News Column

Fitch Rates Louisville Regional Airport Authority Revs 'A+'; Outlook Stable

May 30, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'A+' rating to the Louisville Regional Airports Authority, KY's (the authority) approximately $254 million airport system revenue refunding bonds, series 2014 A, B & C. The Rating Outlook is Stable. The 2014 bonds are being issued to refund the authority's approximately $289 million outstanding airport revenues bonds, the rating of which is hereby affirmed at 'A+' with a Stable Outlook in advance of the refunding.

The 'A+' rating reflects Louisville International Airport's (SDF) stable financial performance, with revenue diversity supported by a well-balanced enplanement base and the United Parcel Service of America's (UPS) strong and growing operational cargo activity. Recent airline service adjustments are expected to result in reduced enplanement levels through fiscal 2015, with stabilizing volumes anticipated over the medium term. It is Fitch's view that SDF should be able to continue to maintain its competitive cost structure while generating a consistent level of cargo airline revenue growth. A stable non-airline revenue component, along with a gradual deleveraging of the airport and its strong liquidity position, further support sustained maintenance of stable financial margins and coverage of debt.

KEY RATING DRIVERS

Diversified Carrier Base & Some Cargo Exposure: SDF's established service area with limited competition supports nearly all the airport's origination and destination (O&D) enplanement base of 1.7 million in fiscal 2013 (fiscal year ends June 30). SDF's central role in the UPS air freight network as well as UPS's demonstrated commitment to the airport helps diversify SDF's revenue stream from a reliance on passenger carriers. However, it also does expose the airport to a business that can fluctuate significantly with the economy. A moderate level of SDF's financial and operational concentration comes from UPS, which accounts for over 82% of landed weight and approximately 26% of operating revenues. Revenue Risk - Volume: Midrange

Strong Contractual Framework: The airline use and lease agreements, one for the terminal facilities and one for the airfield, coupled with strong non-airline revenue generation, provide adequate cost recovery terms. Agreements cover about 50% of the airport's total cost base. SDF's cost structure is comparatively low; cost per enplaned passenger (CPE) was at $6.66 in fiscal 2013. Revenue Risk - Price: Midrange

Modest Capital Needs: The authority's capital program of approximately $148 million is largely grant funded, with no plans to issue debt in the next five years. Infrastructure Development Renewal: Stronger

Conservative Debt Structure: Following the issuance of the series 2014 refunding bonds, all authority debt will be in fixed-rate mode with a descending debt service profile. Maximum annual debt service (MADS) of $28 million is scheduled in fiscal 2017, with debt service then stepping down to approximately $17.6 million in fiscal 2024 and declining thereafter through maturity in fiscal 2038. All bond reserves are expected to be cash funded. Debt Structure: Stronger

Low Leverage and Healthy Liquidity: SDF has a favorable net debt/cash available for debt service (CFADS) ratio of 5x complemented by healthy balance sheet liquidity (470 days cash on hand) and available reserves. Fitch expects leverage to gradually decline given the lack of new debt over the next five years. Historically, stable financial performance has resulted in resolution-based debt service coverage levels of 1.60x or greater over the last five years (through fiscal 2013). Net coverage from cashflow remained stable in fiscal 2013 at 1.32x compared with 1.30x last year. Future coverage ratios should remain at similar levels.

RATING SENSITIVITIES

--Major changes in UPS's commitment to the airport for its airfreight operations and/or significant unanticipated reduction in passenger airline services would reflect weakened credit quality.

--Inability of the authority to manage the airport system cost profile, putting pressure on debt coverage metrics or leading to CPE rising above expected levels, could affect the credit profile.

--Additional debt, not currently expected, leading to either higher leverage metrics or a dilution of debt service coverage would have a negative impact on credit quality.

SECURITY

The bonds are secured by the net revenues of the authority, primarily generated by the operations of SDF. A portion of the authority's bonds are additional payable from a designated portion of passenger facility charge (PFC) receipts.

TRANSACTION SUMMARY

The series 2014 fixed-rate bonds are scheduled to price on or around June 10. The authority expects to refinance all outstanding airport revenue bonds for debt service savings, estimated at $6 million or better on a net present-value basis, without extending the current maturity profile.

Southwest Airlines (IDR 'BBB'/Stable Outlook by Fitch) continues to be the main carrier at the airport, enplaning 33.6% of passengers in fiscal 2013, while Delta Air Lines (IDR 'BB-'/Positive Outlook), is the airport's second-leading carrier, representing 28% of enplaned passengers. Complementing the passenger utilization of the airport, UPS airfreight cargo operations represent 82% of landed weight.

