NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded Massachusetts Port Authority's (Massport or the authority) approximately $198 million in special facility revenue bonds (CONRAC Project bonds) series 2011A&B to 'A' from 'A-'. The Rating Outlook is Stable.
The upgrade reflects a substantially stronger financial profile than was originally projected during the 2011 issuance, evidenced by one million more transaction days in fiscal 2016 (total 5.48 million) than initially forecasted which have allowed debt service coverage ratios (DSCR) to surpass estimates by nearly 60 basis points (bps). Strong rating case average DSCRs of 2.1x (without coverage account) and moderate leverage of roughly 5x are consequently considered more commensurate with an 'A' rating. Fitch believes current financial strength will be sustained given the facility's demonstrated stable operating profile and expected absence of subordinate expenses and near-term capital plans, which should allow continual deleveraging of the CONRAC's debt profile.
The rating reflects Boston Logan International Airport's (BOS) large and resilient origin and destination (O&D) base of roughly 16.5 million enplanements, which has contributed to outperformance in transaction days and customer facility charge (CFC) collections at the CONRAC. The rating also reflects the CONRAC's exposure to moderate transaction day volatility given the discretionary nature of rental car service. The facility benefits from adequate rate-making flexibility which partially mitigates the narrowness of the CFC revenue stream, and contingent rent provisions which provide additional financial cushion in the event of revenue shortfall. The CONRAC's moderately high CFC rate of $6.00 compared to other facilities somewhat increases the risk of elasticity during potential future rate hikes, though no rate increases are currently planned and the moderate rate is partially mitigated by the attractiveness of the Boston rental car market.
KEY RATING DRIVERS
Large O&D Base, Some Volatility: The consolidated rental car facility project has benefitted from healthy transaction-day annual growth of nearly 4.3% over the past five years, bolstered by the airport's sizable and expanding O&D enplanement base. Moderate volatility evidenced by a peak-to-trough of nearly -14% reflects the discretionary nature of rental car service, however, observed volatility was slightly lower than that of other CONRAC facilities, indicating a comparatively stronger rental car market. The CONRAC maintains a well-diversified mix of rental car operators with no one operator possessing more than 20% of market share, partially mitigating service reduction risk.
Strong Concession Agreement, Rate-Making Flexibility: In Fitch's view, the CONRAC's 15-year concession and lease agreements provide contractual support to bondholders, with the leases including a contingent rent provision which allows for additional rent to be collected from tenants in the event of a revenue shortfall. Bondholders also benefit from the ability of Massport to adjust the CFC rate as needed to meet obligations, which partially mitigates the narrowness of the CFC revenue stream. Fitch expects that future rate increases would likely be accompanied by minimal elasticity given the attractiveness of the Boston rental car market, though the facility's moderately high CFC rate of $6.00 per transaction day somewhat increases the risk of future elasticity.
Modern Infrastructure: The CONRAC facility is relatively new, reaching full completion in fiscal 2014. As such, the single-site rental location has modern facilities with no additional capital expenditure or debt issuances expected over the near term.
Conservative Debt Structure: The facility's debt structure is conservative, featuring all senior, fixed-rate debt with a relatively flat debt service schedule. The structure benefits from strong cash-funded project reserves and an adequate rate covenant and additional bonds test of 1.3x including the coverage account and a portion of the supplemental reserve fund.
Strong Coverage, Declining Leverage: The project benefits from strong coverage ratios averaging 2.1x (without coverage account) in Fitch's rating case, with a leverage profile which is expected to continue to decline to 4.3x by fiscal year (FY) 2021 from roughly 5x in FY2016. Fitch's cases include flat cash balances for conservatism; however, should the CONRAC continue to accrue cash in its CFC Stabilization Fund, leverage could decline more rapidly than projected.
Peer Group: Rated peers include CONRACs at Houston Airport (rated 'A-') and Charlotte (rated 'A') with all three projects having similar leverage levels of 4x-5x. Massport and Charlotte benefit from a higher rating as a result of rating case coverage levels over 2x (excluding coverage account), while Houston's rating case coverage levels are thinner at roughly 1.2x.
--Material declines in rental car activity without commensurate CFC rate increases which pressure DSCRs (without coverage account) below 2x on a sustained basis could result in negative rating action;
--Given the recent upgrade and projected financial metrics, further upward migration is not likely over the near term.
Series 2011 bonds are secured by a pledge of the CFC collections received or receivable by the authority and any contingent rent paid by the rental car companies as well as insurance proceeds and condemnation awards. In addition, the authority has pledged the amounts on deposit in the project fund, debt service fund, and reserve funds created under the terms of the CFC trust agreement.
Over the past five years, the addition of flights in terms of new destinations and frequency have allowed for healthy expansion of BOS's traffic base, averaging over 4% growth annually, which has in turn contributed to outperformance in rental car transactions. Notably, while Boston's metropolitan statistical area (MSA) is estimated to be the 10th most populous MSA in the nation, the MSA's population growth of roughly 1% annually has outpaced that of other large Northeastern MSA's such as New York-Newark-Jersey City (ranked first, 0.6% annually) and Philadelphia (ranked seventh, 0.3% annually).
Given that most of Boston Logan's traffic base is comprised of O&D passengers, transaction days, measured by the number of rental car transactions multiplied by the length of the rental in days, have consequently experienced similar growth as enplanements. Specifically, transaction days experienced growth of over 5% annually since 2011, well surpassing Fitch's estimates of approximately 0.4% when the project was originally rated.
Transaction day outperformance has resulted in a much stronger financial profile in comparison to original expectations, yielding an average DSCR (without coverage account) of 2.35x over fiscal 2012-2016 in comparison to original projections over the same period of roughly 1.77x. Management currently has no capital plans for the facility given its relative newness, which alleviates the need for reserve spending or additional debt issuances over the near term. The authority's previous $10 million subordinate loan was completely paid off in fiscal 2016, and Massport does not currently have any other subordinate obligations to pay for with CFCs.
The authority's requirements for Uber and Lyft's operation at the airport are considered relatively stringent, which provides comfort that rental car activity will not be materially adversely affected by the presence of ridesharing companies. Fitch views the aforementioned developments positively, as so long as the facility experiences modest transaction day growth going forward, cash accumulation and progressive deleveraging should occur, thereby preserving the facility's current financial strength.
In Fitch's base and rating cases, the CFC rate remains the same as there are currently no plans to adjust the rate, and the current balance of the CFC Stabilization Fund remains flat for conservatism. Fitch's base case assumes transactions days grow 1%-1.5% over the forecast period, in line with Fitch's projections for enplanement growth at Boston Logan. Fitch's rating case assumes a -11% shock in fiscal 2018 followed by a modest recovery, slightly less than was experienced during the last recession and more than the airport's enplanement shock of -5%, reflecting the expectation that future recessions will be less severe and the tendency for rental car transactions to exhibit greater volatility than enplanements. In the base and rating case, coverage remains strong, averaging 2.3x (without coverage account) and 2.1x (without coverage account), respectively. By fiscal 2021, leverage is 3.9x in the base case and 4.3x in the rating case. If cash balances were grown with surplus cash, leverage would be below 2x in both cases by fiscal 2021.
In comparison to Fitch's airport criteria, Massport CONRAC's coverage levels are stronger than metric guidance for an indicative 'A' category large-hub airport, reflecting the additional financial cushion necessary to offset a narrower and generally more volatile revenue profile generated by discretionary rental car transactions. Consequently, Massport's 'A' rating is considered appropriate in line with criteria and relevant peers.
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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