NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded the rating on approximately $100.4 million of outstanding Kenton County Airport Board's (KY) (Cincinnati/Northern Kentucky International Airport (CVG)) airport revenue bonds to 'A-' from 'BBB+.' The Rating Outlook is Stable.
The rating upgrade comes despite a continuing contraction in the airport's hubbing traffic, and reflects an improving risk profile based on the anticipated transition towards a materially lower fixed cost base that begins in 2014 and extends towards final maturity of the bonds. This transition is highlighted by a more than one-third decrease in total airport revenue-backed debt and a reduction in annual debt service requirements of over 75%.
The upgrade also reflects the airport's ability to maintain competitive cost per enplanement (CPE) levels over the last few years significantly below previous Fitch expectations, despite continued declines in the traffic base. In Fitch's view, the airport will be able to maintain both very low leverage metrics and competitive airline rates even under conditions of losing all of its remaining connecting traffic as a result of Delta's de-hubbing actions. Fitch also recognizes in this rating action the ability for the airport to cover remaining debt service payments from annual passenger facility charge (PFC) collections even in downside scenarios, the lack of any new borrowings for the foreseeable future and robust fund balances available on the balance sheet.
KEY RATING DRIVERS
--O&D Faces Competition, Connecting Vulnerable to Cutbacks: Origination & destination (O&D) enplanements have remained relatively steady between 2.1 and 2.3 million over the last five years, despite competition from several other airports in the region. Nevertheless, there exists significant carrier concentration on Delta Air Lines, Inc. (Delta, rated 'B+' with a Positive Outlook by Fitch), which still accounts for 69% of O&D enplanements despite the significant dehubbing effects at the airport. Connecting traffic is now 89.2% below its peak level of 8.5 million enplanements, and remains at risk amidst Delta's continuing hub realignment process.
Revenue - Volume: Weaker
--Sound Cost-Recovery Structure: The airport operates under a strong, fully residual airline use and lease agreement (AUL). However, flexibility is somewhat limited by high airfares, which have influenced CVG decisions to use fund balances to maintain a more competitive cost structure. With only PFC-backed debt remaining after 2014, only the net requirement of costs, including operating and maintenance expenses, will be passed onto the carriers as PFC collections are estimated to be nearly $3 million above annual debt service obligations. Therefore CPE, which migrated above $10 in 2012 when fund balances were not transferred back to carriers, should fall and then stabilize going forward.
Revenue - Price: Midrange
--Favorable Debt Profile: Outstanding debt fully amortizes at a fixed rate of interest. A large portion of the airport's debt will mature in 2015, substantially reducing the airport's annual debt obligations to $5 million from $23 million.
Debt Structure: Stronger
--Solid Financial Metrics: The airport has achieved debt service coverage of 1.25x through the residual agreement and maintains very low leverage with moderate operating reserves. Fitch-calculated current net debt to cash flow available for debt service (CFADS) equals 0.7x and days cash on hand amount to 251. The airport also currently has more PFC-restricted fund balances than outstanding PFC-backed debt.
Debt Service & Counterparty: Stronger
--Updated and Modern Infrastructure: The capital program running through 2014 has been managed without the use of additional debt and has been funded from a mix of PFCs, AIP grants, and other airport funds. The airport now possesses a modern terminal that houses all passenger carrier operations with ample capacity for expansion in the long term. Through 2025, any debt-funded capital investment would be demand driven and mainly focused on the expansion of the airport's parking facilities.
Infrastructure & Renewal: Stronger
RATING SENSITIVITIES
--Volatility in O&D Demand: A substantial reduction in the airport's O&D traffic base could see the rating fall back out of the 'A' category.
--Poor Cost Management/Stagnant Non-airline Revenue Generation: A deterioration in the airport's cost structure or sluggish non-airline revenue growth could push the airport's CPE upwards, making it a less attractive base for airlines and leading to a fall in traffic.
--Additional Debt Absent Organic Traffic Growth: Issuance of new debt without a corresponding increase in O&D traffic would leave the airport higher leveraged, putting the rating under negative pressure.
SECURITY
Pledge of all funds derived from direct or indirect use of the airport, including all rentals, landing fees, minimum airport use charges, AUL income, concession revenues, motor vehicle parking fees and charges and interest earnings on funds available for operations and on sinking fund and bond reserve funds.
CREDIT UPDATE
Since 2008, Delta has undertaken substantial capacity reductions in its hubbing operations at CVG, such that enplanements have fallen at a 17.2% CAGR since peaking in 2005. Despite these reductions, Delta still accounted for 78.3% (albeit only 27.4% of revenue) of CVG's 2012 traffic, meaning the airport remains exposed to carrier concentration. Airport management projects enplanements to decrease in 2013 by another 7.2% due to an additional 23.5% cut to Delta's connecting services.
Nevertheless, Cincinnati maintains a sizeable O&D base of 2.1 million enplanements which the airport will now primarily serve. Current airport infrastructure is modern and adequate to serve demand driven from this O&D base for the foreseeable future with limited debt needs. Still, Fitch will continue to monitor the stability of CVG's O&D traffic base as fares remain among the highest in the region, and significant competition exists from airports in Dayton, Louisville, Columbus and Indianapolis.
Positive developments for the airport include Frontier Airlines' introduction of low-cost carrier service to Denver at 6 flights per week and the expanding presence of DHL's cargo hub. Management reports 90% load factors on the Frontier flights, which have operated since May. DHL employs 2,200 at CVG and reports that roughly 92% of all US freight volumes pass through CVG. Recently DHL invested $47 million to construct a new sorting facility and to renovate their existing facilities. Cargo landed weight is projected to grow 1% in 2013 and should nearly equalize passenger carrier landed weight by year end. Currently, cargo landed weight is outperforming the budget by 5%.
Despite Delta's reductions in connecting traffic over the last eight years, debt service coverage has remained stable in the 1.25x range pursuant to the CVG's fully residual AUL. The airport has also managed to maintain CPE at a level of around $10 - below previous Fitch expectations - despite declining enplanements by holding non-airline revenues steady, controlling operating costs and transferring portions of its liquidity balances to the carriers. In February 2014, CVG intends to use the debt service reserve balances for the 2002A, 2003C, and 2007B bonds, sized to a full year's principal and interest payments, to retire the debt, thereby avoiding charging the airlines for the final year's debt costs. The above-mentioned series of bonds are scheduled to mature by March 2015.
The only series to remain outstanding thereafter will be the 2003B bonds, payable from PFC collections which Fitch estimates should allow for coverage to be maintained in the 1.5x-1.6x range going forward without charging any remaining debt costs to carriers. As a result, leverage net of unrestricted cash and operating and maintenance and debt reserves should migrate down well below 1.0x by 2017. Even in Fitch's rating case scenario, which assumes a full loss of connecting traffic and a drop in O&D enplanements below 2 million, CPE levels stay within the current range without utilizing fund balances, consistent with other medium and large hub airports rated 'A-.'
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria & Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (July 11, 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=795215
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