OREANDA-NEWS. Fitch Ratings has assigned an 'AA' rating to the Massachusetts Port Authority's (Massport) approximately \$189 million revenue bonds, series 2015A & B. In addition, Fitch has affirmed approximately \$1.15 billion in outstanding Massport revenue bonds at 'AA'. Fitch has also affirmed its 'A+' rating of the authority's approximately \$93 million in outstanding passenger facility charge (PFC) revenue bonds. The Rating Outlook is Stable for all of Massport's debt.

The 'AA' revenue bond rating reflects Massport's strong financial performance anchored by Logan airport's resilient and growing demand for air travel within a strong Boston metropolitan service area, and further supported by a relatively stable maritime activity. The Stable Outlook incorporates the view that airline costs, debt service coverage ratio (DSCR) and leverage metrics are to remain solid relative to peers driven by proven revenue generating capabilities of the authority's asset portfolio and minimal borrowing needs associated with Massport's mature capital program.

The affirmation of the 'A+' PFC revenue bond rating reflects the aforementioned credit strengths of Logan, proven ability of strong PFC collections, short debt tenor and low existing leverage that provides for high coverage levels offset by the limited revenue stream and its inherent volatility due to its direct correlation with passenger volume.

KEY RATING DRIVERS

Revenue Risk: Volume - Stronger
Very Strong Operational Profile: Strong economic underpinnings of the service area support healthy demand for the authority's transportation and commerce related business lines. Airport passenger trends continue to demonstrate solid positive growth, with 15.3 million enplanements in fiscal 2014 (ended June 30), despite the presence of regional-based traffic competition from nearby Manchester and TF Green airports. Logan enjoys a very high origination and destination (O&D, 95%) traffic base offered by a diverse mix of domestic and foreign flag airlines, augmented by the increasing presence of low-cost carriers.

Revenue Risk: Price - Stronger
Well-Structured Cost Recovery Framework: The leases and rate-setting approach with airlines and other commercial users of the aviation and maritime divisions allow for both strong recovery of costs and flexible control of facilities. Airline costs, at \$13.55 per enplanement in fiscal 2014, have been stable in recent years although moderate increases are expected over the next five years.

Infrastructure Development and Renewal - Stronger
Manageable Infrastructure Needs With Minimal Borrowings: The authority maintains a strong infrastructure development program with manageable capital requirements (approximately \$1.37 billion through fiscal 2019) and relatively modest expectations with respect to future borrowings (about \$312 million in 2016 and \$63 million in 2018).

Debt Structure Risk - Stronger
Conservative Debt Profile: Following the issuance of the series 2015 new money bonds, nearly 90% of the authority's debt will be in fixed-rate mode with a descending debt service profile. All bond reserves are expected to be cash funded.

Financial Metrics:
Moderate Leverage and Strong Coverage: Debt levels were moderate relative to the airport's fiscal 2014 enplanement base (\$75 per enplanement) and net debt/cash flow available for debt service (CFADS) ratio of 3.4x was favorable. Days cash on hand (DCOH) at 236 days was modest for the rating level, but the authority's debt and liquidity policies partially mitigate this concern. Massport's general revenue bond DSCR has been consistently at or above 2.0x over the last five years with 2.65x coverage showing further improvement compared with 2.47x last year. Future coverage ratios should remain at similar levels.

Substantial PFC Debt Coverage: A sizable O&D air traffic market supports a large annual PFC collection base in excess of \$62 million. The existing debt provides a low leverage level and a very short maturity period through 2017. Fiscal 2014 DSCR on the PFC backed debt was 2.87x and is expected to remain well above 2x in the near term.

Peers:
Comparable highly rated airport sector peers include Los Angeles International Airport and San Francisco airports. Both are international gateway, large hub facilities and have strong revenue risk profiles supported by large enplanement levels and competitive airline costs coupled with strong financial metrics. Massport compares favorably to other consolidated entities with airport and port operations, such as Port of Seattle.

RATING SENSITIVITIES
Negative - Traffic Base: Elevated volatility in aviation and maritime operations that leads to deteriorating financial metrics.
Negative - Costs: Increased costs that contribute to a deterioration of coverage levels (below 2x on a sustained basis) and liquidity margins to levels inconsistent with the rating category.
Negative - Leverage: A material increase in the capital program size or borrowing needs, beyond current expectations.
Positive - Not likely given Massport's ongoing borrowing needs and expectation that financial metrics are not likely to measurably improve over the next several years.

