Fitch Upgrades Atlanta, GA Passenger Facility Revs to 'A+'; Affirms Airport Sr Revs at 'A+'

CHICAGO--()--Fitch Ratings has upgraded to 'A+' from 'A' the rating on the City of Atlanta's, GA, approximately $857 million of outstanding passenger facility charge (PFC) and subordinate lien revenue bonds issued on behalf of Hartsfield-Jackson Atlanta International Airport (ATL). In addition, Fitch has affirmed the 'A+' rating on approximately $1.78 billion of senior-lien airport general revenue bonds. The Rating Outlook for all bonds is Stable.

The airport's 'A+' senior GARB rating reflects its leading position as the world's busiest airport. Despite the magnitude of connecting passengers, the airport also maintains a sizeable O&D base that supports a strong local MSA. The total enplanement base coupled with strong use and lease agreements continues to provide for ample coverage and favourable cost per enplanement (CPE) while successfully allowing for implementation of its capital program to meet current and future infrastructure needs.

The upgrade to 'A+' on the airport's PFC hybrid/subordinate GARBs reflects the strength of the dedicated PFC revenue stream with modest leverage that has historically and is projected to cover debt service more than 2.0x on a standalone basis. The rating also reflects the additional support of general airport revenues on a subordinate basis, however Fitch does not anticipate that these revenues would ever be necessary to cover PFC debt service and, to the extent they were necessary, the rating could be pressured.

KEY RATING DRIVERS

STRONG TRAFFIC BASE AND KEY DELTA HUB: Revenue Risk (Volume) - Stronger

Atlanta maintains an established status as the busiest operating airport in the world with more than 47 million annual enplaned passengers. Carrier concentration exists with Delta Air Lines (Delta, rated 'BB'/Positive Outlook by Fitch) at 81% of passenger traffic. However, Atlanta is the primary hub and corporate headquarters location for Delta. ATL is anchored by a large, local traffic base with 15 million O&D enplaned passengers for fiscal year (FY) 2014. Passenger traffic trends have been largely positive since 2002, and there is limited competition from other regional airports.

EFFECTIVE COST RECOVERY & STRONG NON-AIRLINE REVENUE SUPPORT: Revenue Risk (Price) - Stronger [Revised from Midrange]

The airport operates with continued airline support evidenced by extension of the use agreements that provide compensatory rate setting. Atlanta's large traffic base generates significant PFC and non-airline revenues enabling airline CPE at $3.36 in 2014 to be among the lowest for a major U.S. hub and international gateway.

WELL MANAGED CAPITAL SPENDING: Infrastructure development/renewal - Midrange

Atlanta maintains significant airside and terminal infrastructure to support a major hub. City and carrier support for capital spending is evident. Approximately $760 million of projects have been identified under the current capital program, with 55% of funds coming from new debt. In addition, Fitch is monitoring the status of a new 20-year airport master plan that should be released later this year. It is expected to be at least as large as the prior plan and may identify additional projects that require longer term future financings.

CONSERVATIVE DEBT STRUCTURE: Debt Structure - Stronger (Senior); Revised to Stronger (PFC/Sub) [from Midrange]

All of the airport's aggregate revenue bonds are in fixed rate mode with conservative amortization profiles. Senior GARB debt service (DS) drops significantly in 2022 and again following 2030. The PFC hybrid bonds have nearly reached maximum annual debt service (MADS), with a flat DS profile thereafter, and are supported by a dedicated revenue stream that is capable of servicing this profile nearly 2.5x without the need for additional subordinate airport revenue support, though available. In addition, each lien benefits from a cash-funded DS reserve equal to MADS.

FINANCIAL METRICS AFFORD FLEXIBILITY: The airport currently shows a very healthy financial position in terms of leverage (approximately 3.6x net debt/cashflow available for debt service), coverage levels (1.8x senior bonds and 2.6x of subordinate hybrid PFC bonds), and liquidity [over 1,100 days cash on hand [DCOH]].

PEERS: Fitch-rated hub airport comparables include Houston ('A'/Stable Outlook sub lien) and Dallas-Fort Worth ('A'/Stable Outlook). ATL has a much greater total enplanement base; however, O&D enplanements at all three airports are more similar. As is expected from hub airports, carrier concentration is prevalent at all three. ATL's DSCR is higher and its CPE lower partly accounting for the rating differential.

RATING SENSITIVITIES

Negative: Material changes to current traffic levels, particularly the hubbing operations and commitment from Delta;

Negative: Material additional leverage to meet the needs of the capital program;

Negative: Changes to the existing favorable airline cost and financial profile.

Positive: Given the airport's exposure to connecting traffic volatility, its high degree of carrier concentration, and uncertainty regarding the new master plan upward migration is not likely in the immediate near-term.

CREDIT UPDATE

ATL represents a major airport facility for the U.S. air transportation network, with significant direct air service to many U.S. and global destinations. With approximately 47.3 million enplanements and nearly 890,000 annual aircraft operations, ATL has been consistently ranked the most active airport in the world. Overall, connecting traffic contributes about 68% of total traffic and could lead to volatility in ATL's future business performance.

While the airport is served by eight major and national passenger carriers and seven foreign flag airlines, there is a high degree of service dependency from Delta Air Lines. Delta and its affiliates accounted for more than 81% of the airport's total enplanements in fiscal 2014, a relatively unchanged level in recent years even though the carrier has reduced its presence at its secondary hubs.

