CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed its 'A' rating on the city of Chicago (the city), Midway International Airport's (Midway) approximately $609 million in outstanding first-lien airport revenue bonds. Fitch has also affirmed its 'A-' rating on approximately $795 million in outstanding second-lien airport revenue bonds.
The Rating Outlook for all bonds is Stable.
In addition, Fitch affirms its 'A-' rating assigned to second-lien revenue bonds series 2014A-C on Nov. 18, 2013. Approximately $660 million of this series was anticipated to be sold in early 2014, but the issuance was delayed. Given improved market conditions, the transaction is now going forward and the par has increased to approximately $840 million to take advantage of additional refunding savings.
The rating reflects Midway International Airport's resilient and growing traffic base within the strong Chicago air service area. While significant carrier concentration exists, it is partially mitigated by Southwest Airlines' long-term commitment to serving the airport. Further, while leverage is slightly elevated, this is the result of Midway's recent terminal and airfield improvements, so capital needs should be minimal going forward. Additionally, the airport's solid cost recovery framework should provide for continued stable financial performance.
KEY RATING DRIVERS
CARRIER CONCENTRATION OFFSETS SERVICE AREA STRENGTH: Midway is the second major airport serving the Chicago regional market and is well situated through a growing scale of low-cost, point-to-point domestic services benefiting from an economically strong local air trade service area in a favorable mid-continent location. The airport served 10.2 million enplanements in 2013, of which 63% were origination and destination (O&D) passengers. In recent years, traffic growth has well outpaced that of both the nation and nearby O'Hare International. Total traffic has climbed each year since 2008 and was 5.0% higher in 2013. However, Southwest Airlines/AirTran (Southwest; rated 'BBB', with a Stable Outlook by Fitch) account for over 90% of enplanements between them, and nearly 40% of total traffic is connecting traffic; as such, Midway remains susceptible to Southwest/AirTran scheduling decisions. Air service competition from O'Hare Airport also lends risks to traffic performance.
Revenue Risk- Volume: Midrange
SOLID COST RECOVERY FRAMEWORK: Midway operates under a residual use and lease agreement (AUL) that has provided for stable financial performance in recent years. Carriers recently signed a 15-year AUL renewal running through 2027, further demonstrating their long-term commitment to the airport. Airline costs are currently competitive at approximately $10.21 per enplanement for 2013. Cost per enplanement (CPE) has risen over the past few years, mainly due to rising debt service obligations related to funding airport improvements agreed to by carriers, but has moderated of late with enplanement gains.
Revenue Risk - Price: Stronger
MANAGEABLE, DEBT-FUNDED CAPITAL PLAN: Midway's capital improvement plan (CIP) for 2014-2020 reflects works totalling $275 million. Approximately 99% of the plan is expected to be funded through bonds, with 13% from prior bonds, 56% funded with the series 2014 new money bonds, and another 30% from future issuances. Key airport facilities are in good condition following recently built terminal and concession areas as well as parking and the completion of the consolidated rental car facility in 2013.
Infrastructure Development/Renewal: Stronger
DECREASED VARIABLE-RATE DEBT EXPOSURE: Following the 2013 and 2014 bond issuances, the airport's debt profile will assume a more conservative structure with only 17% variable-rate debt, of which approximately half is synthetically fixed with swaps. Midway's debt service payment profile will become more level through the restructuring derived from the series 2013 and 2014 refundings, including the elimination of put bonds. Debt Structure (First lien): Stronger; Debt Structure (Second lien): Midrange
ABOVE-AVERAGE LEVERAGE, AVERAGE LIQUIDITY: Midway currently has a higher debt burden and cost profile than peers at $138 debt per enplanement ($219 per O&D enplanement) and 11x aggregate net debt/cashflow available for debt service. Further, leverage is expected to rise slightly with the 2014 issuance, but should return to the 10x range by 2018. Liquidity in the form of unrestricted cash and operating reserves is modest at 300 days cash on hand and will likely remain so given the residual airline agreement. All-in coverage for 2012 (including the transfers from the coverage account) dropped marginally to 1.27x from 1.36x in 2010. Coverage for 2013 was not yet available.
