OREANDA-NEWS. February 16, 2015. Fitch Ratings has rated New Orleans Aviation Board's (NOAB) \\$663 million general airport revenue bonds (GARBs), series 2015A and 2015B. Fitch has also affirmed NOAB's \\$102.8 million series 2009, 'A-' and \\$126 million of outstanding NOAB revenue bonds (passenger facility charge projects), series 2010 and 2007 at 'A-'. The Rating Outlook on all NOAB bonds is Stable.

RATING RATIONALE
The 'A-' ratings reflect Louis Armstrong New Orleans International Airport's (LANOIA) continued strong traffic recovery post-Hurricane Katrina and stabilizing airline cost structure and financial operations. These strengths are somewhat offset by the service area's dependence on tourism and convention center businesses. Further, the proposed capital plan involving a new terminal will pose additional construction risks, higher leverage, and tighter coverage levels.

KEY RATING DRIVERS
Revenue Risk - Volume: Stronger
Solid Regional Airport: NOAB is a not exposed to material air service competition. Over 90% of its more than 4.8 million enplanement base is origin and destination (O&D), and the airport benefits from relatively low carrier concentration with Southwest (Fitch rated 'BBB' with a Positive Outlook by Fitch) providing 39.2% of the market. In addition there is an overall stable presence of low-cost carriers making up a total of 44.2%. NOAB is a not exposed to material air service competition; however, traffic is highly dependent on the tourism industry, and the air service area is potentially exposed to force majeure risk.

Revenue Risk - Price: Midrange (Revised from Stronger)
Solid Cost Recovery Structure: NOAB's residual airline use and lease agreement (AUL) extends through December 2015 and allows the airport to fully recover its operational and debt costs. The airport recently executed new lease agreement term sheets with its signatory carriers with the intention to execute a longer-term, residual agreement through 2025. The term sheets consider the increased capital costs associated with the proposed new north terminal, with up to a \\$650 million total budget, but also targets a CPE to remain at or below the \\$10 level. Satisfying both elements does pose risks in the near term given the uncertainty of both the final guaranteed project costs from the contractor as well as the level of future operating costs from new facility and general traffic performance. Major airlines are supportive of the terminal expansion and, in Fitch's view, the airport has capacity to absorb CPE increases.

Infrastructure Development and Renewal: Midrange
Substantial New Capital Program: All costs associated with the new terminal project are expected to be no higher than \\$650 million. The plan of finance incorporates \\$486 million of net bond proceeds from GARB issuances, coupled with other sources, and long-term uses of passenger facility charges (PFCs) are anticipated to offset a sizable portion of the incremental debt service. The timing for project completion, expected in 2018, will be key to credit stability. The capitalized interest period for the proposed series 2015 bonds is intended to coincide with completion of the facilities. Late project delivery may result in cost increases and adversely impact the overall financial plan.

Debt Structure: Stronger
Conservative Debt Structure: All outstanding GARB and PFC lien debt amortizes fully and at a fixed rate of interest. The proposed series 2015 bonds are expected to have similar amortization features. Covenants for rates, additional borrowings and reserves are similar to many airport credits.

Strong GARB Financial Metrics; PFC Metrics in Line with Expectations: NOAB has historically maintained a very strong balance sheet, now with 645 days cash on hand and low leverage of under 2x. Debt service coverage was sound at 2.03x in fiscal 2013, taking into account rollover coverage (1.77x from cashflow alone). CPE has been well-contained since the 2009 AUL agreement, having fallen from \\$10.20 in 2009 to an estimated \\$8.03 in fiscal 2014. The proposed terminal development project is expected to result in a higher leverage profile in excess of 9x following the capitalized interest period and lead to diluted coverage ratios close to 1.4x, including use of the rollover coverage account.

Peer Analysis: Jacksonville, Lee County (FL), and Palm Beach County (FL) - all rated 'A'/Stable Outlook - serve as adequate comparisons in terms of airline cost and financial metrics and exposure to leisure lines of business. NOAB's enplanement base is larger, as is the capital plan.

RATING SENSITIVITIES
Negative - Project Setbacks: Inability to complete the north terminal project within budgeted costs or a late delivery from the estimated schedule would likely place downward pressure on the rating.

Negative - Enplanement Volatility: Material changes or volatility in passenger traffic trends which negate the recent positive activity performance.

Negative - Airline Cost Recovery Uncertainty: Changes to airline cost recovery mechanisms in light of the proposed capital plan or resistance by carriers to assume a materially higher cost level than the \\$10 per CPE level indicated in the proposed AUL term sheet could weaken the credit.

Positive - Despite the airport's large capital plan, positive rating action may be warranted upon successful project completion coinciding with better-than-expected traffic and operational performance.

