Fitch Rates Minneapolis-St Paul Airport's (MN) Sr. Revs at 'AA-'; Upgrades Sub Revs to 'A+'
The ratings reflect Minneapolis St-Paul International Airport's (MSP) stable and increasing enplanement base, serving a large metropolitan area of the Midwest, with stronger growth coming from the majority origination and destination (O&D) traffic. Although some carrier concentration risk exists with Delta maintaining a dominant enplanement market share (73%), this is partially mitigated by their heavy investment in MSP (second largest hub behind Atlanta), the hubbing covenant, and a hybrid use and lease agreement through 2020. The upgrade of the subordinate lien to 'A+' from 'A' is based on the financial strength of the airport, resulting in competitive metrics on total system basis when compared with other 'A+' Fitch-rated airports. With sustained positive operational and financial performance, the airport is forecast to maintain total leverage within the 4x - 6x range as well as total coverage levels of no less than 1.40x over the next seven years.
KEY RATING DRIVERS
Strong O&D Base with Dependence on Dominant Carrier (Revenue Risk-Volume: Midrange): The Minneapolis-St. Paul metropolitan statistical area (MSA) is a well-established commercial center for the upper Midwest with no competing airport facility in the vicinity. Considerable demand for air service is generated from a diversified local economy with an O&D base of 9.6 million enplaned passengers out of 17.7 million total enplanements. Yet Delta maintains a dominant market share representing 73% of enplanements and connecting traffic represents 46% of total traffic, leaving MSP susceptible to realignment of hubbing service. Enplanements have shown strong growth over the past six years, almost recovering to its pre-recession peak.
Hybrid Use and Lease Agreement; Competitive CPE (Revenue Risk-Price: Stronger): Carriers operate under a hybrid operating agreement with a compensatory methodology for Terminal 1 Lindbergh terminal costs and residual for the airfield. Airline charges for Terminal 2 (Humphrey Terminal) are set under an ordinance. The airport's CPE remained competitive at $6.44 in 2015, below Fitch's prior base case projection of $6.67 for that year. CPE is expected to remain below $7.50 should enplanement trends continue. This range is competitive relative to MSP's ratings and peers.
Modest Capital Needs; Future Borrowing Expected (Infrastructure Development & Renewal: Stronger): The airport's future $1.47 billion capital plan primarily focuses on the repair and upgrade of Terminal 1 and the construction of its new parking garage. Routine airfield and terminal work as well as noise mitigation will continue to be part of the new capital plan. The capital program will be funded from a combination of PFCs, proceeds from new bond issuances, grants, and available cash. Approximately 45% of the capital plan will be funded with new bond issuances over the next five years.
Conservative Debt Structure (Debt Structure (Senior/Subordinate): Stronger/Midrange): All of the existing senior and subordinated long-term airport debt is fixed-rate and fully amortizing, thus minimizing the risk for fluctuations in debt interest costs. The midrange score for the subordinate lien reflects its junior claim to revenues. A combination of senior and subordinate lien debt issuances totalling approximately $809 million over the next five years is expected to remain in similar form.
Stable Performance with Moderate Leverage: MSP has maintained strong and stable financial performance as traffic has recovered from the economic downturn. The airport maintains a diverse revenue stream with aeronautical revenues only accounting for 34% of operating revenues and additional revenues consisting of parking (28% of total revenues), concession, PFC, CFC and other non-airline revenues. MSP's healthy balance sheet helps to manage the financial metrics given the size of its operations including net debt/CFADS of 4.40 times (x); debt per O&D enplanement of $142; and days cash on hand (DCOH) of 853 days using just unrestricted cash and investment. Despite total debt outstanding increasing by approximately 35% by 2022, senior and total coverage metrics remain favourable with sustained traffic and financial performance.
Peer Analysis: MSP's peers include Atlanta (rated 'A+/A+' by Fitch) and Detroit (rated 'A-') airports given that they are hubbing airports with strong carrier concentration. MSP and Detroit also share the same major carrier in Delta, which accounts for more than 70% of enplanements at both airports. MSP's performance falls in between Detroit and Atlanta in terms of CPE, coverage, leverage and days cash on hand.
Negative: Reduction in the Delta hub resulting in 50% or greater loss of connecting traffic could pose downward pressure on the rating.
Negative: Additional new borrowings for non-revenue generating projects that would materially increase leverage would be viewed as a credit negative.
Positive: Given the airport's projected financial profile, together with the Delta concentration, no upward rating action is envisioned at this time.
