News Column

Fitch Rates Massachusetts Port Authority Revs at 'AA' and PFC at 'A+'; Outlook Stable

June 18, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'AA' rating to the Massachusetts Port Authority's (Massport or the authority) approximately $94 million revenue bonds, series 2014A & B and approximately $157 million revenue refunding bonds, series 2014C. In addition, Fitch has affirmed approximately $1.12 billion in outstanding Massport revenue bonds at 'AA'. Fitch has also affirmed its 'A+' rating of the authority's approximately $110 million in outstanding passenger facility charge (PFC) revenue bonds. The Rating Outlook is Stable for all of Massport's debt.

The 'AA' revenue bond rating reflects Massport's strong financial performance anchored by Logan airport's resilient and growing demand for air travel within a strong Boston metropolitan service area, and further supported by a relatively stable maritime activity. The Stable Outlook incorporates the view that airline costs, debt service coverage ratio (DSCR) and leverage metrics are to remain solid relative to peers driven by proven revenue generating capabilities of the authority's asset portfolio and minimal borrowing needs associated with Massport's mature capital program.

The affirmation of the 'A+' PFC revenue bond rating reflects the aforementioned credit strengths of Logan, proven ability of strong PFC collections, short debt tenor and low existing leverage that provides for high coverage levels offset by the limited revenue stream and its inherent volatility due to its direct correlation with passenger volume.

KEY RATING DRIVERS

Very Strong Operational Profile: Strong economic underpinnings of the service area support healthy demand for the authority's transportation and commerce related business lines. Airport passenger trends continue to demonstrate solid positive growth, with 14.6 million enplanements in fiscal 2013 (ended June 30), despite the presence of regional-based traffic competition from nearby Manchester and TF Green airports. Logan enjoys a very high origination and destination (O&D, 95%) traffic base offered by a diverse mix of domestic and foreign flag airlines, augmented by the increasing presence of low-cost carriers. Revenue Risk - Volume: Stronger

Well-Structured Cost Recovery Framework: The leases and rate-setting approach with airlines and other commercial users of the aviation and maritime divisions allow for both strong recovery of costs and flexible control of facilities. Airline costs, at $13.16 per enplanement in fiscal 2013, have been stable in recent years although moderate increases are expected over the next five years. Revenue Risk - Price: Stronger

Manageable Infrastructure Needs With Minimal Borrowings: The authority maintains a strong infrastructure development program with manageable capital requirements (slightly over $1.2 billion through fiscal 2018) and relatively modest expectations with respect to future borrowings (about $214 million in 2017). Infrastructure Development and Renewal: Stronger

Conservative Debt Profile: Following the issuance of the series 2014 new money and refunding bonds, nearly 90% of the authority's debt will be in fixed-rate mode with a descending debt service profile. All bond reserves are expected to be cash funded. Debt Structure: Stronger

Strong Financial Metrics: Debt levels were moderate relative to the airport's fiscal 2013 enplanement base ($77 per enplanement) and net debt/cashflow available for debt service (CFADS) ratio of 3.44x in fiscal 2013 was favorable. Days cash on hand (DCOH) at 263 days was modest for the rating level, but the authority's debt and liquidity policies partially mitigate this concern. Massport's general revenue bond DSCR has been consistently at or above 2.0x over the last five years with 2.47x coverage in fiscal 2013 showing further improvement compared with 2.21x last year. Future coverage ratios should remain at similar levels.

Substantial PFC Debt Coverage: A sizable O&D air traffic market supports a large annual PFC collection base in excess of $60 million. The existing debt provides a low leverage level and a very short maturity period through 2017. Fiscal 2013 DSCR on the PFC backed debt was 2.77x and is expected to remain well above 2x in the near term.

RATING SENSITIVITIES

--Elevated volatility in aviation and maritime operations that leads to deteriorating financial metrics could weaken credit quality;

--Increased costs that contribute to a deterioration of coverage levels (below 2x) and liquidity margins to levels inconsistent with the rating category would lead to a downgrade;

--A material increase in the capital program size or borrowing needs, beyond current expectations, may pressure the rating.

SECURITY

Massport's revenue bonds are secured by the net revenues generated from port authority properties. This includes Logan International Airport and various maritime facilities within the Port of Boston. The PFC bonds are solely secured by the collection of passenger facility charges levied at the current rate of $4.50 per passenger.

TRANSACTION SUMMARY

The series 2014 fixed-rate bonds are scheduled to price on or around July 9. Bond proceeds will finance elements of the authority's capital program and refinance various outstanding revenue bonds. The new money portion of the 2014 bond issue will have a final maturity in 2044, or two years beyond the current debt maturity profile. The refunding bonds maturity will not extend beyond the current maturity of the refunded bonds, series 2003A, 2003C and 2005A.

