CHICAGO--(BUSINESS WIRE)--Fitch Ratings affirms the underlying 'BBB' rating on approximately $33.4 million in outstanding Northwest Arkansas Regional Airport Authority, Arkansas (the authority) fixed-rate airport revenue refunding bonds, series 2003. The authority has approximately $30 million outstanding in parity long-term variable-rate bonds, series 2012 that are not rated by Fitch. The Rating Outlook is Stable.
KEY RATING DRIVERS:
Small Hub with Concentrated Traffic Base: Northwest Arkansas Regional Airport's (XNA, or the airport) small origination and destination (O&D) traveller base has experienced moderate levels of enplanement fluctuations through the economic downturn. The airport reported 565,045 enplanements in 2012, which represented a 0.4% increase from the prior year. American Airlines' concentration at the airport is above average (Fitch Issuer Default Rating 'D'), with 42% market share in 2012. The air trade area's established business profile with large corporate presence (i.e. Walmart and Tyson Foods) is a credit strength, but there is potential for on-going economic sensitivity of these industries that may result in some volatility in enplanement activity.
Revenue Risk: Resilience - Weaker
Favorable Rate Setting Framework: The airline use and lease agreement provides for strong cost recovery terms. The airport's cost structure is comparatively low, with cost per enplaned passenger (CPE) at $5.92 in 2012. Non-airline revenue sources (at approximately 88% of operating revenues in 2012) are expected to continue to grow, with anticipated concession revenue growth associated with the addition of the new concourse.
Revenue Risk: Price - Midrange
Moderate Amounts of Hedged Variable Rate Debt: All of the airport's debt amortizes in a relatively short period through 2027. Still, exposure to counterparty performance adds to potential basis risk on debt interest costs on the airport's capital structure. Approximately 47% of total debt is privately placed in variable-rate mode with Regions Bank (IDR of 'BBB-/F3' that is hedged with Regions through a synthetic fixed swap agreement. Fitch will continue to monitor these exposures for any adverse experience.
Debt Structure - Midrange
Manageable Levels of Financial Leverage: Historically stable financial performance has resulted in healthy debt service coverage levels of 1.42x or greater over the last five years through 2012, with fiscal 2012 ending with 1.62x coverage; XNA's outstanding debt level is higher than most small hub airports at $112 per enplaned passenger. Relatively strong liquidity and the availability of restricted funds, with approximately $12 million specifically set aside to cover debt service shortfalls after payment of expenses, results in a favorable net debt/cash flows available for debt service (CFADS) of 4.93 times [x]. Debt Service - Midrange
Modest Capital Program: The current capital improvement plan focuses on a $30 million runway rehabilitation project that is expected to be largely grant funded. Currently, there are no anticipated future borrowings expected over the next several years; however, limited car rental facility charge (CFC) backed bond financing may be considered for a construction of a parking deck.
Infrastructure Renewal and Development - Stronger
RATING SENSITIVITIES:
--Significant shifts in the enplanement bases and/or downsizing of service or capacity presently operating at the airport, particularly the airport's largest carrier (American Eagle/American Airlines);
--Changes to the airport's financial metrics or cost structure for the airlines;
--Additional leverage that would meaningfully dilute coverage levels.
SECURITY:
Bondholder security for both the series 2003 & 2012 bonds is provided from airport revenues, including passenger facility charges (PFCs).
CREDIT SUMMARY:
The airport's enplanements decreased at a compound annual growth rate (CAGR) of 1.2% between fiscal 2007 and fiscal 2012; however, slight growth of 0.4% to 565,045 enplanements was seen in fiscal 2012. The first three months of fiscal 2013 through March continued to show improvements, with a 2.4% increase in enplanements.
AMR Corp. and its principal subsidiary American Airlines, Inc. were downgraded by Fitch to 'D' from 'CCC' after the company filed for Chapter 11 bankruptcy protection on Nov. 29, 2011. While American has not changed service levels at the airport, such an event without a relatively quick backfill in service from other carriers could have a material impact on the airport's credit rating.
For an airport of this size with a modest level of aggregate debt, there are some risks to the capital structure. In 2012, the airport issued $30.1 million of series 2012 bonds, which refunded the series 2010 bonds. The series 2012 bonds are a variable rate with a final maturity of 2027 and are privately placed with Regions Bank. The airport also entered into a swap agreement with Regions Bank that effectively fixed the interest rate of 4.669% for the life of the bonds, with the swap's notational value being equal to the outstanding balance on the bonds. Any adverse credit or market events associated with this synthetic fixed rate security could impact the airport's debt interest costs.
Operating revenues have grown at a CAGR of 4% from 2007 to 2012, while costs have increased at a rate of 3.4% over the same period. As per the authority's 2012 results, operating revenues increased by approximately 6.9% to $11.8 million while operating costs increased 10.4% to $5.2 million due to increased maintenance expenses associated with the new concourse. The authority had historically been able to decrease operating expenses by maintaining cost saving practices, and although expenses will rise with additional concourses, the airport plans to maintain these practices in the future. Financial performance for 2012 was stable, with approximately $10.6 million in unrestricted reserves (745 days of unrestricted cash on hand) and a total liquidity position of approximately $26.4 million, of which $6.7 million is restricted for debt service and $5.8 million is set aside for operational and maintenance expenses and debt service shortfalls.
Debt service coverage was estimated at 1.37x in 2012 (1.62x when including the rolling coverage account), an increase from 1.21x in 2011. Both series 2003 and series 2012 refunding bonds are scheduled to mature in 2027, with total estimated annual debt service costs ranging between $6 million to $6.2 million through maturity. PFCs have traditionally contributed a minimum of $2 million to the revenue base. Fitch will continue to monitor coverage levels and should coverage levels drop below its historical band, downward rating action may be warranted.
The authority is currently in the process of repairing its runway that will be funded with approximately $30 million in entitlement funds. A possible parking expansion project potentially funded with bond financing supported by customer facility charges is not included as part of the current capital plan.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and 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=794742
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