News Column

Fitch Rates Niagara Frontier Transportation Authority's Airport Revenue Bonds 'BBB+'; Outlook Stable

August 12, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings assigns a 'BBB+' rating to the Niagara Frontier Transportation Authority's (NFTA) approximately $80.8 million of series 2014A&B airport revenue refunding bonds. 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

O&D Airport with exposure to Canadian Traffic: Buffalo Niagara International Airport (BNIA) is a medium hub airport with an origination and destination (O&D) enplanement base of 2.5 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. Toronto's main airport, and to lesser extent, nearby NFIA operations may result in potential regional market share shifts.

Revenue Risk- Volume: 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 is reasonable at $9.18 in fiscal 2014 but may rise at a modest level in conjunction with airport cost developments.

Revenue Risk- Price: Midrange

Some Variable-rate Exposure Offset with Swaps: The airport has a mix of fixed and variable rate debt. Following the proposed refunding of the 1998 and 1999 bonds, approximately 35% of bonds outstanding will be variable rate debt offset with fixed-for-float rate swap agreements with Goldman Sachs. The projected debt service schedule is flat at approximately $13.5 million 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.

Debt Structure: Midrange

Manageable Capital Plan: The five-year CIP totals $135 million, almost entirely funded with grants and PFC revenues. 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.

Infrastructure Development and Renewal: Midrange

Adequate Coverage and Modest Leverage: The airport has adequate coverage ratios and modest leverage. Debt service coverage in fiscal 2014 is 1.54x (1.45x 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 3.97x. The airport also has sufficient liquidity with 242 days cash on hand (includes ADF, operating reserve, O&M fund, and R&R fund) and has historically remained above 200 days.

RATING SENSITIVITIES

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 may pressure the rating.

Negative - Increasing NFIA deficit or Off-airport Transfers: Increasing subsidy for NFIA airport or off-airport transfers adversely impacting the airport liquidity position may result in negative rating action.

Negative - Capital Program with More Leverage: Revisions to the capital program size or sources of funds, leading to more borrowings, could have negative rating implications if financial metrics appear to be weaker.

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 for some time.

TRANSACTION SUMMARY

The series 2014 bonds will refund all outstanding series 1998 and 1999 bonds for estimated present value savings of approximately 21.8%. Fitch does not rate the authority's outstanding series 2000 EFC and series 2004 bonds.

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.

Traffic levels at the airport have historically been stable, growing at a 10-year compound annual growth rate (CAGR) of 1.1%. 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 and three-month year-to-date fiscal 2015 continues to be down 5.5%.

The five-year ULA agreement extends through March 31, 2019. To date, Delta, JetBlue, Southwest, and United have executed the amended ULA and it is anticipated that American, while working through its merger with U.S. Airways, will execute the amendment in upcoming months. 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 2.2% from 2010 to 2014. Operating revenues decreased 0.9% in fiscal 2014 due to a 1.4% decrease in non-airline revenues (represents 55% of operating revenues). Airline revenues were flat in 2014. Terminal revenues decreased by 6.9% due to gate and terminal space returned under the new ULA. However, the authority was able to mitigate this impact by negotiating the inclusion of ticket lobby space which had been excluded in previous ULA. Landing fees increased 7.3% due to recovery of higher snow removal cost. The airport also reduced baggage maintenance cost to airlines by 21.1% through awarding a new service contract. Operating expenses increased by 6.2% in 2014 due to the harsh winter but has limited expense growth from 2.2 to 3.5% in recent years.

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 has 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 are under review by the FAA and the airport may be required to reimburse discretionary grants in that amount. 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 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. The airport covered $1.5 million of deficit through the rate base in fiscal 2014. 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 5% enplanement decrease in fiscal 2015 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 to $11. The airport would generate sufficient revenues to pay the NFIA subsidy and annual off-airport transfers without significant impact to the ADF balance, maintaining above 200 days cash on hand.

Fitch's rating case scenario assumes both greater traffic declines totaling 10% through 2016 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 $11 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.

Additional information is available at '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 Indian Asset-Backed Securitisations

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=649021

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=849454

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Fitch Ratings

Primary Analyst

Raymond Wu, +1 212-908-0571

Associate Director

Fitch Ratings, Inc.

33 Whitehall St.

New York, NY 10004

or

Secondary Analyst

Seth Lehman, +1 212-908-0755

Senior Director

or

Committee Chairperson

Chad Lewis, +1 212-908-0886

Senior Director

or

Media Relations:

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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