Fitch Affirms Niagara Frontier Transportation Auth's Airport Rev Bonds at 'BBB+'; Outlook Stable
OREANDA-NEWS. Fitch Ratings affirms Niagara Frontier Transportation Authority's (NFTA) approximately $77.2 million of series 2014A&B airport revenue refunding bonds at 'BBB+'. The Rating Outlook is Stable.
The rating reflects Buffalo Niagara International Airport's (BNIA) historically stable enplanement base with dependency on Canadian cross-border air travelers, low debt burden and manageable near-term capital investment needs. The airport's financial metrics are favorable to other airports in the rating category. However, the airport has the ability and ongoing history of making subsidy transfers out of the airport system to support other authority transportation operations including the Metro Transit System and the Niagara Falls International Airport (NFIA). While excess revenues generated to support these obligations have historically been supportive for the authority's coverage ratios, currently in excess of 1.5 times, the obligation limits the airport's ability to build liquidity and growing deficits of NFIA can drain the Airport Development Fund (ADF).
KEY RATING DRIVERS
Revenue Risk- Volume - Midrange: O&D Airport with Exposure to Canadian Traffic: BNIA is a medium hub airport with an origination and destination (O&D) enplanement base of 2.38 million. The airport's proximity to the Canadian border and particular fare pricing advantages provided by the airport allows it to capture a significant amount of Canadian traffic, which the airport estimates to be approximately 40% of passengers. The airport is served by a diverse set of low-cost and national carriers with no one airline exceeding more than 34% of enplanement in fiscal year (FY) 2014. Toronto's main airport, and to lesser extent, nearby NFIA operations may result in potential regional market share shifts.
Revenue Risk- Price - Midrange: Compensatory Use and Lease Agreement: Under the current use and lease agreement (ULA) which extends through March 31, 2019, terminal rates are calculated using a modified compensatory methodology and landing fees are calculated using a cost compensatory rate setting methodology. While the base rate setting approach limits airline payments to NFTA, additional protections are established through mid-year adjustments and an 'extraordinary coverage' provision for signatory airlines to make up rate covenant deficiencies in the subsequent year. The airport's cost per enplanement has raised to $10.33 in fiscal 2015 due to declining enplanement levels.
Debt Structure - Midrange: Some Variable-Rate Exposure Offset with Swaps: The airport has a mix of fixed and variable rate debt. The variable rate debt (35%) is hedged with swap agreements through Goldman Sachs. The projected debt service schedule is flat at approximately $13.5 million and then declines to $7.8 million in fiscal 2024 following the maturity of the 2004 bonds. Overall final maturity is in fiscal 2028 and has a fully funded debt service reserve.
Infrastructure Development and Renewal - Midrange: Manageable Capital Plan: The five-year capital improvement plan (CIP) totals $149 million, almost entirely funded with grants and passenger facility charge (PFC) revenues. Management has recently indicated of a possible $10.6 million financing for upgrades to the baggage claim area. Major projects include building a snow removal storage building, expansion of the terminal baggage claim area, runway overlay, and terminal improvements. The authority does not anticipate issuing bonds to finance the capital program but available resources in the airport development fund may be at some risk due to expected draws for subsidies to other authority operations.
Adequate Coverage and Modest Leverage: The airport has adequate coverage ratios and modest leverage. Debt service coverage in fiscal 2015 is 1.51x (1.43x under Fitch's adjusted calculation which considers passenger facility charges as revenues rather than an offset to debt service). Leverage calculated as net debt to cash flow available (CFADS) for debt service is moderate for this airport size at 3.56x. The airport also had sufficient liquidity with 330 days cash on hand (DCOH; includes ADF, operating reserve, O&M fund, and R&R fund) in fiscal 2014 and has historically remained above 200 days.
PEERS: Amongst its peers at the 'BBB+' rating level, such as Albany airport, Buffalo Niagara demonstrates a stronger DSCR with a lower CPE. The airport also has a stronger cash position with 330 DCOH and lower leverage than peers.
Negative - Lower Traffic or Falling Coverage: Traffic declines resulting in coverage levels trending down to the rate covenant and/or the need to exercise extraordinary coverage provision.
Negative - Increasing NFIA deficit or Off-airport Transfers: Increasing subsidy for NFIA airport or off-airport transfers adversely impacting the airport liquidity position.
Negative - Capital Program with More Leverage: Revisions to the capital program size or sources of funds, leading to more a material increase in leverage and negatively impacting key financial metrics.
Positive Rating Movement: Steps to eliminate off airport transfers may bring the rating to the 'A' category. Fitch does not see this as a likely development in the near term.
