Fitch Affirms Indianapolis, Indiana's Airport Revs at 'A'; Outlook Stable

Fri Jun 7, 2013 4:32pm EDT

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Fitch Affirms Indianapolis, Indiana's Airport Revs at 'A'; Outlook Stable

Fitch Ratings affirms the 'A' rating on the Indianapolis Local Public Improvement Bond Bank's (the Bond Bank) approximately $705 million outstanding bonds secured by net revenues of Indianapolis Airport Authority (IAA or the Authority). Fitch also affirms the 'A' rating on the Authority's approximately $25 million outstanding airport revenue bonds. The Rating Outlook on all debt is Stable.

KEY RATING DRIVERS:

--DIVERSE CARRIER BASE SERVING A RELATIVELY STRONG LOCAL MARKET: The airport serves a relatively strong MSA, being the city of Indianapolis, IN and surrounding region with a primarily origination & destination (O&D) enplanement base of 3.7 million. Further, the diverse carrier mix, with no single carrier representing more than 30% of enplanements, ensures that the airport is not exposed to concentrated airline counterparty risk. In addition, Federal Express Corp. (FedEx) operates its second-largest global sorting facility at the airport and has demonstrated its commitment to Indianapolis.

Revenue Risk: Volume - Midrange

--STRONG CONTRACTUAL FRAMEWORK: IAA's strong five-year Airline Use and Lease Agreement (AUL) through 2015 is fully residual, enabling the airport to pass all costs to the air carriers to the extent non-airline revenues are insufficient. Additionally, the diverse revenue stream, with passenger airline carriers representing only 27% of operating revenues, allows the airport to maintain a competitive cost per enplanement (CPE). Currently, the CPE is approximately $10, but is targeted to reduce to $9 or less. A large amount of air cargo activity provides some diversity to the airport's revenue base (nearly 7%) and helps maintain a stable cost environment by distributing airfield expenses across a broader customer base.

Revenue Risk: Price - Stronger

--VARIABLE-RATE DEBT EXPOSURE: The airport has a significant amount of variable-rate debt compared with its peers representing 32% of outstanding debt, mitigated by swaps with adequately rated bank counterparties. Reserves are cash funded.

Debt Structure Risk - Midrange

--HIGH LEVERAGE PARTIALLY MITIGATED BY SIZEABLE RESERVES: The Authority has a high debt burden relative to its peers, reflecting the significant investment made in its new terminal which opened in 2008; however, significant balance sheet liquidity and reserves serve to mitigate some of this risk and provide additional financial flexibility. The airport currently has a net debt/cash available for debt service (CFADS) ratio of 8.8x and debt per O&D enplanement is somewhat high at approximately $304.

Debt Service - Midrange

--MODEST CAPITAL NEEDS WITH NO ADDITIONAL DEBT: IAA recently completed its seven-year, $1 billion dollar new terminal and airport improvements program. Going forward, the Authority's capital improvement needs are modest and are expected to be funded without issuing additional debt.

Infrastructure Development/Renewal Risk - Stronger

RATING SENSITIVITIES:

--Management's inability to control costs and maintain a reasonable CPE could impact its flexibility to continue passing on costs to airlines, resulting in downward rating pressure.

--Should non-airline revenues fall significantly short of current forecasts this would also result in increased pressure on CPE, reducing flexibility and putting downward pressure on the rating.

--Material loss of enplanements which restricts the airport's financial flexibility and stresses CPE could pressure the rating.

--A deterioration of the Authority's strong cash position that partially offsets risk associated with its high debt level and variable-rate debt would result in reduced liquidity and increased leverage, and could consequently lead to a negative rating action.

SECURITY:

Both the bond bank's and the Authority's bonds are secured by the Authority's net revenues.

CREDIT UPDATE:

The Indianapolis International Airport is the primary commercial facility serving the Indianapolis metropolitan area with an approximately 3.7 million enplanement base in 2012. The high O&D component (95%) of passenger traffic ensures enplanements remain largely stable. FedEx's large sorting facility further enhances this stability and the diverse mix of passenger carriers isolates the airport from enhanced airline concentration risk.

However, enplanements were down 2.2% in 2012 as compared to 2011, and are down nearly 14% from their 2005 peak of 4.3 million. Further, enplanements are down 6.4% during the first three months of 2013 as compared to the same period in the previous year, indicating that the bottom may not yet have been reached. Nevertheless, the airport has demonstrated a stable passenger base when considered over a longer period, exhibiting a 10-year CAGR of 0.7% through 2012. Fitch believes any near-term growth could be optimistic unless economic conditions improve.

The Authority's fully residual AUL extending through Dec. 31, 2015 helps provide a basis for sound financial performance. The Authority has the ability to pass through all of its costs, including required debt service payments. As a result, debt service (D/S) coverage was a healthy 1.7x in 2012 and is expected to remain in the 1.6x-1.7x range over the next few years. Fitch notes, however, that the airport's D/S coverage is inflated by the inclusion of rolling coverage funds (approximately 23% of annual D/S) and D/S offsets from traffic-dependent passenger facilities charges (PFC) and customer facility charges (CFC). Without the benefit of rolling coverage funds, 2012 coverage was 1.36x, compared to 1.30x the year before.

Airline CPE continued its decline in 2012 to $10.02 down from a high of $11.33 in 2009 following the opening of the new terminal and recessionary enplanement losses. Management's intention is to reduce CPE to $9 or less by 2015. Fitch notes that this CPE target could be optimistic should any of the following occur: enplanements continue to decline; non-airline revenues are lower than projected; and/or management is unable to control operating and maintenance costs.

IAA's debt burden is slightly elevated compared to peers at $304 debt-to-O&D enplanement and 8.8x leverage. However, the Authority maintains sizable balance sheet cash and reserves and actively seeks to reduce its principal and interest obligations as evidenced by its 2012 refunding. This practice of paying down principal and lowering interest rates is expected to continue in 2013 and as more bonds become callable. The Authority's 32% variable-rate debt is also relatively high compared to peers; however, four swap agreements perfectly hedge associated risk.

The Airport's current $156 million capital plan extends through 2015, and a new 2013-2018 plan is currently being developed. Having recently completed its $1 billion airport modernization, the airport's near-to-mid-term needs are expected to be minor. Further, the Authority does not plan any additional new debt issuances to cover the remaining capital plan.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--Rating Criteria for Infrastructure and Project Finance (July 12, 2012);

--'Rating Criteria for Airports' (Nov. 27, 2012).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

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

Rating Criteria for Airports

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695600

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=793182

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Fitch Ratings
Primary Analyst
Jeffrey Lack, +1 312-368-3171
Associate Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Scott Zuchorski, +1 212-908-0659
Director
or
Committee Chairperson
Saavan Gatfield, +1 212-908-0542
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

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