Air Freight News

Fitch Rates New Orleans Airport (LA) Revs ‘A-’; Outlook Stable

Apr 27, 2017
Fitch Ratings has assigned an 'A-' rating to the New Orleans Aviation Board's (NOAB) approximately $466 million series 2017A, 2017B,2017C, 2017D-1, and 2017D-2 general airport revenue and revenue refunding bonds (GARBs). Fitch has also affirmed the 'A-' rating on $639 million outstanding parity GARBs and the 'A-' rating on $116 million of outstanding NOAB revenue bonds (passenger facility charge projects), series 2010A & 2010B and 2007A, 2007B-1, & 2007B-2. The Rating Outlook is Stable. KEY RATING DRIVERS Summary: The 'A-' rating reflects the airport's dominant position and limited competition within the diversifying and stable New Orleans MSA and state of Louisiana, with a nearly 100% O&D traffic base that has a proven resilience. The rating further reflects MSY's full airline cost recovery structure, and early, but steady progress on a new terminal. However, the airport is exposed to the service area's dependence on tourism and convention center business, terminal construction risk, and a combination of increased near-to-medium term leverage (around 11x to 12x) with tighter coverage levels. Revenue Risk - Volume: Stronger Solid Regional Airport: NOAB is not exposed to material air service competition. More than 95% of its nearly than 5.6 million enplanement base is origin and destination (O&D), and the airport benefits from relatively low carrier concentration with Southwest ('BBB+'/Stable Outlook) providing 37% of the market. Offsetting low competition is traffic's high dependence on the strength of the tourism industry, as well as exposure to force majeure risk. Revenue Risk - Price: Stronger [Revised from Midrange] Solid Cost Recovery Structure: NOAB's fully residual AUL now extends through December 2023 and allows the airport to recover all of its operational and debt costs. The AUL considers increased capital costs associated with the new terminal with a revised budget of $994 million. Additionally, NOAB targets to maintain cost per enplanement (CPE) at or below the $10 level but this will depend in part on traffic performance, costs, and non-airline revenue generation. Major airlines are supportive of the new terminal construction. In Fitch's view, the airport has economic capacity to absorb CPE increases from the current $7.16 in 2016. Infrastructure Development and Renewal: Midrange Substantial New Capital Program: The budget for the new, now 35-gate terminal, expected in 2019, has been revised upward several times to the current $994 million level from $650 million initially, following higher bids and an increase in project scope to fulfill the operational needs of air carriers given the strong recent enplanement trends. Construction will be 77% bond funded following the issuance of the series 2017 bonds. Positively, the carriers are supportive of the project and, besides the new terminal, the capital program is minimal with another $15 million for some taxiway and runway rehabilitation that will not require additional bonding. Debt Structure: Stronger Conservative Debt Structure: All outstanding GARB and PFC lien debt is fixed rate and fully amortizing. Notably, the PFC lien is now closed to new issuances and NOAB intends to refund all outstanding PFC-backed debt to the GARB lien. Covenants for rates, additional borrowings and reserves are sufficient and similar to many airport credits. The debt service profile will remain relatively flat, following the capitalized interest period, which coincides with the expected completion of the new terminal in 2019, but will increase from around $15 million in 2016 to around $75 million per year including the new issuances and once all of the PFC debt is shifted to the GARB lien. Softened Financial Metrics: The additional debt to fund the new terminal is forecast to increase leverage to the 11x to 12x range through the medium term from less than 2x in 2014. Further, GARB DSCR is projected to fall to 1.30x (1.09x without rolling coverage) from nearly 3x (2.65x) in 2016. While leverage will become elevated, NOAB has historically maintained a very strong balance sheet, which grew to 876 days cash on hand in 2016 though management intends to spend down some of this to pay off the GO Zone loan and to fund the incremental rolling coverage account deposit as debt service ramps up. PEER GROUP Lee County (FL) ('A'/Outlook Stable) and Palm Beach County (FL) ('A+'/Outlook Stable) are medium-sized hub, regional airports that serve as adequate comparisons in terms of exposure to leisure lines of business and airline cost. NOAB has a larger enplanement base with stronger traffic growth but significantly higher leverage due to terminal construction. RATING SENSITIVITIES Negative: Inability to complete the new terminal within budgeted costs or a late delivery from the estimated schedule would likely place downward pressure on the rating. Negative: Leverage that remains above 12x on a sustained basis may lead to a rating downgrade. Positive: Despite the airport's large capital plan, positive rating action may be warranted upon successful project completion should leverage evolve to 10x or less on a continued basis. TRANSACTION SUMMARY NOAB intends to issue approximately $360 million of series 2017A and 2017B GARBs as new money issuances to support the North Terminal Project. Included in this issuance will be $21.1 million to fund additional capitalized interest for the series 2015 bonds given the pushed back DBO of the terminal. The bonds will be fixed rate and fully amortizing and sculpted to achieve a level debt service profile. In addition, around $49 million of series 2017C refunding GARBs may be issued to advance refund the series 2009A-1 and A-2 bonds for interest rate savings. Approximately $57 million of series 2017D-1 and D-2 refunding GARBs may also be issued to forward refund series 2007A, B-1, and B-2 PFC lien bonds for interest rate savings and to shift the PFC debt to the working GARB lien. PERFORMANCE UPDATE Enplanements grew 4.4% in 2016 