NEW YORK--(BUSINESS WIRE)--Fitch Ratings downgrades the City of Manchester, New Hampshire's $174.2 million airport revenue bonds outstanding to 'BBB+' from 'A-'. The Rating Outlook remains Negative. The airport also has $21.7 million of bank loans outstanding on parity with the senior bonds not rated by Fitch.
The downgrade reflects the airport's increased risk profile as a result of steady declines in passenger traffic due to competition from Boston Logan International Airport (Logan). In Fitch's view, the airport's high debt burden assumed from prior capital programs coupled with elevated carrier concentration (Southwest with a 60% market share) as well as a revenue profile that relies heavily on traffic supported sources such as parking receipts and passenger facility charges, are inconsistent with the 'A' category. The Outlook remains Negative and reflects concerns that Manchester is exposed to further traffic reductions in conjunction with expanding service levels from carriers operating at Logan. Should passenger traffic at Manchester contract, airport operating revenues may be pressured and could result in weaker financial margins and a less competitive cost profile.
KEY RATING DRIVERS
AIRPORT SERVING COMPETITIVE NEW ENGLAND REGION: Manchester Boston Regional Airport is a secondary commercial facility located in a competitive New England air service region. The airport's traffic profile has shown four years of consecutive declines due to increased presence of low cost carriers at Logan Airport. Enplanements in fiscal 2012 were 1.3 million following a decrease of 6.6% from the prior period. Significant declines are continuing into fiscal 2013, with year to date losses approximately 9.0%. The airport's largest carrier is Southwest Airlines, which represents 60% of the airport's enplanements. Southwest also serves at Logan Airport since 2009, which is pressuring service levels and passenger volumes at Manchester ever since.
Revenue Risk - Volume: Weaker
ADEQUATE CONTRACTUAL FRAMEWORK WITH MODERATE COSTS: Manchester utilizes a hybrid ratemaking methodology that is compensatory for the terminal and residual on the airfield. Airline costs per enplaned passenger (CPE) was $7.67 in FY 2012, but price flexibility is somewhat constrained by nearby competition. The airline agreement is currently scheduled to expire in 2015, and future approaches to rate setting will be relevant to cost recovery flexibility.
Revenue Risk - Price: Midrange
CONSERVATIVE DEBT STRUCTURE: All debt outstanding is now fixed rate debt after the refunding of the series 2008 variable rate bonds with a fixed-rate bank loan with Century Bank. The airport plans to pay down $4.5 million of principal from this bank loan in July 2013, generating $500,000 in average savings annually for the next nine years. The airport's annual debt service payments are high for the traffic base, but the payment schedule is relatively flat with annual debt service payments around $17.6 million.
Debt Structure: Stronger
HIGH DEBT BURDEN WITH ADEQUATE FINANCIAL FLEXIBILITY: The airport has a high debt burden, with debt per enplanement of $155 in fiscal 2012. Leverage is somewhat high for a small hub airport at 6.8 times (x) net debt to cash flow available for debt service (CFADS). Debt service coverage ratio (DSCR) per indenture is 1.62x. However, Fitch's approach to coverage calculation, which excludes rolling coverage and applies passenger facility charges (PFC) as revenues rather than offsets to debt service, is narrower at 1.25x. The airport maintains a strong liquidity position with $38.3 million of unrestricted cash, equivalent to 567 days cash on hand.
Debt Service and Counterparty risk: Midrange
LIMITED NEAR-TERM INFRASTRUCTURE NEEDS: The airport's five-year capital improvement program totals $51.4 million and is primarily grant funded. No additional debt issuance is anticipated in the near term. It is Fitch's view that there are limited rehabilitation needs for the airfield and landside infrastructure as the current passenger terminal was built in 1993 and was expanded in 1999 and 2004 and the runways were extended and rehabilitated in 2002 and 2005.
Infrastructure Development & Renewal: Stronger
RATING SENSITIVITIES
--Significant decrease in traffic volume: A traffic base stabilizing below one million enplanements could result in a weaker base of revenues leading to rating change;
--Inability to pass allowable costs to airlines in order to retain a competitive cost per enplanement level;
--A steady erosion in the airport's liquidity balances.
SECURITY
The airport revenue bonds are special obligations of the city payable from net revenues and pledged funds generated from operations at Manchester Boston Regional Airport.
CREDIT UPDATE
The airport's traffic base has decreased to 1.3 million enplanements in fiscal 2012 after reaching its peak of 2.1 million enplanements in 2005. The airport experienced a significant jump in enplanements in fiscal 1999 when Southwest began operations in Manchester, providing a low cost alternative to entering the New England region. However, the increased presence of JetBlue at Logan has driven fares lower at Logan and attracted some traffic from Manchester. Further service expansions of low cost carriers at Logan may cause Manchester to lose market share in the air service area. Enplanements were down 9.0% for the first eight months of fiscal 2013. Continued declines of this magnitude could bring the 2013 enplanement base below 1.2 million, a level below what was seen in fiscal 1999 when Southwest began service at the airport.
Operating revenues have decreased at a five-year CAGR of 3.1% outpacing expense reductions which decreased at a five-year CAGR of 2.7%. Debt service coverage calculation per indenture decreased to 1.62x in fiscal 2012 from 1.98x in 2011. Fitch's coverage calculation which excludes the rolling coverage account and treats PFCs as revenues rather than an offset to debt service shows that coverage is thin at 1.25x in 2012, compared to 1.41x in 2011. Cost per enplanement remained stable at $7.67. However, the airport's revenue profile has an elevated dependence on volume sensitive non-airline revenues including passenger facility charges, customer facility charges (CFC), and parking revenues. Absent significant cost reductions, continued declines in traffic levels could lead to a higher cost profile for airlines.
Fitch developed forecast scenarios on the premise that traffic levels may experience different levels of stresses over the next several years. The base case assumes further traffic declines in 2013 and 2014 to a one million enplanement level. Under such scenario, the airport's CPE of $7.67, which is currently lower than other secondary airports in the region, may rise to $8 in 2013 and $12 by 2014 in order to maintain debt service coverage levels similar to recent performance. Fitch's stress case assumes more extensive traffic declines to level below 1 million enplanements resulting in CPE rising to levels that could possibly lead to service reductions by air carriers. Fitch believes that further negative rating action could be warranted should the airport perform at levels similar to the stress case scenario.
The City of Manchester owns and operates Manchester-Boston Regional Airport through its Department of Aviation. The Airport is located on a 1,200-acre site in the City and Town of Londonderry, six miles south of downtown Manchester, and approximately 50 miles northwest of Boston. It opened in 1927 and is the only airport in New Hampshire providing commercial jet service.
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' (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
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