NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A' rating on the state of Connecticut's (the state) approximately $135.6 million in outstanding 2011 series A&B general airport revenue refunding bonds. The Rating Outlook is Stable.
Rating Rationale
The 'A' rating reflects the airport's moderately sized yet relatively stable origination/destination (O&D) traffic base of 2.7 million enplanements, sound cost recovery framework with signatory carriers allowing for a competitive cost per enplanement (CPE), below-average leverage at 2.5x net debt-to-cash flow available for debt service (CFADS) coupled with favorable debt service coverage ratios (DSCR) and modest capital requirements.
Key Rating Drivers
Medium O&D Hub with High Competition but Diversified Carrier Base: The airport's traffic base is almost entirely O&D, although this is offset by the highly competitive New England airport environment and historical enplanement volatility at Bradley. The airport holds a well-diversified air carrier mix, led by Southwest Airlines (Fitch Issuer Default Rating [IDR] of 'BBB', Stable Outlook) at 27.3% of enplanements in fiscal 2013 (ends June 30). (Revenue Risk-Volume: Mid-range)
Favorable Cost Recovery Framework and Short-term Agreements: The regulated compensatory rate structure provides strong cost recovery terms from signatory carriers, allowing the airport to support its outstanding debt service requirements and provide adequate insulation against potential declines in enplanements and concession revenues. The previous agreement expired in June 2013, and airlines are currently operating under short-term agreements. The airport is currently negotiating a longer term agreement with carriers, targeting a minimum five-year term. Bradley's airline costs are comparatively low with a CPE at $9.38 in fiscal 2013. (Revenue Risk-Price: Mid-range.)
Manageable Capital Program: The airport's five-year $299 million capital plan includes a $208 million rental car facility project that is expected to be funded with rental car facility charge (CFC) revenues. Management has indicated that no additional parity borrowing is envisaged as part of the current five-year capital program. (Infrastructure Development Renewal: Stronger.)
All Variable-Rate Debt: The current capital structure exposes the airport to counterparty performance through swaps, as well as basis and refinance risks associated with series 2011 bonds. All of the airport's debt is structured to be synthetically fixed through two interest rate swaps, although if underlying bonds are called earlier than swap maturity, swap termination fees may be payable by the airport. Furthermore, the 2011 bonds do not benefit from a dedicated debt service reserve fund. (Debt Structure: Weaker.)
Low Levels of Financial Leverage: Bradley has an adequate liquidity position (more than 48 days of unrestricted cash on hand in fiscal 2013, and with over $61 million in total available unrestricted cash and reserves). The airport's debt burden is relatively low at $51 per enplaned passenger and net debt/CFADS of 2.5x. In fiscal 2013, DSCR improved to 2.35x, including the revenue enhancement reserves, as compared to 1.96x the prior year.
Rating Sensitivities
--Further traffic declines leading to failure to maintain improved coverage levels may place downward pressure on the rating.
--Strategic cost management is critical to avoid increases in CPE and deterioration of financial flexibility.
--Significant erosion in the airport's strong liquidity balances may erode flexibility and place negative pressure on the rating.
--Additional leverage that would increase the net debt/CFADS metrics and dilute DSCR below the 1.7x range may result in negative rating action.
Security
Bradley's revenue bonds are secured by the net revenues of the airport. The series 2011 bonds are additionally secured by the amounts deposited into the passenger facility charge (PFC) coverage account, limited to no greater than 1.25x of the PFC-eligible debt service.
Credit Update
Enplanements at Bradley have historically been volatile, largely due to the airport's proximity to competing facilities in Boston, Albany, and New York City, all located within approximately 200 miles of the airport, as well as the effects of the economic downturn. Enplanements declined in fiscal 2013, dropping 3.2% to 2.65 million. However, for the first nine months of fiscal 2014 through March, enplanements are up 6.4% (vs. a 4.8% decline for the same period in fiscal 2013), indicating some recovery in activity levels as new routes are added, including Los Angeles, Tampa, Ft. Myers, and Atlanta. Southwest remains the lead carrier at Bradley with 27.3% market share. Fitch continues to monitor enplanement trends at Bradley.
Bradley's operating revenues increased 0.4% in fiscal 2013 to $58.1 million and are forecast to increase 4.3% in fiscal 2014. Almost half of the airport's total operating revenues are supported by the airlines. Fiscal 2013 operating expenses increased by 8.1% to $43.6 million, comparing favorably to the budgeted increase of 11.6%. The increase was largely driven by added personnel and associated fringe benefits, as well as legal costs associated with the CAA transition. Actual results through March 2014 indicate favorable performance, with revenues reported 5.6% above budget, and expenses 4.4% below budget over the same time period.
The airport's net revenues provided for 2.19x DSCR in fiscal 2013 (2.35x with the revenue enhancement account). This is an improvement over fiscal 2012 enhanced and unenhanced DSCRs of 1.84x and 1.96x, respectively. Bradley's debt service profile dropped from $17.5 million in fiscal 2012 to $13.1 million after series 2001B bonds matured in October 2012, and will remain at the $12 million level going forward.
Based on Fitch's base case estimates, unenhanced coverage will remain in the 2.1x range through fiscal 2016, when it will likely reduce to the 1.7x range assuming stabilized traffic performance as well as the exclusion of CFC revenues from pledged revenues starting in fiscal 2016 when CFC revenues are expected to be reallocated to a CFC-supported project. Under a rating case with a 10% reduction in enplanements over the next two years, the minimum unenhanced coverage is estimated at 1.55x in fiscal 2016.
The airport's fiscal 2014-2018 capital improvement program (CIP) totals $299 million. The consolidated rental car facility project costs are estimated at $208 million and expected to be fully supported with CFC revenues, including possible CFC-backed bonds. The remaining portion of the plan is estimated to cost $91 million and includes the demolition of the existing Murphy Terminal, roadway demolition and re-alignment and utility relocation, and airfield improvements. Approximately 71% of the plan is expected to be funded with CFC revenues, 18% from PFC funds and 4% from grants. Bradley's share is $19 million or 6% of the total plan. The design and construction of a new Terminal B is considered demand driven and, if necessary, would be undertaken beyond the current five-year CIP window. Presently no additional parity borrowing is anticipated for the airport's CIP.
Additional information is available on www.fitchratings.com.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance', July 12, 2012.
--'Rating Criteria for Airports', December 13, 2013.
Applicable Criteria and Related Research:
Rating Criteria for Airports
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725296
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=835256
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