The next largest carrier, Southwest/AirTran (Southwest, IDR 'BBB'; Positive Outlook), serves a smaller but still relevant 12% of airport traffic. Southwest's recent integration with AirTran has resulted in reductions in both capacity and destinations at ATL in conjunction with a shift to more O&D traffic for the combined carrier. Still, Southwest is expected to maintain much of its current base of operations at ATL.

ATL's traffic levels have remained resilient but in-line with the relatively soft general growth in the aviation industry. Recent enplanement figures over the past five years have been trending in a modest positive direction; however, service reductions by Southwest led to a 0.4% overall traffic drop at ATL for fiscal 2014. Still, the five year CAGR is 1.1% and the airport is seeing a return to growth in fiscal 2015 with enplanements up 3.6% through 10 months.

Atlanta is currently progressing successfully through a multi-year capital program. Evidence of program success is the completion of a new international terminal, which enhances international service capacity at the airport. Currently, Atlanta offers an expanding international traffic base for a U.S. airport with more than 5.2 million international enplanements. Growth of international passengers has been significantly higher than those for domestic in recent years. The airport expects to issue $415 million in commercial paper to partially fund the current $760 million capital program, but a new master plan may increase its borrowing needs. Other available funding sources include PFC pay-go collections, federal grants, and other airport funds.

ATL is supported by a well-positioned financial profile that includes solid overall debt coverage levels of its senior lien general revenue bonds at 1.80x and substantial unrestricted cash reserves of $799 million in fiscal 2014. Airline CPE continues to be at the low-end for a large-hub airport at $3.36 for fiscal 2014. Fitch notes that fiscal 2014 CPE was more in-line with CPE levels experienced prior to 2011-2012 and, going forward, airline rates should remain relatively stable to the extent traffic levels remain unchanged.

The combined debt level (general revenue plus PFC hybrid) represents a modest $58 per enplaned passenger (or $182 per O&D enplaned passenger). Based on the aggregate debt of the airport, the leverage in terms of net debt to cashflow available for debt service at 3.6x is considered considerably below the peer group of large-hub U.S. airports.

Fitch's base case scenario assumes a 1.4% enplanement and a 2.9% expense CAGR through 2019. Under this scenario, DSCR is expected to be 1.87x in 2015 migrating down to 1.65x by 2019. CPE levels are also expected to rise modestly to the $3.95 level. Separate from these direct costs that carriers pay to the airport, the all-in CPE is $1.50 to $2.00 above this base rate as it includes additional outside operator payments. Fitch's rating case scenario assumes a double-dip recession where enplanements fall 8.4% in fiscal 2016 (following 3% growth in 2015) with 1% recovery per annum thereafter. CPE levels are expected to grow to $4.40 under this scenario. Leverage under the base case migrates downward to 2.34x and under the rating case down to 2.58x.

Additionally, Fitch analysed a hub stress scenario which took into consideration a fiscal 2016 loss of 5% to O&D traffic and a 36% loss to connecting traffic. O&D traffic was assumed to recover at 2% per annum thereafter, while connecting traffic was held flat. Under this scenario, assuming expenses grew at a 3.5% CAGR between 2014 and 2019, CPE would rise to $5.74, still competitive for a large hub airport. Leverage would evolve down to 2.84x and remain favorable relative to peers.

The hybrid PFC bonds have a history of self-support from the PFC collections. Fiscal 2014 coverage from PFCs was 2.6x and is expected to remain over 2.0x of future MADS based on forecasted traffic levels. There is still some risk to the PFC credit as coverage of the hybrid PFC bonds from PFC collections is to some extent dependent on the receipts derived from connecting traffic. Still, a subordinate lien on airport general revenues provides adequate risk mitigation. At current traffic levels, the airport collects PFC receipts in excess of $185 million annually and MADS is $75.6 million. Fitch's assumption for the PFC related debt under a base case is that PFC revenues grow with enplanements (at the rate noted above). Under this scenario debt service coverage grows to 2.85x by 2019 given the relatively flat DS profile. The rating case assumes a 90% eligible PFC enplanement rate for the passenger levels forecast in the rating case described above and calculates associated PFC revenues at the $4.50 rate (less the $0.11 collection fee). Under this case debt service coverage drops slightly to a minimum of 2.52x, but remains strong.

SECURITY

The airport general revenue bonds are secured by a first lien on airport net revenues. A senior lien on PFC revenue and a subordinate lien on general revenues of the airport secure the PFC hybrid debt.

Additional information is available on www.fitchratings.com

Applicable Criteria

Rating Criteria for Airports (pub. 13 Dec 2013)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725296

Rating Criteria for Infrastructure and Project Finance (pub. 12 Jul 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

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Contacts

Fitch Ratings
Primary Analyst
Jeffrey Lack, +1-312-368-3171
Director
Fitch Ratings, Inc.,
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Seth Lehman, +1-212-908-0755
Senior Director
or
Committee Chairperson
Chad Lewis, +1-212-908-0886
Senior Director
or
Media Relations
Sandro Scenga, +1-212-908-0278 (New York)
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Jeffrey Lack, +1-312-368-3171
Director
Fitch Ratings, Inc.,
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Seth Lehman, +1-212-908-0755
Senior Director
or
Committee Chairperson
Chad Lewis, +1-212-908-0886
Senior Director
or
Media Relations
Sandro Scenga, +1-212-908-0278 (New York)
sandro.scenga@fitchratings.com