TRANSACTION SUMMARY
The series 2015 A & B bond proceeds will finance elements of the authority's capital program. The bonds will be issued in a fixed rate mode with a final maturity in 2045, or one year beyond the current debt maturity profile.

Logan remains the centerpiece of Massport's properties, generating approximately 87% of total operating revenues in fiscal 2014. The maritime properties generate the bulk of the remaining operating revenues. Logan served over 15.3 million enplaned passengers in fiscal 2014, a 4.9% improvement over fiscal 2013. Domestic enplanement expansion from low cost carriers, particularly with JetBlue Airways, continues to be the leading contributor to growth.

Infrastructure improvements over the past decade, both at the airport as well as access roadways into Logan, have served to make the airport a more attractive facility. The improvements have enhanced Logan's competitive position relative to nearby airports in Connecticut, Rhode Island and New Hampshire. The O&D orientation of the market, currently around 95% of enplanements, attracts a diverse mix of carriers. JetBlue Airways led the market for airline passengers in fiscal 2014, accounting for more than 27% of total enplanements. This was followed closely by the combined American/U.S. Airways market, whose market share was about 22%, and Delta and United each of whom constituted about 12%-14% of passenger traffic. This passenger airline mix is considered a strong positive operating attribute at Logan as it serves a large domestic travel base complemented by international gateway service among many foreign-flag carriers.

Port operations depend on a blend of container throughput, automobile processing, bulk cargo, and cruise passengers. While container and cruise volumes have performed well over the past decade, some volatility exists with respect to the bulk and automobile segments. Massport previously anticipated operational and financial growth in the port property division due to new container line services. However, stagnant economic conditions have resulted in a less near-term optimism for container volume growth. In fiscal 2014, the port division generated \$85.7 million in gross revenues, an improvement of 11.9%, although net revenues from this business line tend to be flat to marginally positive.

Massport has a proven track record of managing its infrastructure needs and its most recently developed five year capital program through 2019 of just over \$1.37 billion will primarily focus on terminal facilities improvements, roadway improvements and airport parking. The consolidated rental car facility opened in September 2013 while construction is now fully completed. The authority issued a separately secured bond financing (Fitch rating 'A-', Stable Outlook), secured solely on a pledge of daily car rental customer facility charges (CFC) to cover project costs. The authority has also made a \$10 million loan towards the project in advance of CFC collections with expectation of repayment by September 2015. Separately, there is over \$1.3 billion of capital projects that would be funded solely from third-party developers and are not currently expected to require authority financial resources.

The 2015 bonds issuance will be used to partially fund construction of new parking spaces, property acquisition, construction of a terminal connector and facility improvements. Planned future parity bonds issuances include \$312 million in 2016 and an additional \$63 million in 2018 to fund projects at Logan.

Financial metrics continue to demonstrate strength and resiliency as evidenced by DSCR of 2.65x and 2.47x, in fiscal 2014 and 2013, respectively. This performance may trend slightly downward due to higher debt service costs over the next few years but is expected to remain very strong for a large hub airport. The authority aims to maintain a minimum of 2x coverage. Massport reported unencumbered liquidity of in excess of \$240 million in fiscal 2014, representing 236 days cash on hand. Going forward, airport reserves may be pressured as a result of draws for the capital program, but management plans to maintain between 200 and 250 days of cash on hand.

Airline costs per enplanement (CPE) have stabilized since 2009 and were reported at \$13.55 in fiscal 2014. Future CPE levels may trend higher to the \$15-\$17 range by fiscal 2019 as long as the airport can maintain a moderate level of annual traffic growth. Total leverage is low and provides for solid financial flexibility. Net debt to CFADS is approximately 3.4x, which is a favorable ratio compared with many other large hub airports. Even under Fitch's rating case scenario of a mild downturn in traffic, the authority's favorable financial and cost metrics should remain intact.

The bonds secured by the PFC collections mature in 2017. Pledged PFC collections totaled \$62.7 million in fiscal 2014, generating 2.87x DSCR. The final years' scheduled debt service payment exceeds \$55 million. This compares to annual payment requirements of \$22 million to \$26 million during the other remaining years prior to final maturity. The balloon payment is expected to be met by the use of the \$27.9 million of investments held in the debt service reserve fund together with normal PFC collections. Currently, management does not anticipate additional borrowings secured on the PFC revenue stream before existing bonds mature.

SECURITY

Massport's revenue bonds are secured by the net revenues generated from port authority properties. This includes Logan International Airport and various maritime facilities within the Port of Boston. The PFC bonds are solely secured by the collection of passenger facility charges levied at the current rate of \$4.50 per passenger.