TEXT-Fitch Rates Metro Airport Commission's (Minneapolis, MN) Subordinate Revs 'A'; Outlook Stable

Tue Oct 16, 2012 6:30pm EDT

NEW YORK, October 16 (Fitch) Fitch Ratings has assigned an 'A' rating to the Metropolitan Airport Commission's (MAC) subordinate airport revenue and revenue refunding bonds series 2012A-B expected to be issued in the amount of $82.8 million.

The proceeds from the proposed series 2012A subordinate airport revenue bonds will be used to finance the expansion of the rental car facilities located in the T2 Humphrey Terminal parking ramp and vicinity.

The proceeds from the proposed series 2012B subordinate airport revenue and refunding bonds will be used refund all or a portion of the subordinate series 2003A bonds with an expected net present value (NPV) savings of approximately $4.4 million.

Fitch has also affirmed the 'AA-' rating on MAC's $746.2 million outstanding senior revenue bonds and the 'A' rating on $723 million of outstanding parity subordinate revenue bonds. The Rating Outlook on all bonds is Stable.

KEY RATING DRIVERS:

--Strong O&D Base With High Dependence on Dominant Carrier: 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 generated from a broad-based local economy with an origination and destination (O&D) base of 8.3 million enplaned passengers. Delta maintains a dominant market share representing 77.8% of enplanements with connecting traffic representing approximately 47.3% of total traffic which leaves Minneapolis St-Paul International Airport (MSP) susceptible to realignment of hubbing service. Enplanements have increased modestly after several years of declines. Revenue Risk-Volume: Midrange.

--Hybrid Use and Lease Agreement Resulting With 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 cost per enplaned passenger (CPE) was a competitive $6.34 in 2011 and is expected to remain competitive despite an expected increase to approximately $6.60 in 2012 as debt service ramps up. Revenue Risk-Price: Stronger.

--Moderate to High Leverage Profile: Comparable to other airports of its size, MSP has a fair amount of leverage with $1.48 billion of debt outstanding (including $9.2 million of general obligation bonds). All of MAC's debt is fully amortizing and fixed rate. Debt Structure: Stronger.

--Stable Performance But Higher Leverage: MSP has maintained strong and stable financial performance despite recent traffic declines. The airport maintains a diverse revenue stream consisting of aero-nautical, parking, concession, PFC, 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/CFADS of 6.7 times (x); Debt per O&D enplanement of $171; and days cash on hand (DCOH) of 626 days. Debt Service Counterparty Risk: Midrange.

--Modest Capital Needs with No Future Borrowing Expected: Having recently completed an approximately $2.9 billion capital program, the airport's future capital plans are modest, focused on airfield and routine terminal work as well as noise mitigation. The capital program will be funded from a combination of PFCs, proceeds from previous and current bond issuance, a short-term bank loan, grants, and available cash. No new money long-term borrowing is currently anticipated. Infrastructure Development Renewal: Stronger.

WHAT COULD TRIGGER A RATING ACTION:

--Significant adverse changes in airport's current traffic base, particularly hub operations, and ongoing commitment from its leading carrier.

--Deterioration of financial metrics as result of as result of inability to manage cost structure.

SECURITY: The bonds are secured by a net pledge of general airport revenues.

CREDIT UPDATE: Passenger demand at the airport is sizable at 15.9 million enplanements with approximately 47.3% of traffic derived from connecting passengers. Enplanements rebounded slightly in fiscal 2011 up 2.7% following four consecutive years of enplanement declines. Passenger enplanements are projected to be down slightly at 0.3% for 2012. Overall, traffic still remains approximately 12% below its peak 2005 level. Key influences to these trends include the prior bankruptcy filing of Northwest, the general downturn in domestic air traffic demand, and reductions in capacity serving both O&D and connecting traffic. Delta (Issuer Default Rating 'B+', Outlook Stable) is the airport's largest carrier, as it and its affiliates accounted for 77.8% of total enplanements in 2011. Under the terms of its lease agreement, which runs through 2020, Delta covenants that it and its regional affiliate airlines will maintain an annual average of 360 daily departing flights from the airport (no less than 250 of such flights will be aircraft with more than 70 seats). Delta is meeting the terms of the covenant by averaging over 390 daily flights every month of 2012 to date. Delta prepaid leases tied to the series 15 general obligation (GO) bonds, which led to the refunding of the $214 million series 15 GO bonds in early 2012. In conjunction with the prepayment, Delta has subsequently consolidated training and support functions from the Minneapolis area to Atlanta as part of its strategic business plan.

The other carriers serving at MSP include American Airlines, Southwest, Sun Country Airlines, US Airways, and United Airlines, none of which represented more than 5% of enplaned passengers in 2011. Despite the tepid traffic performance, the airport maintained its sound financial position in 2011 with net revenues providing 2.24x coverage of senior lien debt service (D/S), and 1.54x coverage of subordinate lien debt service, prior to transfers. When PFC's are treated as revenue instead of an offset to D/S total coverage was 1.37x in 2011. These coverage levels are largely unchanged from performance figures in the four previous years. Revenue sources are diverse with aeronautical revenues contributing only 40% of total airport revenues. However, with Delta alone contributing to nearly 80% of airline revenues, counterparty risk is high. The airport's CPE remains favorable compared to similar sized connecting hub facilities at $6.34 in fiscal 2011 and is expected to rise to $6.60 in fiscal 2012 as debt service increases.

Comparatively, other large hub airports across the Midwest will be facing rising CPE levels as costs associated with capital programs are phased into their airline charges. The airport's future capital needs are modest, having already completed a $2.9 billion capital program in 2010, the principal component of which was the construction of a new runway. Through 2018, the airport's capital program will total $708 million. Most of the projects relate to airfield and runway rehabilitation, noise mitigation, and routine terminal improvements.

The airport expects to fund its capital program with a combination of proceeds from previous and current bond issuance, PFCs, federal and State grants, short-term bank loan as well as other available revenues of the Commission with no future long-term borrowing currently anticipated.

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