NEW YORK--(BUSINESS WIRE)--May 17, 2006--Fitch downgrades the rating on Susquehanna Area Regional Airport Authority's (the authority) approximately $75.2 million of outstanding subordinate airport system revenue bonds (subordinate bonds) to 'BBB-' from 'BBB'. At the same time, Fitch affirms the 'BBB+' rating on the authority's approximately $133.5 million of outstanding senior airport system revenue bonds (senior bonds). A pledge of subordinate net revenues of the airport system secures the subordinate bonds, while a pledge of airport system net revenues secures the senior bonds. Additionally, receipts of a Federal Aviation Administration Airport Improvement Program (AIP) grant are pledged to repay a portion of subordinate lien debt service and passenger facility charge (PFC) revenues are irrevocably committed to offset a portion of senior lien debt service. The Rating Outlook is Stable.
The rating downgrade to 'BBB-' on the subordinate bonds reflects an increasingly constrained financial picture stemming from the continued loss of scheduled seats and passenger traffic at Harrisburg International Airport (MDT), the authority's primary revenue generating asset, as a result of air carrier decisions to redeploy capacity away from MDT to larger hub markets. These downward trends began during mid 2005 and continued into 2006, with airline seats and passenger volumes down roughly 20% and 16%, respectively for the month of March 2006 compared to the same month in the previous year. As a result of this loss in traffic, financial margins for 2005 are tighter than previously expected yielding coverage of senior and subordinate bonds debt service (total debt service) well below levels originally forecast. Though the airport's weakening business profile also impacted the 'BBB+' rated senior bonds, the lower leveraged nature of this lien makes the operational declines far more manageable.
Credit strengths which continue to support investment grade ratings on both the senior and subordinate bonds include the airport's highly origination & destination oriented traffic base and economically diversified service area, home to the state capital of Pennsylvania, which provides for a base level of airport traffic, albeit small, over time; a hybrid use & lease agreement which allows the authority to raise airport rates and charges to meet bondholder covenants thereby lending a degree of stability to airport financials independent of traffic trends; sound coverage of debt service on senior bonds and adequate coverage of total debt service; and experienced management, highlighted by their ability to secure significant federal and state funding support for MDT's recently completed terminal redevelopment and their financial prudence in operating the airport system. Key credit considerations include significant regional competition for air service, particularly from Baltimore-Washington International Airport (Passenger Facility Charge (PFC) revenue bonds; rated 'A' by Fitch) and Philadelphia International Airport (general airport revenue bonds; rated 'A' by Fitch), both of which house a sizeable operation for Southwest Airlines (senior unsecured debt; rated 'A' by Fitch) and other low fare carriers; and an above industry average airline cost per enplaned passenger (CPE).
The Stable Rating Outlook is based upon Fitch's expectation for stable financial performance and debt service coverage, supported by enplanements at or near current levels.
The authority recently completed a $233 million terminal redevelopment designed to attract additional service from incumbent and/or new air carriers at MDT. To date, however, efforts to add new non-stop destinations or bringing larger aircraft to the airport have been unsuccessful. While the combination of short-lived service to Orlando provided by now defunct Transmeridian Airlines and the temporarily lowered pricing strategies of MDT's legacy carriers pushed enplanements up by 4.4% during 2004, to approximately 700,000 traffic fell by 6.2% during 2005, to approximately 656,000, as Transmeridian exited the market, airfares rose, and other carriers began to shift capacity away from MDT. Over the intermediate term, Fitch expects the recent downward trend to eventually stabilize given the airport's rising load factors and the strong yields generated by the airlines serving MDT. Additionally, over the longer term, the presence of state government and several corporate headquarters, including Hershey Foods Corporation, provide for at least a base level of demand for the airport. Barring the unexpected entry of a low-fare carrier into the market, however, Fitch expects only minimal future growth in traffic above current levels.
The authority's hybrid airline use & lease agreement provides for at least adequate financial performance by allowing the airport to adjust rates and charges to meet bondholder covenants. During 2004, the last year for which audited financials are available, the authority's operating ratio increased to 13%, up from 8% during 2003, though still well below the 27% achieved during 2000. While unaudited figures for 2005 show modest additional financial improvement as a result of management's stringent focus on cost control, the operating ratio remains below the level originally budgeted by the authority as a result of lower than expected passenger related revenues. Estimated at between $12.00 and $13.00 through 2009, MDT's CPE is above average given the size and operating scope of the airport. However, the airport's spacious, and brand new terminal infrastructure, coupled with no airfield delays, provide important offsets to the fairly high cost structure.
Total debt service coverage is expected to equal an adequate 1.13 times (x) during 2005, roughly 18% lower than the budgeted level and just slightly above the 1.10x rate covenant. Reflecting the lower leverage on the senior lien, coverage of senior bond debt service equaled a sound 2.37x for 2005, which is below the 2.88x level budgeted, though still far in excess of the 1.25x senior bond rate covenant. Similar coverage levels are expected for both total debt and senior bonds during 2006. Fitch recognizes that PFCs and LOI receipts provide important offsets to senior and subordinate bond debt service, respectively. Should PFCs prove lower than anticipated and/or LOI monies not be received, the authority would be forced to raise already high airline rates to compensate for the loss of these revenue streams. While such an event would be viewed negatively, Fitch notes the stability of both streams over time, and recognizes the interruption of the LOI payment stream is highly unlikely given successful completion of the terminal project. Moreover, at the current rating levels for both the senior and subordinate bonds these risks are adequately captured.
CONTACT: Fitch Ratings Douglas J. Kilcommons, 212-908-0740 Jessica L. Soltz-Rudd, 415-732-5616 Christine Pollak, 212-908-0526 (Media Relations) KEYWORD: NEW YORKINDUSTRY KEYWORD: BANKING BOND/STOCK RATINGSSOURCE: Fitch Ratings