NEW YORK–(BUSINESS WIRE)–Fitch Ratings has assigned an ‘A+’ rating to Charlotte, North Carolina’s
(the city) approximately $108 million series 2014 fixed-rate airport
refunding revenue bonds, series A&B, issued on behalf of the Charlotte
Douglas International Airport (the airport, or CLT). Fitch has also
affirmed the city’s approximately $591 million in outstanding airport
revenue bonds at ‘A+.’ The Rating Outlook is Stable.
RATING RATIONALE
The A+ rating on the city of Charlotte’s general airport revenue bonds
reflects the airport’s extremely strong financial metrics and stable
traffic performance offset by the risks posed by both a high degree of
carrier concentration in American Airlines / US Airways (‘B+’/Stable
Outlook) and a potentially large capital program after 2016 that would
call for sizeable additional debt funding.
KEY RATING DRIVERS
Revenue Risk-Volume: Midrange
Large and Concentrated Connecting Hub: The airport enjoys a stable to
growing travel base of 22 million enplanements due primarily to its
strategic location and status as a primary American Airlines / US
Airways hub. CLT is exposed to the carrier’s dominant market share and
potential volatility with scheduling decisions, as 76% of traffic
consists of connecting passengers.
Revenue Risk-Price: Stronger
Strong Revenue Profile: The airline use agreement, coupled with solid
contributions from non-aeronautical revenues, allows for strong debt
service coverage metrics well above those achievable with a traditional
residual framework and the ability to accumulate exceptional liquidity,
while still translating into an extremely competitive cost per enplaned
passenger (CPE), currently at $1.33 (unaudited fiscal 2014).
Infrastructure Development & Renewal: Midrange
Flexible and Potentially Large Capital Program: The airport’s capital
improvement program (CIP) includes $308 million of projects currently
funded and underway. Future projects are flexible, require airline
approval and a renewed airline use agreement in 2016, and may call for
sizeable debt issuance if pursued.
Debt Structure: Midrange
Low Debt-Structure Risk: The airport’s general airport revenue bonds
(GARB) profile is flat to declining and fully amortizing with standard
strong structural features. Following the issuance of bond anticipation
notes (BANs) on the senior lien in conjunction with the 2014 refunding,
an estimated 28% of par will float at unhedged variable rates.
Very Strong Financial Metrics: An estimated net debt-to-cash flow
available for debt service of approximately 2.1x after the refunding,
nearly 1,500 days cash on hand, and a debt per enplanement figure of $31
after the refunding and the BAN issuance compare favorably to other
large connecting hub airports.
Peers: A peer to CLT is Atlanta Hartsfield (‘A+’) given the percentage
of connecting traffic and concentration risk in Delta Air Lines
(‘BB-‘/Stable Outlook). CLT’s financial profile is arguably stronger,
but Atlanta’s origin and destination (O&D) base is more substantial.
RATING SENSITIVITIES
Negative: A reduction or elimination of American Airlines’ hubbing
activity.
Negative: The initiation of significant debt-funded capital projects
without an increase in air traffic and revenue sufficient to support new
facilities.
Positive: Despite concentration and hubbing risks, positive rating
action would be possible if the financing plan for the airport’s
potentially large capital program preserves the airport’s extremely low
financial risk metrics in the context of continued strong commitment to
the airport by American Airlines and continued growth in its O&D travel
base.
TRANSACTION SUMMARY
The 2014 A&B refunding issuances are expected to total $107.6 million
and are being issued to take out the existing 2004 A&B bonds, of which
$122.7 million is currently outstanding. The MBIA sureties in place for
the 2004 bonds will be replaced by a fully cash-funded debt service
reserve fund (DSRF) for the 2014 series, funded by airport cash instead
of bond proceeds.
In conjunction with the refunding, the airport is also issuing a new
money BAN to be directly purchased by PNC Bank (‘A+’/Stable Outlook).
The BAN is on a parity lien with the senior GARBs, with the full amount
of the principal due on Nov. 6, 2017. The airport intends to use the BAN
to begin a number of its current capital projects and reimburse itself
for capital projects already funded and has indicated it plans to
refinance the BAN with a long-term GARB in advance of the bullet
maturity.
Although it is planned that the senior lien BANs, which do not benefit
from a dedicated reserve fund, will be refinanced, that risk associated
with a potential refinancing is effectively mitigated by the airport’s
substantial liquidity balances expected to remain far in excess of the
expected BAN par amount. Nevertheless, the BAN creates additional
unhedged variable-rate exposure on parity with the current GARB debt
which Fitch considers more consistent with a midrange debt structure
assessment, as enumerated in Fitch’s “Rating Criteria for Airports.”
Passenger traffic growth at the airport has been strong in recent years
and continues to outperform prior traffic forecasts. Charlotte’s traffic
base achieved a record of nearly 22 million enplaned passengers in
fiscal 2014, due to strong growth in connecting passengers as American
Airlines / US Airways continued to focus on hubbing through the airport.