TRANSACTION SUMMARY
The airport is proposing to issue approximately \\$663 million of 30-year, fixed-rate bonds on parity with the outstanding senior lien general airport revenue bonds. The debt service is expected to be structured to create an overall level debt service profile, including parity obligations. The series 2015 proceeds will be used to provide a majority of the funding costs associated with the airport's proposed North Terminal project, which includes a 30-gate terminal, a 2,000-space parking garage and related roadway/airfield related infrastructure. The bonds are expected to fund a debt service reserve fund as well as capitalized interest through May 2018, coinciding with the planned completion of the North Terminal project. Fitch notes that while NOAB has estimated an overall project budget of \\$650 million, the proposed contractor has neither submitted a guaranteed maximum price nor a guaranteed completion date.

Enplanements continue to perform at a very healthy rate of growth, up an estimated 6.4% in 2014, which follows an equally impressive 6.8% rise in 2013. Traffic has now fully recovered from the severe losses incurred in 2005 by Hurricane Katrina and is supported by increased low-cost carrier service, among other things, including the continuing economic recovery in the area. Tourism continues to be a positive economic force, with visitor levels rising above 9.3 million and annual tourism spending at approximately \\$6.5 billion. Carrier diversity is consistently maintained with Southwest Airline's having a leading market share of 39%. On a combined basis, Southwest and Delta currently hold a 59% share of the market.

The airport's capital program is primarily focused on the construction of the new north terminal, which will replace the aging and inefficient current terminal facilities. NOAB is well-advanced in the design phase, led by Parsons Brinkerhoff, and has selected a well-experienced construction joint venture (CJV) team of Hunt Construction, Gibbs Construction, Boh Bros., and Metro Services for the project. Fitch notes that while NOAB has estimated an overall project budget of \\$650 million, the proposed CJV has not submitted either its guaranteed maximum price or guaranteed completion date. The updated CJV proposal is expected to occur during the summer of 2015 and completion of the terminal is currently envisioned for May 2018, coinciding with the 300th anniversary of the city.

Sources of project funding are diverse and include the series 2015 bonds, leverage and pay-go PFC funds, as well as grants from federal and state sources. Management plans to apply excess PFC receipts, after payment on PFC bonds, to offset portions of the debt service issued on the GARB lien. Building a new facility is a relatively expensive proposal on a total project cost basis, and may result in higher leverage. However, should the airport successfully deliver the project at terms which are broadly neutral to airline costs, NOAB should be well-positioned from an infrastructure standpoint for the foreseeable future.

NOAB's historical financial profile remains strong, as evidenced by approximately 645 days cash on hand and a very low net debt-to-CFADS of 1.8x, not including rollover coverage. As a function of the airport's ongoing residual agreement and actions taken by management on expense containment and building non-airline revenue sources, CPE has been trending downward, falling from \\$10.20 in 2009 to an estimated \\$8.03 for 2014. Non-airline revenue gains reflect mainly higher terminal concession and parking revenues.

The sponsor forecast assumes a 2.1% enplanement traffic growth over a 10-year period as well as ongoing cost control before and during the completion of the new terminal facility, which will be roughly half the size of the current configuration. Under such assumptions, resulting CPE levels remain competitive, reaching a maximum of \\$9.27 by 2018 but declining thereafter to the \\$7 range. Coverage approaches the 1.40x level, consistent with NOAB's anticipated residual framework. Airport leverage is expected to initially rise to over 16x but evolve into a more rating-consistent level of 7x-9x once the terminal is operating and the carriers are contributing to the new debt costs following the three-year capitalized interest period.

Fitch's base case scenario haircuts these traffic assumptions somewhat to account for exposure to the underlying economic volatility of the tourism industry. Fitch also stresses the airport's ability to control costs despite management's demonstrated recent successes in doing so. Under such a scenario, CPE may rise over several years to the \\$11 range in order to maintain cash flow coverage above 1.25x. Fitch views CPE levels, even if modestly above the \\$10 target proposed by management and the airlines, to be reasonable in light of the strong traffic profile and lack of competition in the region. To the extent adverse developments caused a much higher CPE level, stresses on the residual agreement could develop and then the rating could also be pressured.

Current coverage on the standalone PFC bonds is approximately 2x and coverage levels can still remain over 1.8x even under the Fitch rating case scenario, which assumes 10% traffic declines phased in over 2016 and 2017 followed by a steady recovery period thereafter. Pursuant to the second supplemental bond resolution, additional PFC bonds for new projects are no longer allowed and this should protect coverage levels from further dilution.

SECURITY
The GARBs are secured by a first lien pledge of general airport net revenues. The 2010 PFC bonds are solely secured by a first lien on PFC revenues collected at the airport with no recourse to other revenues and funds of the airport. Only excess PFC revenues following payment to the outstanding PFC bonds can be available and pledged to the GARBs.