RATING SENSITIVITIES
--Either a material downshift or volatility in the traffic profile given the Southwest concentration could lead to negative rating action;
--Significant increases to Midway's current plans for borrowings or airline costs as a result of underperforming trends in non-aviation revenues or higher operating expenses could pressure the current ratings.
SECURITY
The first- and second-lien bonds are secured by a pledge of the net revenues generated at the airport on a senior and subordinate basis, respectively. The series 2010C bonds are secured by airport revenues, but the city intends to pay debt service with consolidated rental car facility charges (CFCs).
CREDIT UPDATE
The series 2014 AB fixed-rate bonds are scheduled for negotiated sale the week of May 26, 2014 and the 2014C VRDBs are scheduled to price the week of June 9. The bonds will be a combination of approximately $125 million new money bonds for capital projects as well as approximately $715 million for refundings of bonds and commercial paper notes. Collectively, the 2013 and 2014 transactions will enhance the capital structure risk by the reduction of variable-rate debt to approximately 17% from the current 24%, the elimination of both put bonds that were subject to 2015 and consented 2016 mandatory tender dates, and a reduction to the maximum annual debt service spike. In addition, the $125 million of new money series 2014 bonds will be used to partially fund Midway's CIP, which is primarily focused on noise mitigation projects and routine maintenance, and final maturity of the second-lien debt will extend to 2044.
Midway's traffic continues its strong growth following the sharp decline in enplaned passengers in 2008. Traffic grew for the fifth consecutive year, up 5.0% in 2013, to a new peak enplanement level of 10.2 million. Further, additional growth may be supported into 2014 as Southwest continues to add capacity and service. Enplanements are essentially flat year-on-year over the first three months of 2014 given the especially harsh winter weather, yet management forecasts enplanements to end the year up 1.1%.
Whereas most of the airport's recent growth has been derived from connecting traffic related to Southwest's increased hubbing operations, O&D traffic is once again showing positive trends, growing by a strong 6.2% in 2012 on the back of nearly 4% growth in 2011. The pace of connecting traffic growth since 2006 has shifted the O&D passenger mix from around 75% of total enplanements at that time to 63% in 2013. Given the expectation of the continued high market share of Southwest/AirTran (currently 91%) and the 37% connecting passenger base at the airport, Midway's future traffic performance and financial flexibility will be heavily influenced by Southwest's scheduling decisions.
Demonstrating its long-term commitment to Midway, Southwest (and the other signatory carriers) executed a 15-year renewal of the residual AUL in 2012. This airline agreement approach has provided for stable airline costs and financial performance, and is expected to continue to do so through the forecast period.
Midway's expenses have remained stable over the past few years, growing at a modest 1.5% compound annual growth rate (CAGR) since 2008. However, as the costs of its capital program have come online, CPE rose to an estimated $10.21 in 2013. Midway's airline costs are likely to rise over the next two to three years but should remain largely under control even as rates and charges are increased to cover additional debt service obligations from new issuances. Fitch's base case projections forecast CPE to remain under $15 through its five-year forecast period. However, as the airport issues additional debt or should non-airline revenues fall short of expectations, Midway's financial profile could be pressured, resulting in higher CPE.
Taking into account the use of cash reserves and non-pledged revenue sources such as PFCs and CFCs, the airport's total debt service coverage ratio (DSCR) was 1.27x in 2012, on par with coverage the year prior. Fitch notes this is down slightly from the 1.36x in 2010, but still above the 1.10x covenant level and in line with expectations given the residual nature of the AUL. The city anticipates total coverage to remain above its 1.1x rate covenant through the projection period.
The city's 2014-2020 CIP is currently manageable at $275 million. Fitch notes this is down considerably from the $379 million for 2013-2019. Primary investments are the recently completed consolidated rental car facility, residential sound insulation, and airfield pavement rehabilitation. The airport plans to fund nearly all of its capital needs with bonds including approximately 56% with the series 2014 issuance and another 30% with future borrowings.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance', dated July 11, 2012;
--'Rating Criteria for Airports', dated Dec. 13, 2013.
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=725296
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=830981
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