O&D traffic also grew solidly in 2013 by 5.0% and by another 2.3% in
2014. Connecting enplanements demonstrated robust growth through the
2008-2009 downturn and are 52.0% above 2007 levels without a single year
of decline since 2003. Continued strong performance is expected, even
though the airport conservatively forecasts overall enplanements to grow
just 0.1% per annum through fiscal 2017.
With the benefit of strong business performance, debt service coverage
remains very comfortable at or above the 3.0x range, using the airport’s
indenture-based coverage calculation. In Fitch’s more conservative
calculation, DSCR equaled 1.8x and 1.9x in fiscals 2013 and 2014,
respectively, excluding revenue carried over from prior years and
treating passenger facility charges (PFCs) as an addition to revenue
rather than a debt service offset. Going forward, the airport expects to
generate coverage levels in line with historical performance, hitting a
low of slightly under 2.7x in fiscal 2015 (1.6x using the Fitch
calculation).
The airport’s low debt burden results in extremely competitive CPE
levels. Historically, the airport’s CPE has been consistently under
$1.00, ranging from $0.78 to $0.96 during the period from 2010 to 2012.
Based on corresponding 16.7% and 19.3% increases in operating expenses
in fiscals 2013 and 2014, respectively, CPE rose to $1.13 and $1.33
these same years. The increases in operating expenses were the result of
the airport’s addressing of deferred maintenance needs and also
enhancements that the tenant airlines requested. The airport projects
expenses to substantially increase through 2017 as it continues to
address these deferred needs, stabilizing thereafter. However, the
airport still expects CPE to remain below $2.00 through 2017. Internal
liquidity remains a key credit strength, with the airport maintaining
nearly 1,600 days cash on hand as of fiscal 2014 unaudited results.
The current Airline Use and Lease Agreement (AUL), previously a 30-year
agreement, expires at the end of fiscal 2016. Fitch will monitor
progress towards a new agreement and the ability of the airport to
preserve its current ability to generate healthy non-airline revenues to
build liquidity and keep airline costs competitive even with the
assumption of a large capital program.
Current capital projects on course for completion or underway soon total
$307.4 million. The full 2015-19 capital plan calls for $1.5 billion in
projects, with the majority assumed following the expiration of the AUL.
The plan requires majority-in-interest (MII) approval from the airlines
and would not proceed in full unless approval is granted through the
negotiation of a new AUL. Major potential projects include a new 24-gate
domestic concourse, a new runway and associated airside and taxiway
projects, roadway improvements, and other terminal improvements.
With the US Airways – American Airlines merger closed in December of
2013, there is the potential for operational changes at all of the
combined carrier’s hubs, including Charlotte. Still, Fitch notes that
Charlotte is well-positioned to maintain greater credit stability even
under adverse conditions with regard to adverse scenarios for carrier
service or connecting traffic. Specifically, if the combined American /
US Airways were to measurably restructure its route network and
de-emphasize Charlotte airport as a primary connecting hub, there would
likely be an immediate effect on the airport’s operations. The combined
carrier handles approximately 66% of the total O&D traffic base, and the
timing and possibility for backfill may be uncertain. However, the
airport’s strong internal liquidity, flexibility to increase PFC charges
(currently levies a $3.00 PFC), and low cost structure position the
airport well to deal with such a challenge.
Under a high-stress sensitivity scenario reviewed by Fitch that assumes
a 100% reduction in Charlotte’s connecting traffic, CPE would remain
moderate compared to peers at around $6.70. This stress scenario also
indicates that coverage would fall only marginally below 2.0x,
reflecting the assumption that management would take steps to increase
the airport PFC rate to $4.50 and apply unspent PFC balances to reduce
annual debt service requirements. Lower passenger levels would likely
affect the revenue sharing benefits with the signatory airlines, but
overall solid ‘A’ category credit metrics would likely be maintained.
This sensitivity scenario assumes the connecting traffic cuts occur in
2016. Were the airport to proceed with its large capital program upon
the negotiation of a new AUL and experience a significant loss of
connecting traffic thereafter, credit metrics could be more constrained
than currently envisioned.
Fitch’s rating case assumes a more modest 25% loss of connecting traffic
which results in temporary losses on the O&D side as well. Resulting CPE
reaches a maximum of $2.41 through 2017, with indenture-based DSCR
remaining above 2.5x and leverage rising only modestly above 2.0x.
The airport is owned by the city of Charlotte and operated as a
self-supporting enterprise fund. An appointed aviation director manages
airport operations and capital improvements. In July of 2013, the North
Carolina General Assembly enacted Senate Bill 380 into law, creating the
Charlotte Regional Airport Authority. Subsequently, the city challenged
the legislation and was granted an injunction blocking transfer of
control of the airport to the new commission. A ruling in the case is
expected shortly. It is not known at this time what impact, if any, this
change would have on the airport’s management and operations.
Additional information is available at ‘www.fitchratings.com‘.
Applicable Criteria & Related Research:
–‘Rating Criteria for Infrastructure and Project Finance’ (July 11,
2012);
–‘Rating Criteria for Airports’ (Dec. 13, 2013).
Applicable Criteria and Related Research:
Rating Criteria for Airports
Rating Criteria for Infrastructure and Project Finance
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