OREANDA-NEWS. Fitch Ratings has assigned an 'A+' rating to approximately $48.415 million of Kenton County Airport Board (the airport) Cincinnati/Northern Kentucky International Airport (CVG) series 2016 revenue bonds.

Fitch has upgraded $58.59 million of the airport's series 2003Bs to 'A+' from 'A-' as the bonds are expected to be refunded with the 2016 bonds.

The Rating Outlook has been revised to Stable from Positive.

KEY RATING DRIVERS

The upgrade reflects the airport's measurably improved financial profile on a go-forward basis under its new hybrid compensatory airline use agreement (AUA). Very low leverage as measured by both the airport traffic base and net cashflow, coupled with reduced debt service obligations under the planned 2016 refunding transaction, with no planned parity revenue bond capital related borrowings also provide a strong financial position.

The rating reflects the continued stabilization of the airport's O&D traffic profile, at nearly 85% of 3.2 million total enplanements, amid continued connecting traffic declines from Delta's hub reduction actions. Fitch expects debt service coverage ratios (DSCR) to drastically increase to above 3x starting in 2016 under the new AUA, versus 1.25x in recent years under the prior residual agreement. Airline costs continue to remain stable and cash reserves are maintained at high levels relative to airport debt.

REVENUE RISK - VOLUME: MIDRANGE

SHIFT TO O&D TRAFFIC BASE:

O&D enplanements have increased by more than 25% over the past four years, to nearly 2.7 million in 2015, despite regional competition, and represent nearly 85% of FY2015 total traffic. Delta retains significant carrier concentration (48% of CY 2015 O&D enplanements), although this market share is lower than previous years as dehubbing continues. The airport has realized increased service from low-cost carriers which hold 20.6% of seats as of June 2016. Large-scale cargo services from DHL also diversify CVG's aviation activity.

REVENUE RISK - PRICE: STRONGER (FORMERLY MIDRANGE)

SOUND COST-RECOVERY STRUCTURE

A new five-year hybrid compensatory airline agreement started in January 2016, replacing a long-term residual agreement, and providing for continued strong cost recovery terms while allowing for higher airport net revenue generation. Terms include surplus revenue sharing with a terminal concession credit as well as an extraordinary coverage protection clause to provide a backstop for rates to meet all costs. Passenger facility charges (PFC) collections are eligible for all debt service payments, and annual receipts of nearly $12 million well exceed debt service obligations. Average cost per enplanement (CPE) increased slightly over FY 2015 to $9.17 from $8.77 in FY2014 but should remain stable going forward even under a new agreement.

INFRASTRUCTURE DEVELOPMENT & RENEWAL: STRONGER

MODERN FACILITIES AND MANAGEABLE REQUIREMENTS

The $345.9 million capital program through 2021 is well defined and is expected to be managed without additional debt, with funding expected to come from a mix of federal grants (7.1%), customer facility charges (CFCs; 43.4%), and PFCs as well as other airport funds (28.2%). No new GARB debt is anticipated in the near term, and management has allotted 43.4% of capex for a future CFC-funded CONRAC. The airport has recently consolidated its multiple terminal operations for all passenger carrier operations into a single, modernized facility (Terminal 3).

DEBT STRUCTURE: STRONGER

FAVORABLE DEBT PROFILE

All airport debt is expected to be fixed-rate and amortizing through final maturity in 2033. All covenants and reserves are established at standard levels for U. S. airports. The series 2016 refunding bonds will reduce gross debt by nearly $10 million and generate over $10 million in present value savings or approximately 17% of refunded par. Debt service payments decline to about $4.3 million versus the $5.1 million annual level budgeted for FY2016 prior to the 2016 refunding bonds.

SOUND FINANCIAL METRICS: Historical debt service coverage was limited to 1.25x through the prior residual rate-setting agreement, ending in FY2015. Going forward, we expect future coverage under the new hybrid agreement to significantly increase to over 3x even under Fitch's rating case. Furthermore, debt to enplanement is very low for an airport of this size, at $15 per enplanement, while net debt-to-cash flow available for debt service (CFADS) for FY2015 equalled a similarly low -0.97x. Fitch expects leverage to remain minimal under the cashflow generation of the airline agreement and the effects of continued debt amortization. Robust cash balances are evidenced by multiple reserve accounts, providing a Fitch-calculated 259 DCOH in FY2015.

PEERS: Relevant peers include Memphis (rated 'A'/Stable) and Louisville (rated 'A+'/Stable) airports. Memphis also experienced a significant loss of connecting traffic; however, CVG's liquidity and leverage metrics compare favorably to Memphis (4.6x leverage). Louisville has a smaller traffic base relative to CVG but is similar in its cargo presence. Louisville has modestly higher leverage at 3.6x but a lower airline CPE.

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RATING SENSITIVITIES

Negative - A substantial reduction in the airport's O&D traffic base below two million enplaned passengers could warrant negative rating action.

Negative - Deterioration in the airport's cost structure or sluggish non-airline revenue growth could push the airport's CPE upwards (making it less attractive for airlines), lead to a fall in traffic, and result in credit decline.

