(This is a correction of a release issued earlier today. It amends the rating for the outstanding subordinate lien bonds to 'A'. )
Fitch Ratings assigns an 'AA-' rating to the Minneapolis-St. Paul (Minnesota) Metropolitan Airports Commission's (the commission) approximately $147 million senior airport revenue bonds series 2010A-D (series 2010 bonds). The bonds are scheduled for negotiated sale during the week June 28, 2010.
Fitch also affirms the commission's outstanding debt as follows:
--Approximately $723 million of outstanding senior lien revenue bonds at 'AA-';
--Approximately $694 million outstanding subordinate lien bonds at 'A'.
The Rating Outlook on all debt is Stable.
The series 2010 bonds are secured by a senior lien pledge of the net revenues generated by the operation of the airport system, the main component of which is Minneapolis-St. Paul International Airport (MSP, or the airport). Proceeds of the bonds will be used to finance capital improvements and to repay outstanding commercial paper notes.
The ratings for the commission reflect the continuation of a strong overall financial profile and competitive cost structure even under the recent stresses in the general aviation industry and the continuing trend of enplanement declines at MSP. Since 2005, connecting traffic has fallen by nearly 20% while origination/destination (O&D) enplanements have declined by approximately 10%. The considerable demand for air service generated from a broad-based local economy, a well-balanced traffic profile of O&D and connecting passengers, and the lack of competing facilities in the upper Midwest are among the credit's key strengths. Further, the commission has largely completed a significant $2.9 billion capital investment program over the past decade, and while additional capital projects are planned, future new-money debt borrowings following this series 2010 bond issue is not likely. Credit concerns continue to center on the dominant market share position of Delta Airlines (following its merger with Northwest Airlines), now comprising almost 80% of total passenger traffic. With the merger of the two carriers complete, risks remain as one potential outcome over time may be a realignment of service across MSP's domestic-focused hub facilities which could translate to a trimming of connecting based capacity. Fitch notes that this risk is tempered at least in the near term as the commission successfully negotiated an extension to the Delta use agreement out to 2020 and has also incorporated favorable 'hubbing' covenants that are designed to provide a strong level of employment and service commitment to the Minneapolis-St. Paul region. Failure by Delta to meet certain minimum service requirements at MSP may trigger their loss of credits from shared concession revenues, a relatively new provision available to all signatory carriers that has allowed cost per enplanement levels to remain at moderate levels ($6.00 in 2009).
Fitch believes that the commission's current set of financial strengths and favorable cost profile, together with continued importance of Delta's domestic hubbing operations at MSP are the key drivers to maintaining the ratings and Stable Outlook for the senior and subordinate lien bonds. Further traffic losses relative to current performance that lead to stresses to financial performance could pressure the ratings.
Passenger demand at the airport is sizable at 15.6 million enplanements with approximately half of total traffic derived from connecting passengers. While the airport has a long-term track record of solid enplanement growth in conjunction with the regional economic expansion, Fitch notes that there have been four consecutive years of declines in traffic accumulating to over 14% since 2005. Based on four-months data through April 2010, traffic is down an additional 3% as compared to the same period in the previous year. Key influences to these trends include the prior bankruptcy filing of Northwest, the general downturn in domestic air traffic demand, and reductions in capacity serving both O&D and connecting traffic. Traffic forecasts prepared in conjunction with this financing for the commission projects a reversal of traffic declines beginning with flat growth in 2010 followed by 3.3% and 2.7% positive growth in fiscal 2011 and 2012, respectively. While improvements to seating capacity at MSP are anticipated later in 2010, Fitch believes actual results are at risk to underperform against these optimistic traffic forecasts given both the continued challenges in the economy and the aviation industry as well as the uncertainty of routing decisions by Delta for its primary domestic hubs
As the airport's largest carrier, Delta (Fitch Issuer Default Rating 'B-' with a Negative Outlook) and its affiliates accounted for 78.9% of total enplanements in 2009. The other leading carriers serving at MSP include American Airlines, Sun Country Airlines, and United Airlines, none of which represented more than 4% of enplaned passengers in 2009. Southwest Airlines introduced service in 2009 and is likely to serve as a catalyst for a larger low-cost carrier presence at the airport. Southwest currently serves three markets and is adding a fourth market (Phoenix) later in 2010.
Despite the tepid traffic performance, the airport maintained its sound financial position in 2009 with net revenues providing 2.12 times (x) coverage of senior lien debt service, and 1.51x coverage of subordinate lien debt service, prior to transfers. These coverage levels are largely unchanged from performance figures in the three previous years. Revenue sources are diverse with aeronautical revenues contributing only 30% of total airport revenues. However, with Delta alone contributing to over 80% of airline revenues, counterparty risk is high. The airport's cost per enplaned passenger (CPE) remains favorable compared to similar sized connecting hub facilities at $6.00 and is projected to decline slightly to $5.93 in fiscal 2010. At current enplanement levels, the commission should be able to maintain stability in its CPE levels over the next several years given the lack of large future debt requirements. Comparatively, many other large hub airports across the Midwest will be facing rising CPE levels as costs associated with capital programs are phased into their airline charges. Thus, MSP should be able to maintain its favorable cost position. Cash reserves are notably strong with unencumbered balances in excess of $235 million, translating to 720 days cash on hand, as well as a separate balance of PFC funds of more than $150 million.
Having largely completed most of its $2.9 billion 2010 capital program, the principal component of which was the construction of a new runway, the airport's future capital needs are modest. Through 2016, the airport's capital program will total $528 million. Most of the projects relate to airfield and runway rehabilitation, noise mitigation, and routine terminal improvements. Other than $120 million of net proceeds with the 2010 bond issue to cover project costs and retire commercial paper notes, the airport estimates little to no additional borrowings, with most of the program financed through internal sources, PFC revenue, and grants.
The application of the following criteria was used to derive the rating of the above referenced bonds:
--'Rating Criteria for Infrastructure and Project Finance', dated Sept. 29, 2009;
--'Airports Rating Criteria Handbook for General Airport Revenue, PFC and Letter of Intent Bonds', dated March 12, 2007.
All are available on the Fitch web site at 'www.fitchratings.com' under the following headers:
Global Infrastructure & Project Finance then Rating Criteria and U.S. Public Finance then Rating Criteria
Additional information is available at 'www.fitchratings.com'.
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Contacts:
Fitch Ratings
Seth Lehman, 212-908-0755, New York
Dino
Kritikos, 312-368-3150, Chicago
or
Media Relations:
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Stoller, 212-908-0526, New York
Email: cindy.stoller@fitchratings.com
