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Fitch Rates Susquehanna Area Regional Airport Authority's $45.5MM Bonds 'BBB-'

Posted on: Friday, 28 March 2008, 18:00 CDT

Fitch Ratings assigns a 'BBB-' underlying rating to Susquehanna Area Regional Airport Authority's (authority) $45.5 million series 2008 senior airport revenue refunding bonds consisting of $44.3 million series 2008 A (AMT) and $1.2 million series 2008 B (taxable) fixed-rate bonds. Bond proceeds will be used to refund the authority's auction rate securities. The remaining balance will provide proceeds to repay a $12.8 million line of credit from Sovereign Bank and fund the reserves associated with the 2008 Bonds. In addition, the airport intends to apply its federal fiscal year 2008 LOI (Letter of Intent) payment ($11.3 million) to defease the series 2003C bonds in combination with a bank loan of $2 million which will be repaid by the 2009 LOI payment of $2.2 million. Fitch also affirms the 'BB+' rating on the authority's outstanding $55.7 million in subordinate airport system revenue bonds. The Rating Outlook for all liens of debt is Stable.

The rating reflects the high origination & destination passenger traffic profile, and business oriented traffic base which provides for a base level of airport traffic. The rating also captures the airport's hybrid use & lease agreement which allows the authority to raise rates and charges to meet bondholder covenants. Offsetting credit factors include the airport's significant regional competition for air service, the airport's small enplanement base, and a substantial higher than average cost per enplaned passenger (CPE). The Stable Outlook reflects the stabilization in air service provided at the airport and a manageable capital plan which does not include any future debt issuances through 2013.

In January 2008, Fitch downgraded the senior and subordinate lien bonds, which are secured by a pledge of airport system net revenues and an irrevocable commitment of passenger facility charge receipts, to 'BBB-'. The downgrade reflected Harrisburg International Airport (the airport) exposure to a fundamental change in U.S. airline industry service patterns to small and medium sized airports. With the majority of legacy airlines, notably US Airways (the airport's dominant carrier), diverting mainline aircraft to larger city pairs, and low cost airlines now deploying assets to proven markets rather than secondary airports, the prospects for material increases in service and/or enplanements at this airport are dim. The downgrade of the subordinate lien bonds, which are secured by a subordinate pledge of airport system net revenues, was based on the substantial leverage carried on this lien, which has been significantly weakened due to reductions in passenger volumes.

Financial margins at the airport are stable. In 2007, the airport reported a 12% increase in total operating revenue from the previous year while successfully keeping operating expenses flat. From the 2008 through 2013, the airport expects operating expenses to increase by 2.8% per year whereas operating revenue (not including PFCs) will increase by 1% on average annually. Similarly, debt service coverage is expected to remain adequate through the forecast period. The authority expects debt service coverage at 2.07x (with PFC offset) in 2008 for the senior bonds and remain around 2.0x through the remainder of the forecast. Total debt service coverage on the senior and subordinate bonds is expected at 1.15x in 2008, consistent with historical levels. Both coverage levels exceed the required rate covenants of 1.25x for the senior bonds and 1.1x for all debt.

In addition to prudent expenditure management and timely increases in rates and charges, passenger volumes have steadily increased. In 2007, enplanements grew 10% over 2006 levels, reflecting slight increases in leisure travel. Available data through February 2008 shows continued growth, with total enplanements up approximately 7% over the corresponding time period in 2007; however, passenger traffic is still significantly below originally forecast levels. Going forward, the airport expects enplanements to grow at a rate of 1.5% per year; however, Fitch views continued growth at the airport cautiously. In light of recent economic downturn, the airport might suffer from air service reductions and be forced to raise rates and charges, resulting in an escalating CPE (currently expected to be $14.93 in 2008). Fitch will continue to closely monitor the airport for fluctuations in air service and resulting costs.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.

Source: Business Wire

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