Negative - Issuance of new debt without a corresponding increase in O&D traffic, leaving the airport more highly levered, could deteriorate credit quality.

Positive - Sustained overall enplanement stability over several years could warrant positive rating action with current financial metrics.

TRANSACTION SUMMARY

The authority is refunding the remaining series 2003B bonds (100% fixed-rate, fully amortizing, $58.59 million of total principal outstanding at FYE2015) with the series 2016 bonds (100% fixed-rate, amortizing, $48.4 million of total principal will be outstanding at FYE2016, FY2033 final maturity) for approximately $10.9 million of present value savings or 17.22% of refunded par. With the refunding, the debt service profile declines to $4.28 million after MADS is reached during FY2016 at $4.94 million. A large portion of the airport's debt was retired in FY2013 using internal funds, substantially reducing the airport's annual debt obligations to $5 million from $23 million, further strengthening the credit profile. The DSRF is 100% cash funded at $5.2 million at FYE2015. The airport uses PFCs to fund debt service and PFC collections exceed $10 million per year, which provides 2x DSCR.

Fitch recognizes CVG's diversifying carrier mix and growing O&D base. Enplanements increased 6.6% to 3.16 million in 2015 due to increased airline service and passenger travel. Enplanements are also up 8.4% through April 2016 (FY ends Dec. 31) showing continued improvement in traffic from recently added new flights to both the west and east coast markets.

Fitch also recognizes CVG's ability to grow both airline and non-airline revenues as well as control costs. FY to-date 2016 operating revenues are up 1.5% to $29.17 million (through April 30, 2016) due to a 4.2% increase in airline revenues (to $12.8 million) and a 6.58% increase in non-airline revenues (to $16.4 million). Operating expenses FY to date 2016 (through April 30, 2016) have fallen 22.5% to $21 million in part due to a one-time demolition expense realized over FY2015.

Delta's market share has been declining, as CVG benefits from new low-cost carrier service and continued strong service from American and United. FY to date 2016 (January to April) Delta accounted for 54% of the total enplaned passengers (vs. 60.3% the same period in FY2015, 71.4% FY2014 and 76.6% FY2013). Delta eliminated four year-round destinations during FY2015. No year-round markets have been eliminated from the Delta schedule in FY2016. While Delta FY to date 2016 enplanements are down 2.8% compared to FY2015 because of reduced connections, Delta's FY to date 2016 O&D traffic is up 5.5% because of increased passenger traffic. Based on current schedule filings, Delta's air service levels as measured by total seats on departing flights are scheduled to be down 1.9% in the first half of 2016 compared with FY2015.

Fitch views CVG's new hybrid compensatory airline agreement, which was executed in January 2016, as providing for strong continued cost recovery as compared to the original 1976 residual agreement, while allowing for higher airport net revenue generation. The agreement provides for extraordinary coverage protection, as well as net remaining revenue sharing. Revenue sharing guarantees the authority a certain portion of remaining revenues (depending on tier of remaining revenues earned).

Delta's existing commitments to CVG have been maintained through 2020 for Terminal 3/Concourse B. The 2016 refunding of the 2003B series bonds has also provided management the opportunity to modernize KCAB's Bond Resolution and align with the new use agreement. Management has included extraordinary coverage protections in the agreement, and neither new debt nor impact to PFCs is anticipated. DSCRs are expected to continue to increase given reduced debt obligations and expected growth from non-airline revenues.

Fitch's base case applied enplanement, revenue, and expense growth sensitivities of 1.8%, 3%, and 3%, respectively, through 2021. Under this scenario, net revenues are expected to produce a minimum Fitch-calculated coverage of 3.54x and average leverage of -1.06x due to reduced debt obligations. Fitch's rating case lowers annual enplanements to a 0.2% CAGR but still stressed expenses growing at around a 3% CAGR given expenses would already be higher than inflation. Under the new agreement, management would have to increase average CPE to about $10. Average leverage would still remain very low at around -1.34x. Minimum Fitch-calculated coverage would be nearly 3x at 2.92x in FY2021.

Despite Delta's reductions, CVG's DSCR remained stable at 1.25x under the prior residual airline agreement, which was in effect until FY2015. Coverage is expected to drastically increase under the new hybrid agreement. CVG has also maintained moderate CPE in the $8-$10 range despite some enplanement declines by increasing non-airline revenues and controlling OpEx. Series 2016 debt service is payable from PFCs and is assumed to be covered by annual PFC collections in the 1.5x-1.6x range going forward without charging any remaining debt costs to the carriers. As a result, leverage net of unrestricted cash and operating and maintenance and debt reserves should remain well below 1.0x by 2021 due to decreased outstanding debt. Even testing a full loss of connecting traffic and drops in O&D enplanements which would increase CPE levels slightly, all metrics remain consistent with other medium and large-hub airports rated 'A+'.

SECURITY

The bonds are secured by a pledge of net airport revenues, and PFC monies can be applied to the full amount of debt service on the 2016 bonds through FYE2021.