Fitch Rates Indianapolis Int'l Airport, IN Local Public Improvement Bond Bank's 2015I Revs 'A'
KEY RATING DRIVERS
The rating assignment and affirmation reflect the air trade service area which is well-anchored and supported by O&D traffic. The 'A' rating considers the airport's relatively high leverage alongside adequate liquidity following the completion of the airport's new terminal, and strong cost recovery framework under a full residual use and lease agreement (AUL), which Fitch expects will be renewed under similar terms before expiration in fiscal year-end (FYE) 2015.
REVENUE RISK - VOLUME: MIDRANGE
DIVERSE CARRIER BASE SERVING A STABLE LOCAL MARKET: IND serves a stable and diverse region with an enplanement base of 3.7 million of primarily (94%) origination & destination enplaned passengers. Further, the diverse carrier mix, with no single carrier representing more than 30% of enplanements, protects the airport from concentrated airline counterparty risk. In addition, Federal Express Corp. (FedEx) operates its second-largest global sorting facility at the airport and has demonstrated its commitment to Indianapolis with continued significant capital improvements.
REVENUE RISK - PRICE: STRONGER
STRONG RECOVERY FRAMEWORK: IAA's strong AUL is fully residual and Fitch expects it will be renewed under similar terms before expiring FYE2015. The AUL enables the airport to pass all costs to air carriers if non-airline revenues are insufficient. Additionally, the diverse revenue stream, with passenger airline carriers representing only 25% of operating revenues, allows the airport to maintain a competitive cost per enplanement (CPE) in the \\$9-\\$10 range. A large amount of air cargo activity provides some diversity to the airport's revenue base (7%) and helps maintain a stable cost environment by distributing airfield expenses across a broader customer base.
INFRASTRUCTURE RENEWAL & DEVELOPMENT: STRONGER
MODEST CAPITAL NEEDS WITH NO ADDITIONAL DEBT: IAA recently completed its seven-year, \\$1 billion new terminal and airport improvements program. Going forward, the authority's capital improvement needs are modest and are expected to be funded without issuing additional debt. The authority's 5-year (FY2016-FY2020) capital improvement program totals \\$253.8 million, approximately 30% grant-funded, 55% authority-funded, and the remainder funded from other external sources.
DEBT STRUCTURE: MIDRANGE
VARIABLE-RATE DEBT OFFSET WITH SWAPS: All debt ranks senior and is fully amortizing with a final maturity of 2037, but IAA owes more variable-rate debt when compared with peers at 34% of total outstanding principal which is mitigated by swaps with adequately rated bank counterparties. IAA also has a fully funded cash debt service reserve fund at \\$62.3 million as of FYE2014 and satisfactory 1.25x rate covenants for all debt.
HIGH LEVERAGE PARTIALLY MITIGATED BY SIZEABLE RESERVES: Fitch expects near-term leverage, calculated as net debt-to-cash flow available for debt service (CFADS), to remain high averaging around 8x before dropping below 8x reflecting savings from refundings. Additionally, significant balance sheet liquidity and reserves serve to mitigate some of this risk and provides additional financial flexibility. The authority had \\$51 million of unrestricted cash and investments and \\$11 million in the operations and maintenance (O&M) reserve, equivalent to 364 days cash on hand at FYE2014. IAA-calculated debt service coverage ratio (DSCR) was adequate at 1.62x, while Fitch-calculated coverage, which considers PFC and CFC as revenues rather than an offset to debt service and excludes the rolling coverage account, was lower at 1.23x.
PEER ANALYSIS: Fitch-rated airports with similar levels of passenger traffic as well as large cargo-hubs include Cincinnati ('A-', Positive Outlook) and Alaska ('A+', Stable Outlook). IAA holds comparable CPE to Alaska's \\$10.87 CPE and Cincinnati's \\$8.80 CPE despite a higher debt burden reflecting the new terminal.
NEGATIVE: Material decrease in traffic and/or increase in costs leading to an unsustainably higher CPE level.
NEGATIVE: Significant deterioration of the Indianapolis Airport Authority's strong cash position resulting in a materially higher leverage.
POSITIVE: Rating is likely restricted to its current level absent a significant reduction in the airport's leverage calculation.
The series 2015I bonds will be used to refund the series 2005B bonds for estimated present value savings of approximately \\$20.2 million or 10.2% of refunded bonds. With the 2015 refunding, the authority is saving approximately \\$32.4 million in debt service, and the debt service schedule increases from approximately \\$78 million to maximum annual debt service (MADS) at \\$96 million in 2018 and then remains flat between \\$75 million and \\$80 million before dropping back down below \\$75 million through final maturity in 2037.
Fitch considers IND's passenger airline mix as well as O&D base strong attributes. Enplanements increased 2.4% to 3.7 million in 2014 due to increased airline service and passenger travel. Traffic level at the airport has declined since peaking at 4.3 million enplanements in 2005. Enplanements are up 3.4% through June 2015 showing continued improvement in traffic from new service which includes United to SFO, Delta flights to Miami, and Frontier to Trenton. Allegiant has started operating at IND already this fiscal year, and Southwest has started service to Boston and Los Angeles as well. The added flights have been successful and opened up new travel opportunities to both the west and east coast markets from the airport.
In Fitch's view, IND's current and upcoming AUL agreements provide for strong cost recovery terms from signatory airlines while allowing airline costs (CPE) to remain regionally competitive. The airport's AUL with eight signatory carriers (SW, UA, Allegiant, Delta, AA/US Air, Frontier, Fedex, and Cargolux) is in effect until year-end 2015. Management expects to execute a new agreement later this year with all current signatories and no material changes in terms. Passenger carriers have preferential use of gates, and Fitch will continue to monitor the AUL developments.
Targeted ordinance coverage is strong at 1.5x, and IAA believes 1.20x cash coverage allows sufficient margin to fund their capital program, withstand airline downturns, and comfortably meet required ordinance coverage of 1.25x. CPE has historically been between \\$9 and \\$10 with a slight decrease to \\$9.73 over FY2014. Management expects to keep CPE around \\$10 but is willing to increase costs to airlines if passenger traffic falls short of expectations. Fitch tested slight enplanement, revenue, and expense growth in the Fitch's base case. Respective CAGRs of 1.77%, 1.24%, and 3% are expected to produce a minimum Fitch-calculated coverage of 1.27x and average leverage of 8.05x.
Fitch's rating case kept enplanements flat from a decrease mid-forecast followed by recovery years and stressed expenses growing at 4% per year which would require management to increase CPE above \\$11 in order to meet minimum coverages. Leverage would remain elevated at 8.50x, minimum Fitch-calculated coverage would be 1.20x, and days cash on hand would average around 306.
The bonds are secured by airport net revenues.