to 5.6 million (96% of which are O&D traffic), building upon the strong 9.3% growth in 2015. The five-year and 10-year CAGRs are 5.4% and 6%, respectively, with growth in all but one year since 2006. Traffic has more than recovered from the Katrina losses (115% of the 2004 pre-Katrina peak) and reached a new record in each of the past three years. Only one month of 2017 traffic is available, but January represents 7.3% growth year-over-year. Scheduled departing seats for Q2 and Q3 show increased seat capacity of 10.1% over 2016. Southwest (rated 'BBB+'/Stable Outlook) has the greatest market share at 37%, though all primary U.S. airlines serve the airport and the mix is diverse. Robust passenger growth is aided by a strengthening economic base/MSA with a recovering population (92% pre-Katrina level) and a diversifying economy as well as a strong tourism rebound. Growth is also a function of new carriers entering the market, the addition of non-stop destinations (historical high, including five non-stop international destinations), expansion of domestic service (particularly within the low-cost carrier space; average airfares are the cheapest in-state). MSY is the dominant airport in LA, serving 82% of its passenger base. Total operating revenues increased 6.6% to $78.5 million in FY16. Airline revenues increased by 3% (tied to residual costs) while passenger-driven non-airline revenues (terminal concessions/rentals/parking) increased by 11%. Operating expenses were reduced 2.1% in 2016, despite the 4.4% enplanement growth. The five-year CAGR of -0.3% demonstrates strong cost containment despite a high 5.4% CAGR in enplanements over the same period. Now servicing its largest enplanement base to-date, expenses are forecasted to grow by 35% over FY16 - FY19, reflecting conservative budgeting as well as potential increases when the North Terminal comes into operation. GARB DSCR grew to 2.90x/2.65x w/without rolling coverage in 2016, up from 2.59x/2.34x in 2015. Part of the increase is attributable to $6 million in the rates and charges for the general purpose fund. GARB coverage is expected to fall to the 1.30x/1.09x range by 2019 following the end of the capitalized interest period and opening of the North Terminal as well as the reduction to $3 million/year in the rates and charges for the general fund. PFC coverage was 2.25x in FY16 and should remain at or above this level for the next few years until the PFC debt is completely moved to the GARB lien. CPE is estimated at $7.16 in FY16, but is forecast to climb because of additional debt service from the North Terminal. Leverage has also increased from the historical lows with the new borrowings, but should fall and stabilize following the capitalized interest period and once the debt service is included in the carrier's rates and charges. The capital program remains focused on North Terminal construction, which is currently on budget and on time to reach commercial operation in February 2019 (revised from the original October 2018 given the additional scope). In January 2016, the total project budget increased to $807 million from $650 million previously due to an expansion of scope to 760,000 sq. ft. from 648,000 sq. ft. to meet the operational needs of air carriers. In October 2016, the MII rose to $917 million for Concourse A 5-gate addition and further scope changes. In April 2017, the MII grew to the current $994 million for an increase in Concourse A size, additional ticket counters, loading bridges and other operational enhancements. The project is 77% bond funded. Beyond the North Terminal Project, remaining CIP in 2017 - 2021 is a modest $15 million for taxiway and runway rehabilitation. FITCH CASES Fitch's base case scenario assumes sponsor traffic growth assumptions with a CAGR of 3% from 2016 - 2022. Costs are budgeted to grow by 26% in 2017 followed by more tempered growth of 2.2% to 4.4% per year for a six-year CAGR of 6.7%. Fitch assumes the $360 million of new series 2017 debt as well as another $34 million in 2018 to move off balance sheet, parking debt to the GARB lien. Capitalized interest is assumed until 2019 for the terminal debt and no refunding debt service savings are included. Under this scenario, CPE peaks at $8.86 in 2021. GARB debt service falls to the 1.30x level following completion of the new terminal in 2019 and to just 1.09x without the rolling coverage account, levels not uncommon for fully residual agreements. Net debt-to-CFADS begins steadily deleveraging following the completion of the terminal and evolves to 11x by 2022. Fitch's rating case scenario assumes a 6% cumulative traffic growth stress in 2018 and 2019, modelling the underlying economic volatility of the tourism industry, with 2% per year recovery thereafter. Following the traffic stress years, costs are assumed to grow by a rate 1% greater than the base case annually. Under this scenario, CPE peaks at $10.59 as additional costs are passed through to the airlines. Fitch views CPE levels, even if modestly above the $10 target, to be reasonable in light of the strong traffic profile and lack of competition in the region. Coverage and leverage are commensurate with base case levels given the nature of the residual agreement with the airlines. Coverage on the standalone PFC bonds is forecasted to remain over 2.0x even under the Fitch rating case scenario. Pursuant to the second supplemental bond resolution, additional PFC bonds for new projects are no longer allowed and this should protect coverage levels from further dilution. Long-term uses of residual PFCs are anticipated to offset a sizable portion of the incremental GARB debt service. SECURITY The GARBs are secured by a first lien pledge of general airport net revenues. The PFC bonds are solely secured by a first lien on PFC revenues collected at the airport with no recourse to other revenues and funds of the airport. Only excess PFC revenues following payment to the outstanding PFC bonds can be available and pledged to the GARBs.

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