SUMMARY OF CREDIT
Traffic levels at the airport have historically been stable but declining in recent years, growing at a 10-year compound annual growth rate (CAGR) of -2.2%. Enplanements have only decreased by an aggregate of 4.9% during economic downturn (2009 to 2012). However, airline consolidations along with a harsh winter led to enplanement decrease of 4.1% in fiscal 2014. Further, the strong dollar has pushed business away from Canadian passengers which make up an estimated 40% of the traffic base and has resulted in an overall 5.19% decline in fiscal 2015.
The five-year ULA agreement extends through March 31, 2019. The agreement uses a compensatory rate making methodology allowing the airport to generate excess revenues to fund the airport's subordinate obligations. The agreement provides support to fund NFIA deficit through the airport's rate base capped at the lesser of 50% of deficit or the agreed upon maximum contribution amounts. Fitch views this provision as supportive to maintaining minimum coverage levels; however, to the extent there is an ongoing need to raise airline rates in this manner would be a signal of structural financial weakness.
The airport's operating revenues have grown at a CAGR of 1.4% from 2010 to 2015. Operating revenues decreased 1.6% in fiscal 2015 due to a 3.2% decrease in non-airline revenues (represents 55% of operating revenues). Airline revenues were flat in 2015. Operating expenses increased 6.2% in fiscal 2014 partly due to a rise in snow removal costs, thereafter increasing 1.4% in fiscal 2015.
The airport is classified as a 'grandfathered' airport by the FAA from the perspective of revenue diversion for off-airport uses. In practice, balances in the Airport Development Fund have been called on for off-airport expenditures. In recent years, there have been instances where transfers exceeded specified caps, called the 'safe harbor' amounts. The airport had exceeded the annual safe harbor amounts of $4.2 million in both fiscal 2011 and 2012 by an aggregate of $3.6 to support the Metro transit system when deficits exceeded budgeted amounts. These excess transfers were under review by the FAA and the airport may have been required to reimburse discretionary grants in that amount. However, the FAA has recently determined that the matter is conditionally resolved unless a new revenue diversion issue arises in the future. While management has indicated that the airport is committed to keep off-airport transfers below the safe harbor amount, changes in grant funding for the transit system or volatility in mortgage recording/sales tax revenues may result in renewed pressure the airport's liquidity balances. The airport transferred $4.2 million in fiscal 2014 and has voiced that they plan to continue to transfer between three and four million going forward. The airport has made off-airport transfers since 2007, but none from 1998 to 2006.
In addition to the off-airport transfers, the airport subordinate obligation to NFIA can also pressure fund balances in the ADF. NFIA serves as a reliever airport to BNIA and is forecasted to operate at deficit. NFIA currently receives money from the state equal to the less of $1 million or 7% of total net drop from electronic gaming devices from gaming facilities. This source of funding will stop after December 2016. Along with the declining maximum contribution from airlines, the airport will be required to make greater transfers from the ADF after 2017.
Fitch conducted several sensitivity analyses with the base case assuming a 2.5% enplanement decrease in fiscal 2016 followed by 1% annual increases. Expenses grow over time at a 3% annual increase. The base case also assumes NFIA subsidy payments based on the authority forecast and off-airport transfers equivalent to the safe harbor amount of $4.2 million annually. Under such assumptions, coverage ratios remain above 1.50x with CPE levels in the range of $10.70 to $11.35. The airport would not generate sufficient revenues to pay the NFIA subsidy and annual off-airport transfers, however, without significant impact to the ADF balance, maintaining above 200 DCOH.
Fitch's rating case scenario assumes both greater traffic declines totaling 10% through 2017 followed by steady recovery and slightly higher expense growth rate of 3.5% per annum. The rating case also assumes greater subsidies to NFIA after state funding ends in fiscal 2017. Under the rating case scenario, coverage trends down to below 1.4x while CPE grows above the $12 level. ADF will get drawn down over time, but liquidity remains above 90 days through the forecast period. Fitch notes that metrics may not be consistent with the current rating level absent management actions to improve the financial flexibility.
The airport is approximately 10 miles east of Buffalo's central business district and serves as a gateway to the Niagara Falls tourist region. The airport is situated in a bi-national urban region known as the 'Golden Horseshoe' which is the fourth largest urban region in North America. Driving time from the airport to downtown Toronto is typically 90 minutes. While Toronto is mostly served by Toronto Pearson Airport (36 million annual passengers), the advantages provided by the airport, especially when flying to a U.S. destination, has allowed it to capture a significant amount of Canadian travelers. These benefits include lower airfares and time savings through quicker processing time on land borders.