Logan remains the centerpiece of Massport's properties, generating approximately 87% of total operating revenues in fiscal 2013. The maritime properties generate the bulk of the remaining operating revenues. Logan served over 14.6 million enplaned passengers in fiscal 2013, a 0.4% improvement over fiscal 2012. The rebound trend has softened since 2011 but passenger traffic continued to rise, up 4.5% through the nine months in fiscal 2014 over the same period in fiscal 2013. Domestic enplanement growth from low cost carriers, particularly with JetBlue Airways, continues to be the leading contributor to the rebound.

Infrastructure improvements over the past decade, both at the airport as well as access roadways into Logan, have served to make the airport a more attractive facility. The improvements have enhanced Logan's competitive position relative to nearby airports in Connecticut, Rhode Island and New Hampshire. The O&D orientation of the market, currently around 95% of enplanements, attracts a diverse mix of carriers. JetBlue Airways led the market for airline passengers in fiscal 2013, accounting for more than 26% of total enplanements. This was followed closely by the combined American/U.S. Airways market, whose market share was about 23%, and Delta and United each of whom constituted about 12%-14% of passenger traffic. This passenger airline mix is considered a strong positive operating attribute at Logan as it serves a large domestic travel base complemented by international gateway service among many foreign-flag carriers.

Port operations depend on a blend of container throughput, automobile processing, bulk cargo, and cruise passengers. While container and cruise volumes have performed well over the past decade, some volatility exists with respect to the bulk and automobile segments. Massport previously anticipated operational and financial growth in the port property division due to new container line services. However, stagnant economic conditions have resulted in a less near-term optimism for container volume growth. In fiscal 2013, the port division generated $76.6 million in gross revenues, an improvement of 4.5%, although net revenues from this business line tend to be flat to marginally positive.

Massport has a proven track record of managing its infrastructure needs and it's most recently developed five year capital program through 2018 of just over $1.2 billion will primarily focus on terminal facilities improvements, roadway improvements, airport parking and the remaining costs associated with the rental car facility. The consolidated rental car facility opened in September 2013 and final construction is expected to be completed this fall. The authority issued a separately secured bond financing (Fitch rating 'A-', Stable Outlook), secured solely on a pledge of daily car rental customer facility charges (CFC) to cover project costs. The authority has also made a $10 million loan towards the project in advance of CFC collections with expectation of repayment over the next few years. Separately, there is over $977 million of capital projects that would be funded solely from third-party developers and are not currently expected to require authority financial resources.

The new money portion of the 2014 bonds issuance will be used to partially fund roadway improvements, construction of a new parking garage at Framingham Logan Express, post security corridors between Terminals C and E and the replacement of certain electrical substations. The only future planned bond issue that Fitch understands is currently contemplated is approximately $214 million to fund $184 million in projects at Logan to be issued as parity obligations under the general revenue credit, currently planned for 2017.

Financial metrics continue to demonstrate strength and resiliency as evidenced by DSCR of 2.47x and 2.21x, in fiscal 2013 and 2012, respectively. This performance may trend slightly downward due to higher debt service costs over the next few years, but is expected to remain very strong for a large hub airport. The authority aims to maintain a minimum of 2x coverage. Massport reported unencumbered liquidity of in excess of $250 million in fiscal 2013, representing 263 days cash on hand. Going forward, airport reserves may be pressured as a result of draws for the capital program, but management plans to maintain between 200 and 250 days of cash on hand.

Airline costs per enplanement (CPE) have stabilized since 2009 and were reported at $13.16 in fiscal 2013. Future CPE levels may trend higher to the $15-$16 range by fiscal 2018 as long as the airport can maintain a moderate level of annual traffic growth. Total leverage is low and provides for solid financial flexibility. Net debt to CFADS is approximately 3.4x, which is a favorable ratio compared with many other large hub airports. Even under Fitch's rating case scenario of a mild downturn in traffic, the authority's favorable financial and cost metrics should remain intact.

The bonds secured by the PFC collections mature in 2017. Pledged PFC collections totaled $60.2 million in fiscal 2013, generating 2.77x DSCR. The final years' scheduled debt service payment exceeds $55 million. This compares to annual payment requirements of $22 million to $26 million during the other remaining years prior to final maturity. The balloon payment is expected to be met by the use of the $28.3 million of investments held in the debt service reserve fund together with normal PFC collections. Currently, management does not anticipate additional borrowings secured on the PFC revenue stream before existing bonds mature.

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=835250

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Tanya Langman, +1 212-908-0716

Director

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Seth Lehman, +1 212-908-0755

Senior Director

or

Committee Chairperson

Saavan Gatfield, +1 212-908-0542

Senior Director

or

Media Relations:

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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