Fitch Affirms Minneapolis-St. Paul Airport's (MN) Sr Revs at 'AA-', Sub Revs at 'A'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'AA-' rating on $672 million of Minneapolis-St. Paul Metropolitan Airport Commission (MAC) senior airport revenue bonds. Fitch has also affirmed the 'A' rating on MAC's $632.2 million subordinate airport revenue bonds. The Rating Outlook on all bonds is Stable.

The ratings reflect the airport's stable and improving enplanement profile serving a large metropolitan area with strong growth coming from the slight majority of origination and destination (O&D) traffic base. Although some carrier concentration risk exists with Delta maintaining an enplanement share of 74%, this is partially mitigated by their heavy investment at Minneapolis-St. Paul International Airport (MSP), the hubbing covenant, and a use agreement through 2020. MSP is Delta's second largest hub behind Atlanta.

KEY RATING DRIVERS

Revenue Risk - Volume: Midrange

Strong O&D Base with High Dependence on Delta: 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 region. Considerable demand for air service is generated from a broad-based local economy, supporting an O&D base of 9.3 million enplaned passengers. Connecting traffic represents nearly 45% of total traffic, leaving MSP susceptible to realignment of Delta's hub operation. Enplanements have increased modestly after several years of declines and are showing strong year-to-date growth.

Revenue Risk - Price: Stronger

Hybrid Use and Lease Agreement Results in Competitive CPE: 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 rose to $6.81 in 2014 with increasing debt service obligations, and is expected to remain below $8 as long as current enplanement trends continue.

Infrastructure & Renewal Risk: Stronger

Modest Capital Needs, Future Borrowing Expected: Having recently completed a $3.2 billion capital program, the airport's future capital plans are minor, focused on airfield and routine terminal work as well as noise mitigation. In 2016, MAC plans on issuing $316 million of debt to fund the expansion of a parking facility at Terminal 1 and the addition of three Terminal 2 gates to accommodate increasing demand. Aside from these projects, the capital program will be funded from a combination of passenger facility charges (PFCs), proceeds from previous bond issuances, grants, and available cash.

Debt Structure: Senior - Stronger, Subordinate - Midrange

Conservative Debt Structure: Comparable to other airports of its size, MSP has a moderate amount of debt with $1.3 billion outstanding. All of MAC's debt is fully amortizing and fixed rate. A significant factor in the two-notch rating differential of the liens is due to more restrictive covenants on issuing additional senior bonds compared to other dual-lien structures in Fitch's portfolio.

Healthy Financial Metrics: The airport maintains a diverse revenue stream with aeronautical revenues accounting for only 40% of total operating revenues while parking generates 45% of non-aeronautical revenues (27% of total revenues). MSP's strong balance sheet supports the robust financial metrics given the size of its operations including net debt/CFADS of 4.6x (6.1x with the anticipated debt issuance); debt per O&D enplanement of $150; and days cash on hand of 836 days.

Peer Analysis: MSP's peers include Orlando ('AA-'/Stable Outlook) and Detroit ('A-'/Stable Outlook) airports given their similar enplanement numbers and trends, debt amount, liquidity, CPE, and leverage. MSP and Detroit also both serve as major hubs for Delta, which accounts for more than 70% of enplanements at both airports.

RATING SENSITIVITIES

Negative - Reduction in the Delta hub resulting in 50% or greater loss of connecting traffic would likely put downward pressure on the rating.

Negative - Additional new borrowings for non-revenue generating projects that would materially increase leverage would be viewed as a credit negative.

Positive - No upward rating action envisaged at this time due to high carrier concentration and high connecting volume coupled with modest enplanement volatility.

CREDIT UPDATE

Passenger demand continued its rebound in 2014, growing 3.9% to 17 million enplanements. This exceeds 2008 levels, but still remains 5.7% below the 2005 peak. More important, growth of the O&D base has outpaced that of connecting traffic over the last 10 years (1.6% versus -2.2%) such that O&D traffic now accounts for a majority (55%) of MSP's traffic compared to connecting traffic, which accounted for 55% in 2004. Through nine months of 2015, enplanements have continued their strong growth (up 3.3%), coming from both O&D and connecting traffic gains.

Operating expenses increased 4.9% in 2014 largely due to personnel and maintenance costs as a result of winter clean-up as well as increased utilities expense. Fitch notes that the airport has experienced a moderate expense compound annual growth rate (CAGR) of 4.5% since 2009. Operating revenues increased a similar 4.7% in 2014 due to increased airline rates and charges from increased activity at Terminal 2, higher parking revenues, and a pass-through of harsh winter expenses noted above.

Delta Airlines ('BB+'/Positive Outlook) is the airport's largest carrier, accounting for 74% of total enplanements in 2014. 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). Delta currently averages over 400 flights per day. Southwest and Sun Country operate at MSP's Terminal 2 (Humphrey Terminal) and have been the fastest growing carriers. Both carriers have a combined share of 10% of enplanements at MSP. Due to congestion, Spirit Airlines has been moved to Terminal 1 from Terminal 2.

As traffic performance has improved, the airport has maintained its strong financial metrics with senior lien debt service coverage (including transfers) of 3.43x and total debt service coverage of 1.77x. When PFCs are treated as revenue instead of an offset to debt service, senior lien coverage declines to 2.98x with total coverage of 1.59x. Senior coverage levels improved from 2014 due to the refunding in 2014 that provided $2 million in annual savings.

Fitch's base case scenario is derived from management's estimates for 2015 and budget for 2016 which incorporates a conservative 2.4% enplanement growth in 2015, a 1.4% increase in 2016 followed by a long-term annual growth rate of 1.0%. Operating expenses grow at a 4.2% CAGR while rates and charges grow at 1.6% and total revenues at 2.6%. Without incorporating the additional debt service from the new money expected in 2016, debt service coverages with transfers and PFCs as an offset remain above 3.5x for the senior lien and above 1.6x for the subordinate lien. Fitch expects the pass-through of the additional debt service through rates and charges and the revenue generation of the parking facility and gate expansions to lead to a relatively coverage neutral effect on the profile post-issuance. CPE is projected to remain in the $6 range during the forecast period.

The airport's financial metrics hold up adequately under Fitch's rating case scenario, which in 2016 assumes a hypothetical 10% enplanement loss which does not completely recover over the following three years. Some cost savings are incorporated in the year of lost enplanements leading to a 4.1% CAGR of operating expenses over the forecast period. Revenue losses from fewer enplanements results in a 0.1% CAGR for total revenues. Senior debt service coverage with transfers and PFCs as an offset sinks 50 basis points but remains above 3.0x and the subordinate lien remains over 1.4x with CPE stabilizing in the $7 range.

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. 28 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=870967

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Contacts

Fitch Ratings
Primary Analyst
Daniel Adelman, +1-312-368-2082
Associate Director
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
or
Secondary Analyst
Jeffrey Lack, +1-312-368-3171
Director
or
Committee Chairperson
Saavan Gatfield, +1-212-908-0542
Senior Director
or
Media Relations, New York
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Daniel Adelman, +1-312-368-2082
Associate Director
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
or
Secondary Analyst
Jeffrey Lack, +1-312-368-3171
Director
or
Committee Chairperson
Saavan Gatfield, +1-212-908-0542
Senior Director
or
Media Relations, New York
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com