NEW YORK & BOGOTA--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A-' rating on the Rhode Island Economic Development Corporation's approximately $261 million in outstanding Rhode Island Airport Corporation (RIAC) senior lien general airport revenue bonds. The Rating Outlook remains Negative.
KEY RATING DRIVERS
Declining O&D Traffic Base Exposed to Competition and Concentration: T.F. Green (the airport) serves a primary origination & destination (O&D) base of 1.95 million enplanements, but it's also influenced by the competitive New England airport environment that has contributed to six consecutive years of enplanements declines. Above average concentration risk exists with Southwest Airlines representing 51% of T.F. Green's enplanements in fiscal 2011 (ended June 30).
Strong Contractual Rate Setting Framework with Elevated Costs: The airport's hybrid use and lease agreement (expiring in fiscal 2015) includes both a revenue sharing component and extraordinary coverage protection. Fitch notes that the strong cost recovery terms have led to a rising cost per enplanement (CPE, at $11 in fiscal 2011); price flexibility is somewhat constrained by nearby competition.
Conservative Debt Structure: All of the airport's debt is in fixed-rate mode with a level to declining amortization profile.
Moderate Current Leverage and Healthy Liquidity: The airport's leverage is moderate at approximately 6.7x times (x) net debt/cashflow available for debt service (CFADS), which is supported by $51 million in available reserves (equivalent to strong 625 days cash on hand). Indenture based debt service coverage, which includes rolling coverage account and fund transfers derived from net revenue sharing with the carriers, increased to 1.70x in fiscal 2011 from 1.57x in the prior year. The airport's debt load is elevated at $134 per enplaned passenger.
Manageable Near-Term Infrastructure Needs: The airport's $190 million capital plan is expected to be largely grant-funded. Management is contemplating issuing additional debt within the next year in support of three airfield projects; debt size and structural components have not yet been finalized.
WHAT COULD TRIGGER A RATING ACTION
--Further erosion in traffic volumes could lead to an unsustainable cost profile, negatively impacting credit quality. Absent significant improvement in the airport's traffic base, negative rating action is likely;
--Issuance of additional parity debt to fund a portion of the capital plan resulting in coverage dilution or higher airline costs;
--Inability to manage operating expenses including those costs related to RIAC's non-commercial outerlying airports.
SECURITY
The bonds are special obligations of RIAC payable principally from net revenues and pledged funds generated principally from T.F. Green. Passenger Facility Charge (PFC) revenues are excluded from the definition of 'Revenue,' but have been pledged to the payment of a portion of debt service.
CREDIT UPDATE
The Negative Outlook reflects T.F. Green's elevated risk profile resulting from multi-year traffic declines since peak level in fiscal 2005, down an aggregate 32% to 1.952 million enplanements in fiscal 2011. Increased activity from low-fare carriers at Boston Logan Airport contributed to year-over-year traffic losses of 8.8%, 10.5% and 3.6% in fiscal years 2009, 2010 and 2011, respectively. The first nine months of fiscal 2012 (through March) have shown signs of stability, with a marginal 0.1% increase over the same period in fiscal 2011.
Management has indicated that other low-cost carriers have expressed interest in adding service at T.F. Green, with possible introduction of new service within the next year. The competitiveness of RIAC's CPE levels as well as demonstrated stabilization of enplanements will both be important credit considerations given the availability of a much broader low cost and network carrier service from Boston Logan. To the extent that RIAC is able to measurably increase its enplanement base, a return to stable outlook may be warranted.
RIAC utilizes a hybrid ratemaking methodology that is compensatory for the terminal and residual on the airfield. The combination of an elevated debt burden and weaker enplanement levels has resulted in a rising CPE through the economic downturn, reaching $11 in fiscal 2011 compared to $6.28 in fiscal 2006. In fiscal 2012, the airport expects CPE to remain unchanged from the prior year. However, CPE could continue to ascend under a flat-to-low growth enplanement scenario or absent reductions in operating expenses.
Operating revenues decreased by 2.9% in fiscal 2011 and fiscal 2012 year-to-date through March (YTD) operating revenues have been tracking slightly above the 1% budgeted increase for the year. Operating expenses decreased by 6% in fiscal 2011 as a result of airport's cost control measures, and fiscal 2012 YTD results have shown lower than budgeted expense increases. Non-airline revenues represent approximately 57% of total operating revenues. Parking revenues (40% of total non-airline revenues) have decreased at a five-year compound annual growth rate of 3%, driven by traffic declines. To enhance revenue sources, management has taken a number of initiatives including a planned $1 increase to the daily parking rate in fiscal 2012. Continued management of the airport's cost profile is critical as there is sensitivity to traffic operations.
Indenture based debt service coverage, which includes pledged PFCs, rolling coverage and fund transfers, was 1.70x in fiscal 2011. Net Revenues included in the coverage calculation are prior to the payment of the non-commercial airports expenses (with the exception of the Quonset airport) and other adjustments totaling $4.3 million in fiscal 2011. Historically, approximately $4.2 million in PFCs have been included annually as revenues available for debt service. When applying only the net revenues and pledged PFCs, debt service coverage was 1.32x in fiscal 2011. Fitch will monitor the debt service coverage levels on a net revenue basis, ensuring levels are comfortably above sum sufficient.
Key projects under the airport's $190 million capital plan include a $76 million for federally mandated runway rehabilitation, to be funded at 75%/25% with grants/PFCs or debt, and a $25 million wastewater facility project, expected to be financed with approximately $20 million in future bond proceeds. Separately, RIAC has submitted a federal grant 'letter of intent' application to cover 75% of the $88 million runway extension project costs and expects to receive formal feedback in the fall of 2012. The extension of the runway is considered a demand-driven project and the timing, amount and structure of the possible issuance are dependent on the level of approved federal grants and aid.
Fitch notes that additional debt to support the capital program would likely elevate the airport's already above average debt load. In light of the tepid trends in airport traffic, a rating action may be considered should any future borrowing be viewed to create added pressure to the airport's leverage or cost profile.
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. 28, 2011.
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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