Recent traffic performance is uneven and is an indication that enplanements at SDF are influenced by both economic cycles and carrier service decisions. Between fiscal years 2008 and 2013, SDF's enplanements declined at a compound annual growth rate (CAGR) of 2.6%, largely driven by an enplanement decline of 14% in fiscal 2009. In fiscal 2013, enplanements increased 1.9% from the prior year, reaching 1.715 million. This level was consistent with the airport's expectations for the fiscal year as airlines increased frequencies, aircraft size and added new markets, including new service to Atlanta, Denver and JFK airports. In fiscal 2014 (through March), the authority reported a decrease of 2.2% over the same time period in fiscal 2013. Management anticipates ending the fiscal year down by 2.4% as a result of weather-related cancellations as well as service termination to St. Louis, Memphis and Cleveland. The authority expects an additional 3.8% decline in fiscal 2015 resulting from reduced scheduled seats and departures, and reflecting a shift to larger, more fuel efficient aircrafts.

Complementing the passenger operations at the airport is the presence of UPS Airlines' headquarters and central sorting depot for its air freight operations. Cargo business at the airport has demonstrated resiliency to the global economic recession, supported by significant infrastructure investments and commitment by UPS. UPS accounted for 98% of cargo passing through the airport during fiscal 2013. Cargo operations were up, albeit moderately, by about 1% in fiscal 2013. Over the first nine months of fiscal 2014, cargo tonnage is up by approximately 3.1%. Management expects to see continued moderate growth in cargo volumes and expects UPS to continue to be in the 82%-83% range as a percentage of landed weight.

SDF's two use and lease agreements establish a hybrid structure of rate setting, with a compensatory methodology used for terminal charges and a residual methodology used for the airfield. Collectively, these agreements provide adequate cost recovery at competitive costs to the signatory airlines. The airport's 2013 CPE of $6.66 was largely in-line with previous forecast and is expected to decline to $6.34 in fiscal 2014. CPE is expected to be maintained in the $6-$7 range.

Operating revenues declined at a CAGR of 0.6% between fiscal 2008 and 2013, while operating expenses increased by a CAGR of 0.4% over the same period. Operating revenues were up 2% to $61.4 million in fiscal 2013, which compared favorably to the airports flat growth assumptions for the year. The authority continued to contain operating expense growth and incurred a moderate 1.9% increase from the prior year, below the budgeted 3.7% increase. Operating revenues were budgeted to decline 1.1% in fiscal 2014, while operating expenses were budgeted to increase 4.7%; however, first nine months of the year showed essentially flat revenue growth and lower than projected operating expense growth of 3.5% over the same period in fiscal 2013.

Fiscal 2013 debt service coverage on a resolution basis, including the rolling coverage account and net of the PFC-eligible portion of series 2011 debt service, was solid at 1.69x; a slight increase from 1.67x in fiscal 2012. Fitch calculation of coverage, excluding both the rolling coverage account and treating PFCs as revenues and not offsets, was 1.32x.

The authority's forecast of coverage ratios (on a resolution basis) is expected to remain between 1.56x-1.72x. This forecast reflects assumptions of a -0.5% traffic CAGR between fiscal 2013 and 2018 and management of expenses to a 2.9% CAGR over the same period. If PFCs are treated as revenues instead of being used to offset annual debt service and rolling coverage account is excluded from the calculation, coverage levels are narrower but adequate in the 1.31x-1.40x range through fiscal 2018.

Fitch's rating case scenario assumes greater traffic stress of declines totaling 14% by fiscal 2016, followed by 3% annual recovery through 2018. Revenues and expenses were adjusted to reflect weaker performance in terms of enplanements, such that the fiscal 2013-2018 CAGRs for operating revenues and operating expenses were -0.8% and 3.3%, respectively. As a result, coverage levels in this scenario drop to 1.41x on resolution basis and 1.16x based on Fitch's calculation, indicating less financial flexibility. It should be noted that under this scenario there is no material impact on CPE, which remains in the mid-$6 range, but could limit internal funding for future capital spending.

SDF's manageable capital improvement program (CIP) totals $148 million for fiscal years 2015 through 2019, with approximately 66% supported by grant funds, 32% by internally generated funds and 2% by PFCs. No borrowing is expected. CIP calls for a continuation of the federally funded soundproofing program and ongoing airfield improvements, as well as terminal building rehabilitation works.

Additional information is available on www.fitchratings.com.

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (July 12, 2012);

--'Rating Criteria for Airports' (Dec. 13, 2013).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Rating Criteria for Airports

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725296

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=832401

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Fitch Ratings

Primary Analyst

Tanya Langman

Director

+1-212-908-0716

Fitch Ratings, Inc.

33 Whitehall St

New York, NY 10004

or

Secondary Analyst

Chad Lewis

Senior Director

+1-212-908-0886

or

Committee Chairperson

Seth Lehman

Senior Director

+1-212-908-0755

or

Media Relations

Elizabeth Fogerty, +1-212-908-0526

elizabeth.fogerty@fitchratings.com


Source: Fitch Ratings


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