CHICAGO--(BUSINESS WIRE)--Fitch Ratings affirms its 'A' rating on the Indianapolis Local Public Improvement Bond Bank's (the Bond Bank) approximately $1.2 billion in outstanding bonds secured by net revenues of the Indianapolis Airport Authority (IAA or the Authority). Fitch also affirms its 'A' rating on the Authority's approximately $25 million in 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 consisting of the City of Indianapolis, IN and surrounding region with a primarily origination & destination (O&D) enplanement base of 3.8 million. Further, the diverse carrier mix, with no one carrier representing more than 33% of enplanements, ensures that the airport is not susceptible to risk from any one airline. FedEx operates its second-largest global sorting facility at the airport and has demonstrated its commitment to Indianapolis.
--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 and decreasing cost per enplanement (CPE). The airport has a goal of maintaining CPE at or below $9. 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.
--EXPOSURE TO VARIABLE RATE DEBT: The airport has a significant amount of variable rate debt compared with its peers representing 29% of outstanding debt, which is partially mitigated by swaps in which the Authority receives variable rate payments based on an index that coincides with the interest rate the Authority is paying. Reserves are cash funded.
--HIGH LEVERAGE PARTIALLY MITIGATED BY SIZEABLE RESERVES: The Authority has a high debt burden relative to its peers; however, its 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 8.8 times (x) and debt per O&D enplanement is somewhat high at approximately $313.
--MODEST CAPITAL NEEDS WITH NO ADDITIONAL DEBT: The airport 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.
WHAT COULD TRIGGER A RATING ACTION:
--Management's ability to control costs and maintain a reasonable CPE.
--Significant deviations in non-airline revenues from current forecasts.
--Enplanement volatility.
--Authority's ability to maintain strong cash balances to offset risks associated with its high debt level and its variable rate debt in particular.
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 estimated 3.8 million enplanements in 2011, nearly 95% of which is O&D traffic, resulting in passenger stability. FedEx's large sorting facility further enhances this stability and a diverse mix of carriers isolates the airport from risk associated with any one particular airline. Enplanements are beginning to recover from the economic downturn, up slightly in 2010 and year-to-date growth of approximately 1.3% (through September) in 2011. This is in contrast to the recessionary decline of nearly 10% over the 2008 - 2009 period. Historically, the airport has demonstrated a stable passenger base, with enplanements rising an average of 1.4% annually from 1990 through 2010. While management forecasts steady traffic growth at a 1.8% CAGR through 2015, Fitch believes this growth could be slightly optimistic if economic conditions do not improve.
The Authority's fully residual AUL, which extends 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 1.6x in 2010 and is estimated to remain relatively unchanged at 1.5x - 1.6x through 2015. However, Fitch notes that the airport's D/S coverage is higher since it includes both rolling coverage funds (approximately 20% 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, fiscal 2010 and estimated 2011 coverage ratios fall to 1.26x and 1.12x, respectively.
Airline CPE for 2011 is estimated to improve to $10.17 after reaching $11.35 in 2010 as a result of recessionary enplanement declines and new terminal expenses. Management forecasts continued reductions to CPE to less than $9 by 2015. Fitch notes that this CPE projection could be optimistic should any of the following occur: the airport experiences another drop in enplanements; non-airline revenues are lower than projected; and/or management is unable to control operating and maintenance costs.
The Airport's current $141 million capital plan extends through 2015. Having recently completed its $1 billion airport modernization, the airport's needs in the near-to-mid term 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'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (Aug. 16, 2011);
--'Rating Criteria for Airports' (Nov. 29, 2010).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648832
Rating Criteria for Airports
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=656970
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