Fitch Rates Chicago O'Hare (IL) Airport Rev Bonds 'A-'; Outlook Revised to Positive
RATING RATIONALE: The rating reflects the strong local market, the strategic location of Chicago as a hub, and the demonstrated importance of the airport to both United and American Airlines. The Rating Outlook is revised to Positive from Stable reflecting continued favourable progression of the airport capital programs with overall costs continuing to remain in line within existing budgets while airport traffic is trending in a positive direction. Positive rating migration will be dependent on operational performance consistent with Fitch's base case assumptions, a reduction in overall leverage and cost certainty related to the remaining capital program costs. The PFC rating reflects consistent performance of high debt coverage levels and low leverage from current cashflow.
KEY RATING DRIVERS
Revenue Risk - Volume: Stronger
SIZABLE TRAFFIC BASE: O'Hare is the primary airport within the Chicago metropolitan area and is well positioned to serve as major domestic connecting hub and international gateway. The airport relies heavily on its two dominant carriers, United Airlines and American Airlines with an over 80% combined market share while connecting traffic captures half of the total 35 million enplanements. Traffic performance is beginning to trend positive following several consecutive years of flat growth.
Revenue Risk-Price: Stronger
STRONG RATE SETTING MECHANISMS: The existing residual agreement runs through 2018 and provides for timely recovery of airport costs including funding requirements for reserve maintenance. Airline costs per enplanement (CPE) are currently moderate for a large-hub airport at \\$16.53 but are expected to rise above \\$20 over the next five years and potentially peaking at the \\$30 level later on under Fitch's base and rating cases as airport capital spending is captured in the airline rate base. Strong market yields mitigate to some extent the rising CPE direction.
Infrastructure Development and Renewal Risk: Midrange
LARGE SCALE CAPITAL PROGRAM: Much of the airport improvements are focused on airfield improvements to enhance capacity for hubbing operations. To-date, the airport has been successful on project delivery while maintaining costs within budget. Future requirements are still significant and rely heavily on future debt borrowings for funding.
Debt Structure: Stronger
CONSERVATIVE CAPITAL STRUCTURE: Much of O'Hare's airport revenue and passenger facility charge debt is issued in fixed rate mode with conservative debt amortization. Bond covenants and reserve requirements are at adequate levels for a major U.S. airport.
STABLE FINANCIAL METRICS, HIGH LEVERAGE
Debt service coverage and liquidity metrics have historically been sound. Taking into account rollover fund balance transfers, debt service coverage was 1.1 times (x) in fiscal 2014. Liquidity from unrestricted reserves is adequate based on 172 days cash on hand. High leverage remains a concern with a 12.8x net debt to cashflow available for debt service. Fitch expects leverage to migrate to approximately 10x by 2021.
PFC COVERAGE PROVIDES CUSHION. A sizable air traffic market supports a large annual pledged PFC revenue level of nearly \\$131 million. The stand-alone PFC lien has moderate leverage of 4.3x and PFC debt service coverage is stable at 2.17x in fiscal 2014. Fitch's base case projections indicate coverage levels to average over 2x placing a small level of risk to the connecting traffic segment of enplanements.
PEER ANALYSIS
Appropriate rated peers to Chicago O'Hare Airport include major-market hub airports with international gateway service including Dallas-Ft Worth (A), and Miami International Airport (A). Both airports have elevated leverage levels in excess of 10x; however, DFW has higher debt coverage ratios and lower airline charges as compared to Miami and Chicago.
RATING SENSITIVITIES
Positive: A material reduction in overall airport leverage on a long term basis could enhance the financial flexibility of the airport.
Negative: Increased volatility or a changing profile to the traffic base, influenced by hubbing operations from ORD's leading carriers;
Negative: Weak capital program management lending to higher reliance on debt than currently projected leading to higher than expected CPE or a sustained period of higher leverage.
TRANSACTION SUMMARY
The series 2015A-E bonds are senior lien obligations of O'Hare International Airport and are being issued to current and advance refund nearly \\$1.8 billion existing bonds for debt service savings. A portion of the proceeds will also be used to finance certain capital improvements as well as to refinance certain outstanding draws on commercial paper notes. The new issue is estimated to total approximately \\$2 billion. The proposed bonds are expected to be issued in fixed rate mode and have a final maturity in 2046.
