NEW YORK--(BUSINESS WIRE)--Fitch Ratings downgrades the Rhode Island Economic Development Corporation's approximately $243 million in outstanding Rhode Island Airport Corporation (RIAC) senior lien general airport revenue bonds to 'BBB+' from 'A-'. The Rating Outlook is revised to Stable.
The downgrade reflects the airport's plans for additional senior lien parity debt borrowings, while the airport continues to struggle to reverse a prolonged period of traffic declines that continues into the current fiscal year. Higher planned debt will lead to some elevation in overall leverage levels, and could have a modest impact to airline costs and coverage ratios at the current traffic base. Boston's Logan Airport's operational dominance and expanding service levels in the greater New England air trade service area exacerbates the challenge in the near term for RIAC to improve its market position. The Stable Outlook reflects Fitch's expectations that the airport is nearing a base level of traffic that is sustainable and incorporates the current borrowing plan.
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 1.91 million enplanements, but it's also influenced by a more competitive New England airport environment that has contributed to seven consecutive years of enplanements declines. Above average concentration risk exists with Southwest Airlines representing 50% of T.F. Green's enplanements in fiscal 2012 (ended June 30). Revenue Risk-Volume: Weaker.
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 2012); price flexibility is somewhat constrained by nearby competition. Revenue Risk-Price: Mid-range.
CONSERVATIVE DEBT STRUCTURE: All of the airport's outstanding debt is fixed-rate with a level to declining amortization profile. Debt Structure: Stronger.
MODERATE CURRENT LEVERAGE AND HEALTHY LIQUIDITY: The airport's fiscal 2012 leverage was moderate at approximately 6.2x times (x) net debt/cashflow available for debt service (CFADS), supported by $51 million in available reserves (equivalent to strong 660 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, remained stable at 1.69x in fiscal 2012. The airport's debt load was elevated at $132 per enplaned passenger in fiscal 2012 and may increase to the 140-150 range when incorporating $71 million in planned new parity debt issuances in support of the airport's airfield projects. Leverage is estimated to increase to 7x range when factoring in the additional debt. Debt Service Counterparty Risk: Midrange.
NEAR-TERM INFRASTRUCTURE NEEDS: The airport's $237 million capital plan (CIP) is expected to be funded with a combination of grants, new debt and passenger facility charge (PFC) revenues. The airport has secured a loan through the Clean Water State Revolving Fund program to fund $30.2 million of airfield related projects. Additional debt is contemplated for 2015 to provide partial funding sources (about $30.1 million) for a runway extension project Infrastructure Development Renewal: Midrange
RATING SENSITIVITIES
--A continuation of enplanement losses could further stress the airport's financial flexibility, negatively impacting credit quality;
--Erosion of the airport's currently robust liquidity position;
--Increases to RIAC's operating budget, including those costs related to RIAC's outlying airports, which impact net revenues and coverage ratios;
--Debt issuances that are above current assumptions in the multi-year capital program.
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 airport's traffic base has decreased to 1.9 million enplanements in fiscal 2012 after reaching its peak of 2.9 million enplanements in fiscal 2005, down an aggregate 33%. Increased activity from low-fare carriers at Boston Logan Airport contributed to year-over-year traffic losses of 8.8%, 10.5%, 3.6% and 1.9% in fiscal years 2009, 2010, 2011 and 2012, respectively. Enplanements were down an additional 4.8% through the first 10 months of fiscal 2013, despite JetBlue's entry in November 2012 offering nonstop service to Fort Lauderdale and Orlando. New service and recent positive trends in seat capacity have resulted in year-over-year enplanement growth for March and April, up 3.6% and 7.8% respectively. Management anticipates continued enplanement growth into next fiscal year from the new service and expected positive trends in seat capacity. In Fitch's view, material increases in enplanement base will be an ongoing challenge over the medium term given the capacity constraints by many U.S. carriers as well as the availability of a much broader low cost and network carrier service from Boston Logan.
RIAC utilizes a hybrid ratemaking methodology that is commercial 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. In fiscal 2012, the airport recorded an $11 CPE; CPE is expected to remain essentially unchanged in FY2013 from the prior year. However, CPE could continue to ascend under a flat-to-low growth enplanement scenario and with new debt issuances.
Fiscal 2012 operating revenues were largely unchanged from the prior year and in line with the budget at $50.3 million. Fiscal 2013 year-to-date through March (YTD) operating revenues have been tracking 1.7% below the $37.3 million budgeted increase for this period. Revenue declines from reduced enplanements have been somewhat offset a parking rate increase in garage A implemented in July 2012. Operating expenses decreased by 2.9% in fiscal 2012 as a result of airport's cost control measures, and fiscal 2013 YTD results have shown lower than budgeted expense increases. When compared to the same period in fiscal 2012, expenses are essentially unchanged. Non-airline revenues represent approximately 57% of total operating revenues. Parking revenues represent 40% of total non-airline revenues. To enhance revenue sources, management plans a $1 increase to all rates (all facilities other than the short-term lot D) in fiscal 2014. 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 1.69x in fiscal 2012. 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 2012. 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 and excluding the general fund transfers and the coverage account, debt service coverage was 1.35x in fiscal 2012. 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 $237 million capital plan include a $40 million for federally mandated runway safety area project, to be funded at 75%/25% with grants/PFC pay-go; a $35 million state mandated deicer management system, expected to be financed with approximately $30 million in RI Clean Water Finance Agency loan proceeds; and an $82 million runway extension project, to be funded with $50 million in AIP grants and $30 million future bond proceeds. The extension of the runway is considered by management to be a priority project as it is expected to enhance capacity, efficiency and competitive advantage of T.F. Green.
The additional debt plans to support the capital program would likely elevate the airport's already above average debt load and could create added pressure to the airport's leverage and cost profile.
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=793356
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