OREANDA-NEWS. Fitch Ratings has assigned an 'A' rating to the Indianapolis Local Public Improvement Bond Bank's (the Bond Bank) approximately $160 million series 2016A bonds. Fitch has also affirmed the 'A' rating on the Bond Bank's approximately $344 million and the Indianapolis Airport Authority's (IAA or the authority) approximately $22.8 million outstanding airport revenue bonds secured by net revenues of the airport. In addition, the airport has approximately $395.6 million of outstanding bonds not rated by Fitch. The Rating Outlook is Stable.

The rating reflects the air trade service area which is well-anchored and supported by origination & destination (O&D) traffic, the diverse carrier base and strong cost recovery framework under a fully residual use and lease agreement (AUL) through fiscal year (FY) 2018 which continues to protect the authority's liquidity and coverage ratios in the event of negative financial impacts to the forecast. The rating considers the airport's moderately high leverage alongside adequate liquidity following the completion of the airport's new terminal.

KEY RATING DRIVERS

REVENUE RISK - VOLUME: MIDRANGE
DIVERSE CARRIER BASE SERVING A STABLE LOCAL MARKET: IND serves a stable and diverse region with an enplanement base of 4 million of primarily (96%) O&D enplaned passengers. The diverse carrier mix, with only one single carrier (Southwest IDR 'BBB'/Positive Outlook) representing 30% of enplanements, protects the airport from concentrated airline counterparty risk. In addition, Federal Express Corp. (FedEx) operates its second-largest global sorting facility at the airport and has demonstrated its commitment to Indianapolis with continued significant capital improvements.

REVENUE RISK - PRICE: STRONGER
STRONG RECOVERY FRAMEWORK: IAA's strong AUL is fully residual and was renewed under similar terms before it was set to expire at fiscal year-end (FYE) 2015. The AUL enables the airport to pass all costs to air carriers if non-airline revenues are insufficient. Additionally, the diverse revenue stream, with passenger airline carriers representing only 25% of operating revenues, allows the airport to maintain a competitive cost per enplanement (CPE) in the $9-$10 range, dropping to $9.22 at FYE2015. Air cargo activity provides some diversity to the airport's revenue base (still constant at 7%) and helps maintain a stable cost environment by distributing airfield expenses across a broader customer base.

INFRASTRUCTURE RENEWAL & DEVELOPMENT: STRONGER
MODEST CAPITAL NEEDS WITH NO ADDITIONAL DEBT: IAA recently completed its seven-year, $1 billion new terminal and airport improvements program. Going forward, the authority's capital improvement needs are modest and are expected to be funded without issuing additional debt. The authority's five-year (FY2016-FY2020) capital improvement program totals $262.3 million, approximately 28% grant-funded, 55% authority-funded, and the remainder funded from other external sources.

DEBT STRUCTURE: STRONGER
VARIABLE-RATE DEBT OFFSET WITH SWAPS: All debt ranks senior and is fully amortizing with a final maturity of 2037. IAA's 34% variable-rate debt is higher compared with peers but is mitigated by swaps with adequately rated bank counterparties. IAA also has a fully funded cash debt service reserve fund at annual debt service which had a balance $60.5 million as of FYE2015 and satisfactory 1.25x rate covenants for all debt.

FISCAL 2015 FINANCIAL METRICS
HIGH LEVERAGE PARTIALLY MITIGATED BY SIZEABLE RESERVES: Fitch expects near-term leverage, calculated as net debt-to-cash flow available for debt service (CFADS), to remain around 7x before dropping to approximately 6.5x reflecting savings from refundings. Significant balance sheet liquidity and reserves serve to mitigate some of this risk and provides additional financial flexibility. At FYE2015, the authority's liquidity grew to $71.4 million of unrestricted cash and investments and $11.3 million in the operations and maintenance (O&M) reserve, equivalent to 484 days cash on hand (DCOH). IAA-calculated debt service coverage ratio (DSCR) was adequate at 1.84x, while Fitch-calculated coverage, which considers PFC and CFC as revenues rather than an offset to debt service and excludes the rolling coverage account, was lower at 1.31x.

PEER GROUP:
Fitch-rated airports with similar levels of passenger traffic as well as large cargo-hubs include Cincinnati ('A-', Positive Outlook) and Alaska ('A+', Stable Outlook). IAA holds comparable CPE to Alaska's $10.87 CPE and Cincinnati's $8.80 CPE despite a higher debt burden reflecting the new terminal.
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RATING SENSITIVITIES
NEGATIVE: Material decrease in traffic and/or increase in costs leading to an unsustainably higher CPE.
NEGATIVE: Significant deterioration of the Indianapolis Airport Authority's strong cash position resulting in a materially higher net leverage.
POSITIVE: Continuation of good operational trends alongside a sustained decline in leverage.

TRANSACTION SUMMARY
The parity series 2016A bonds will be used to refund the series 2006 bonds for estimated present value savings of approximately $27.4 million or 16.6% of refunded par. With the 2016 refunding, the authority is saving approximately $81.5 million in consolidated debt service, and the debt service schedule increases from approximately $76 million to maximum annual debt service (MADS) at $87.3 million in 2021 and then remains between $73 million and $82 million before dropping back down below $73 million through final maturity in 2037.

Fitch considers IND's passenger airline mix and O&D base to be credit strengths. Enplanements increased 8.7% to 4 million in 2015 due to increased airline service and passenger travel. Enplanements increased13.6% through March 2016 showing continued improvement in traffic from recently added new flights to both the west and east coast markets. Little change has also occurred from the AA/US Air merger as airlines did not have much cross over.

In Fitch's view, IND's new AUL which was executed prior to FYE2015, as Fitch expected, remains a credit strength due to the fully residual framework with strong cost recovery terms from signatory airlines while allowing airline costs to remain regionally competitive. No changes to MII provisions which continues to allow the authority to complete the capital program without an airline approval process. Furthermore, the residual rate-making methodology allows the authority to fund capital program without issuing additional debt. The airport's AUL with eight signatory carriers (FedEx, SW, AA, Delta, UA, Allegiant, Frontier, Cargolux) is in effect until year-end 2018, and the authority has an option for two one-year extensions.

Targeted ordinance coverage is strong at 1.5x, and IAA believes 1.20x cash coverage allows sufficient margin to fund their capital program, withstand airline volatility, and adequately meet required ordinance coverage of 1.25x. CPE has historically been between $9 and $10 with a slight decrease to $9.30 over FY2015. Management expects to keep CPE around $10 but is willing to increase costs to airlines if passenger traffic falls short of expectations.

Fitch's base case applied enplanement, revenue, and expense growth sensitivities of 0.96%, 0.28%, and 2.35%, respectively, through 2020. Under this scenario, net revenues are expected to produce a minimum Fitch-calculated coverage of 1.50x and average leverage of 6.85x. Fitch's rating case lowers annual s enplanements at a -2.3% CAGR and stressed expenses growing at around a 4% CAGR slightly higher than inflation which would require management to increase CPE above $11 in order to meet minimum coverages. Average gross leverage would remain around 7.28x, minimum Fitch-calculated coverage would be 1.50x.