The underlying strength of the airport comes from the passenger base that ranks among the nation's largest for both origination and destination (O&D) traffic as well as international services. Over 50 domestic and foreign-flag carriers operate out of O'Hare to 161 domestic and 59 international non-stop destinations. In 2014, the airport handled over 35 million enplaned passengers with about half being connecting traffic. After several years of stalled traffic growth, O'Hare has experienced a favourable 5% increase in passenger volume in 2014 followed by a more than 9% increase year-to-date in 2015. Both domestic and international segments realized increases over the past year and a half and new services from low cost carriers such as Spirit (Issuer Default Rating [IDR] 'BB+', Outlook Stable) and Frontier have been contributors to the positive traffic developments.
Both United (IDR 'BB-', Outlook Positive) and American (IDR 'B+', Outlook Stable) still remain the dominant carriers, contributing 45.7% and 37.3%,respectively, of O'Hare's enplanements in 2014. For both carriers, O'Hare serves an important role in both their hubbing networks and international gateway roles. American emerged from bankruptcy in late 2013 and successfully completed its merger with US Airways. These developments have not led to any material operational changes. The stability of United and American is important as their presence and hubbing operations are highly influential to O'Hare's future capital investment and leveraging commitments.
O'Hare has made significant progression of its entire multi-phase OMP upgrades and more than half of the costs have been incurred. With the upcoming new runway opening of 10R-28L in October 2015, three of the four new runways will have been completed along with one of the two planned runway extensions. Costs related to the completion phases of the OMP, which will cover the additional airfield projects, are also anticipated to be close to \\$3.3 billion. Together, the airfield projects position the airport better for capacity to manage operational growth. The phase 2A component, smaller at \\$1.03 billion, has already been approved by signatory carriers and all of its funding sources have been secured. Approximately \\$677 million has been spent to-date.
A future phase 2B component is much larger in scale at over \\$2 billion, and additional airline approvals would be needed to move forward. Latest financial plans to support the remaining elements of the capital program show overall debt levels rising to over \\$9 billion in total over the next five years. Fitch estimates that net debt to CFADS is currently 12.8x for the GARBs will remain flat over the next five years before moderating slowly to lower levels.
The overall airline cost and financial profile is reflective of both the residual operating agreement and growing fixed costs associated with debt issuances that supported past capital programs. Historically, O'Hare's financial operations have produced stable debt service coverage, at or near 1.10x, (including fund balances) and the CPE was \\$16.53 in 2014. Going forward, coverage levels on overall airport debt are expected to remain largely at the minimum required 1.10x (including fund balances) level specified under bond documents, but will require substantial increases in airline fees to cover higher debt costs.
The latest sponsor traffic and financial forecasts assume both the full leveraging under the 2A and 2B capital programs. Fitch reviewed the underlying assumptions, including a moderate traffic growth that averages at 1.2% through 2024 coupled with revenues and expenses growing at 6% and 6.5%, respectively, to be applied as the Fitch base case. Under this scenario, CPE is expected to be around \\$21.50 in 2017 increasing to \\$24 and \\$30 in 2020 and 2024, respectively, as debt costs are incorporated into the airline rate base. Leverage is expected to be elevated in the near term, above 12x through 2020, falling to 8.7x but 2024 as revenues increase under the methodology of the current airline agreement.
Considering the history of lower traffic growth in recent years, even in the context of post-recession recovery and the risk of market share loss to the nearby city-owned Midway airport, Fitch's rating case assumes a 0.2% average traffic growth rate. The results indicate that CPE levels will be \\$2-\\$4 higher in each year while debt service coverage levels remaining unchanged. Under this scenario, leverage is marginally above Fitch's base case of 12x-13x through 2020 and then reducing below 10x. Given the hubbing risks, Fitch also stressed the loss of an American connecting traffic and results show CPE exceeding \\$40 by the end of the forecast period. While underperformance in traffic would likely translate in even higher airline charges, as shown in the rating and hub stress cases, Fitch views O'Hare as a strategic market with a relatively strong ability to attract more services.
The PFC credit has historically maintained healthy coverage cushions. In 2014, debt service coverage derived from \\$141.6 million in pledged PFC revenues was 2.17x while leverage, at 4.3x, remains in a declining trend. Coverage of future maximum annual debt service is projected to remain over 2x based on current traffic levels. Fitch's rating on the PFC debt considers the risks inherent in the narrow nature of the revenue stream rendering the projected coverage ratios susceptible to losses in the connecting portion of the airport's traffic. The updated plan of finance for the capital program does not include additional PFC stand-alone borrowings.
SECURITY
The airport general revenue bonds are secured by a first lien on airport net revenues. The PFC bonds are secured by a first lien on the PFC receipts.
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