. The airport maintains a diverse revenue stream with aeronautical revenues accounting for only 34% of operating revenues and additional revenues consisting of parking (28% of total revenues), concession, PFC, CFC and other non-airline revenues. MSP's healthy balance sheet helps to manage the financial metrics given the size of its operations including net debt/cash flow available for debt service (CFADS) of 4.40x; debt per O&D enplanement of $142; and days cash on hand (DCOH) of 853 days using just unrestricted cash and investment. Despite total debt outstanding increasing by approximately 35% by 2022, senior and total coverage metrics remain favorable with sustained traffic and financial performance.
MSP's peers include Atlanta ('A+/A+'/Stable) and Detroit ('A-/A-'/Positive) airports given that they are hubbing airports with strong carrier concentration. MSP and Detroit also share the same major carrier in Delta, which accounts for more than 70% of enplanements at both airports. MSP's performance falls in between Detroit and Atlanta in terms of CPE, coverage, leverage and DCOH.
--Reduction in the Delta hub resulting in 50% or greater loss of connecting traffic could put downward pressure on the rating.
--Additional new borrowings for non-revenue-generating projects that would materially increase leverage would be viewed as a credit negative.
--Given the airport's projected financial profile, together with the Delta concentration, no upward rating action is envisioned at this time.
MSP is expected to issue series 2016C, 2016D and 2016E improvement bonds of approximately $225 million, $25 million, and $187.7 million, respectively, to partially fund its $1.47 billion program. The bonds are expected to be issued in fixed-rate mode with final maturity in 2046. Proceeds from the series 2016 improvement bonds (including interest earnings during construction) are expected to be used mainly towards the cost of the Airport's Parking Facilities Expansion project, rental car facility improvements, and to repay a portion of MAC's line of credit used to fund portions of the Terminal 2 Humphrey Expansion Project. The airport expects to issue additional improvement bonds of $209.9 million and $155.6 million in 2019 and 2021, respectively, to further support their capital plan.
Passenger demand continued its strong growth trajectory in 2015, increasing 4.3% to 17.7 million enplanements. This is close to its pre-recession peak of 18 million in 2005. More important, growth of the O&D base has outpaced that of connecting traffic over the last 10 years (1.6% versus -1.8%) such that O&D traffic now accounts for a majority (54%) of MSP's traffic compared to connecting traffic, which accounted for 45.6% in 2005. Through the first half of 2016, enplanements have continued their strong growth (up 3.5%), coming from both O&D and connecting traffic gains.
Operating revenues increased 3% in FY2015, largely due to increases in parking revenues, auto car rentals, food and beverage spending, and higher terminal building rental rates. Parking revenues (6.6% five-year CAGR) continue to drive growth in revenues as a result of longer lengths of stay combined with higher parking rates implemented in January 2015. With the return of Concourse G to MAC on Jan. 1, 2016, concession revenues are expected to increase over the next few years. Operating expenses increased by 6.4%, exceeding revenue growth. This is associated with the implementation of GASB 68, which resulted in a significant pension expense adjustment. Professional services and operating services increased slightly, but this was offset with a larger decline in utilities. Overall, expenses increased moderately by approximately 2% from last year, excluding the pension adjustment.
Delta Airlines ('BBB-'/Stable) is the airport's largest carrier, accounting for 73% of total enplanements in 2015. Under the terms of Delta's lease agreement, which runs through 2020, Delta covenants that it and its affiliate airlines will maintain an annual average of 360 daily flights at the airport (no less than 250 of such flights will be aircraft with more than 70 seats) and at least 30% of enplaned passengers of Delta and its regional affiliate airlines will be connecting passengers. Delta currently averages 387 daily flights in every month of 2016 to date. Southwest and Sun Country operate at MSP's Terminal 2 (Humphrey Terminal) and have been the fastest growing carriers, with a combined share of 11.1% of enplanements at MSP. The airport operates under a level of stability with 28 airline lease agreements currently in place, of which 22 expire in 2018 and six, including Delta, expiring in 2020.
Sustained traffic growth over the past six years and manageable expenses have allowed the airport to maintain its strong financial metrics. In FY2015, senior and total debt service coverage (including transfers) improved to 3.66x and 1.78x, respectively. When PFCs are treated as revenues instead of an offset to debt service, senior lien coverage declines to 3.41x with total coverage of 1.66x. Total leverage (net debt/CFADs) is relatively low at 4.40x but will gradually increase with planned future issuances. CPE remains competitive at $6.44 versus to its peers.
The sponsor provided an updated forecast for the current issuance, reflecting an improved outlook over the forecast period (2016 to 2022). Based on the update, Fitch-calculated average senior and total DSCR (with transfers and PFCs treated as revenues) rise to 3.65x and 1.74x, respectively, and CPE is projected to remain below $7. Leverage also falls, to 4.71x at the end of the forecast period. Fitch will maintain its base and rating case assumptions from the last review as it had factored in the anticipated issuances.
Fitch's base case scenario is derived from management's estimates for 2016 and the consultant's forecast from 2016 to 2022. Under this scenario, enplanements increase at a conservative 1.4% CAGR over the forecast period. In line with modest enplanements growth, total revenues and operating expenses grow at a 3.4% and 3.5% CAGR, respectively. This is reasonable given that revenues and expenses have historically grown in tandem. Including $809 million of new debt that will be issued over the next six years, the airport continues to demonstrate competitive total coverage and leverage metrics when compared with Fitch's 'A+' rated airports. Fitch-calculated average senior and total DSCR (with transfers and PFCs treated as revenues) is 3.56x and 1.71x, respectively. Total leverage ranges from 3.82x to 4.77x over the forecast period while CPE is projected to remain below the $7.50 range.
The airport's financial metrics hold up adequately under Fitch's rating case scenario, which assumes a hypothetical 7% enplanement loss in 2017 due to an economic shock, with enplanements not fully recovering over the following five years. Some expense cost savings are incorporated in the year of enplanement loss, leading to a 3% CAGR of operating expenses over the forecast period of 2016 to 2022. Revenue losses from fewer enplanements results in a 2.5% CAGR for total revenues. Fitch-calculated average senior and total DSCRs fall by approximately 10 basis points to 3.46x and 1.66x, respectively. Total leverage still remains competitive within a 4.41x to 5.62x range, while CPE increases gradually to $8.40. Under this scenario, the airport still demonstrates financial resilience at both lien levels despite its increasing debt service profile combined with moderate levels of traffic volatility, commensurate with the 'AA-' rating on the senior debt and 'A+' rating on the subordinate bonds.
Relevant Committee Date: Aug. 22, 2016
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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