OREANDA-NEWS. Fitch Ratings has affirmed its long-term 'A-' rating of Massachusetts Port Authority's (Massport or the authority) approximately $205.04 million special facility revenue bonds series 2011A (tax exempt) and 2011B (federally taxable). Bond proceeds were used to finance construction of a consolidated car rental facility (ConRac or the facility) at Boston Logan Airport (Logan). The Rating Outlook is Stable.

The rating reflects the strength and resilience of Logan airport's large origin and destination (O&D) enplanement base which the facility serves. The structural enhancements built into the rental car concession agreement provide further credit protection by allowing the authority to adjust rental rates and charge a contingency rent if revenues fall short of projections. These strong credit features are somewhat offset by elevated leverage combined with the narrow revenue stream pledged to the bonds in the form of customer facility charges (CFC) and its inherent volatility due to its direct correlation with visiting O&D passenger volume and the duration of rentals.

KEY RATING DRIVERS

Large O&D Base With Diverse Rental Car Company Market: Massport serves a strong economic base, and is the dominant air transportation facility for the New England air service market. High O&D traffic supports both ongoing demand for air travel and a high level of rental car transactions with over 14.5 million enplaned O&D passengers.

Concession Agreement Sets High Barriers to Entry & Provides Pricing Flexibility: The 15-year ConRac concession and lease agreements apply to all nine rental car companies expected to service Logan passengers. The airport is able to adjust the rate as needed to cover costs and meet coverage but the actual rates charged to on- and off-airport operators are currently different. The leases include a contingent rent provision allowing for additional rent to be collected from project tenants in order to meet obligations in the event of a shortfall in revenue, which Fitch views favorably. However, the CFC revenue stream supporting ConRac bonds is somewhat narrow, with direct reliance on car rental transaction activity to generate pledged revenue.

Strong Financials but Somewhat Elevated Leverage: The project benefits from strong net senior debt service coverage of 2.34x in fiscal 2014 (ended June 30), combined with strong levels of ongoing reserves, providing the ability to withstand operational stresses. The project has somewhat elevated senior leverage with net debt-to-cash flow available for debt service (CFADS) at 5.91x. CFC bonds represent about 60% of total sources for the project.

RATING SENSITIVITIES
Negative:
--Material declines in rental car activity supported by the O&D component of the airport's traffic base could weaken credit quality and result in negative rating action;
--Inability to maintain sound coverage metrics for the senior lien ConRac bonds as well as adequate CFC cash flow generation to meet all obligations would pressure the rating.
Positive:
--Continued volume growth at Logan airport that bolsters revenues and decreases leverage may signal that positive upward movement of the rating is merited

SUMMARY OF CREDIT
The recently completed ConRac project involved development of a consolidated facility in the southwest service area (SWSA) of the airport to integrate airport-related rental car operations and facilities into one, making for more efficient operations. Transportation from the airport terminals to ConRac is now served by a unified shuttle bus system. The facility includes a four-level 1.2 million square-foot garage that can hold up to 3,200 rental car parking spaces, a customer service center, and four rental car service and storage areas.

Construction began in June 2011 and ConRac officially opened in September 2013; the project has since been closed out. Fitch notes that the long-term nature of the 15-year concession agreement with the rental car operators, which took effect on the project date of beneficial occupancy (DBO) and is co-terminus with the lease agreement, is viewed as a credit strength.

The CFC debt is secured by a somewhat narrow revenue stream that is contingent upon strong performance in rental car activity. The current $6 per-day CFC rate is relatively high when compared to other airports with CFC-secured stand-alone bonds. No additional CFC rate increases are planned over the medium term.

Fiscal 2014 visiting O&D enplanements increased by 4.7% to 6.9 million following flat growth in fiscal 2013 and a 2.7% increase in fiscal 2012. Transaction days at the facility stood at 5 million, up 2.2% in fiscal 2014. Fiscal year-to-date through April, transaction days are up 4.2%. Transaction days have historically demonstrated a higher degree of volatility than O&D enplanements through economic cycles. However, Fitch notes that the authority has the ability to ensure that all obligations are met by charging a contingent rent to tenants and/or by increasing CFC rates, in addition to all the reserve funds supporting the project.

In November 2013, the authority made a $10 million loan to the ConRAC project. Interest on the loan is paid monthly from the CFC cash flow while $4 million in principal is expected to be repaid by the end of June 2015 and the remaining balance of the loan is expected to be repaid in September 2015.

Fiscal 2014 senior debt service coverage is adequate at 2.34x on a net revenue basis and 2.64x including the rollover and supplemental funds. Fitch's base and rating case enplanement assumptions were matched respectively with those from the recent review of the Logan airport revenue bonds. Under Fitch's base case forecast, which assumes moderate growth through fiscal 2019, net senior debt service coverage is projected to be in the 2x range. Under Fitch's rating case scenario that assumes a 12% reduction in transaction days in fiscal 2016 with a moderate recovery thereafter, net coverage is estimated in the 2.0x range. Leverage peaks in fiscal 2016 at 5.85x.

Security:
Series 2011 bonds are secured by a pledge of the CFC collections received or receivable by the authority and any contingent rent paid by the rental car companies as well as insurance proceeds and condemnation awards. In addition, the authority has pledged the amounts on deposit in the project fund, debt service fund, and reserve funds created under the terms of the CFC trust agreement.