SUMMARY OF CREDIT
MSP is expected to issue series 2016A and 2016B airport revenue refunding bonds of $334.4 million and $153.2 million, respectively, to generate debt service (DS) net present value (NPV) savings of approximately $60 million. DS savings are anticipated to be front-loaded in the first two years, followed by average NPV savings of approximately $3.87 million from 2019 until debt maturity. The bonds are expected to be issued in fixed-rate mode with final maturity in 2032.
Passenger demand continued its strong growth trajectory in 2015, increasing 4.3% to 17.7 million enplanements. This is close to its pre-recession peak of 18 million in 2005. More important, growth of the O&D base has outpaced that of connecting traffic over the last 10 years (1.6% versus -1.8%) such that O&D traffic now accounts for a majority (54%) of MSP's traffic compared to connecting traffic, which accounted for 45.6% in 2005. Through the first half of 2016, enplanements have continued their strong growth (up 3.5%), coming from both O&D and connecting traffic gains.
Operating revenues increased 3% in FY2015, largely due to increases in parking revenues, auto car rentals, food and beverage spending, and higher terminal building rental rates. Parking revenues (6.6% five-year CAGR) continue to drive growth in revenues as a result of longer lengths of stay combined with higher parking rates implemented in January 2015. With the return of Concourse G to MAC on Jan. 1, 2016, concession revenues are expected to increase over the next few years. Operating expenses increased by 6.4%, exceeding revenue growth. This is associated with the implementation of GASB 68, which resulted in a significant pension expense adjustment. Professional services and operating services increased slightly, but this was offset with a larger decline in utilities. Overall, expenses increased moderately by approximately 2% from last year, excluding the pension adjustment.
Delta Airlines ('BBB-'/Stable Outlook) is the airport's largest carrier, accounting for 73% of total enplanements in 2015. Under the terms of Delta's lease agreement, which runs through 2020, Delta covenants that it and its affiliate airlines will maintain an annual average of 360 daily flights at the airport (no less than 250 of such flights will be aircraft with more than 70 seats) and at least 30% of enplaned passengers of Delta and its regional affiliate airlines will be connecting passengers. Delta currently averages 374 daily flights in every month of 2016 to date. Southwest and Sun Country operate at MSP's Terminal 2 (Humphrey Terminal) and have been the fastest growing carriers, with a combined share of 11.1%% of enplanements at MSP. The airport operates under a level of stability with 28 airline lease agreements currently in place, of which 22 expire in 2018 and six, including Delta, expiring in 2020.
Sustained traffic growth over the past six years and manageable expenses have allowed the airport to maintain its strong financial metrics. In FY 2015, senior and total debt service coverage (including transfers) improved to 3.66x and 1.78x, respectively. When PFCs are treated as revenues instead of an offset to debt service, senior lien coverage declines to 3.41x with total coverage of 1.66x. Total leverage (net debt/cash flow available for debt service (CFADs)) is relatively low at 4.40x but this will gradually increase with planned future issuances. CPE remains competitive at $6.44 compared to its peers.
Fitch's base case scenario is derived from management's estimates for 2016 and the consultant's forecast from 2016 to 2022. Under this scenario, enplanements increase at a conservative 1.4% compound annual growth rate (CAGR) over the forecast period. In line with modest enplanements growth, total revenues and operating expenses grow at a 3.4% and 3.5% CAGR, respectively. This is reasonable given that revenues and expenses have historically grown in tandem. Including $809 million of new debt that will be issued over the next six years, the airport continues to demonstrate competitive total coverage and leverage metrics when compared with Fitch's 'A+' rated airports, supporting the upgrade of the subordinate lien. Fitch-calculated average Senior and Total DSCR (with transfers and PFCs treated as revenues) is 3.49x and 1.64x, respectively. Total leverage ranges from 3.82x to 4.77x over the forecast period while CPE is projected to remain below the $7.50 range.
The airport's financial metrics hold up adequately under Fitch's rating case scenario, which assumes a hypothetical 7% enplanement loss in 2017 due to an economic shock, with enplanements not fully recovering over the following five years. Some expense cost savings are incorporated in the year of enplanement loss, leading to a 3% CAGR of operating expenses over the forecast period of 2016 to 2022. Revenue losses from fewer enplanements results in a 2.5% CAGR for total revenues. Fitch-calculated average Senior and Total DSCR fall by approximately 10 basis points to 3.37x and 1.59x, respectively. Total leverage still remains competitive within a 4.41x to 5.62x range, while CPE increases gradually to $8.40. Under this scenario, the airport still demonstrates financial resilience at both lien levels despite its increasing debt service profile combined with moderate levels of traffic volatility, commensurate with the 'AA-' rating on the senior debt and 'A+' rating on the subordinate bonds.