OREANDA-NEWS. November 11, 2015. Fitch Ratings has affirmed the 'BBB+' rating on approximately \\$192.7 million in outstanding airport system revenue bonds previously issued by the Rhode Island Economic Development Corporation (now the Rhode Island Commerce Corporation) on behalf of the Rhode Island Airport Corporation (RIAC or the airport). The Rating Outlook is Stable. The airport also has approximately \\$42.3 million in the form of a parity private placement loan which is not rated by Fitch.

KEY RATING DRIVERS

The rating affirmation reflects a small market airport that has maintained stable financial performance amid weakening traffic trends caused by route rationalization and competition in the greater New England air trade service area. The airport maintains a higher than average cost per enplanement level (CPE) as a result of its use and lease agreement, which provides extraordinary coverage protection. In addition, the rating reflects RIAC's relatively high debt levels, which are partially mitigated by healthy reserve balances of approximately \\$33.6 million.

Revenue Risk - Volume: Weaker
Small Market with Competition: T.F. Green Airport serves a 96% origination & destination (O&D) traffic base of 1.8 million enplanements, as of fiscal 2015. As a result of the competitive New England airport environment, the airport has experienced enplanement declines since 2006, though declines have slowed in recent years. Concentration risk exists with Southwest Airlines (rated 'BBB' with Positive Outlook by Fitch) representing 46% of enplanements in fiscal 2015 (ended June 30).

Revenue Risk - Price: Midrange
Elevated Costs Due to Rate-Setting Flexibility: The airport's hybrid use and lease agreement (expiring in fiscal 2020) includes both a revenue sharing component and extraordinary coverage protection. Fitch notes that the strong cost recovery terms have led to a rising CPE level, albeit rates are somewhat constrained by nearby competition.

Infrastructure Development and Renewal: Midrange
Sizable Capital Plan: The airport's \\$170 million capital improvement plan (CIP) is expected to mainly be funded with a combination of grants, new debt and passenger facility charge (PFC) revenues. Future debt is expected to partially fund the extension of Runway 5/23, which will allow the airport to enhance service options, and thereby hedge itself against capacity discipline.

Debt Structure: Stronger
Conservative Debt Structure: All of the airport's outstanding debt is in fixed-rate mode with a level-to-declining amortization profile.

Healthy Liquidity, Moderate Coverage: Operations are supported by \\$33.6 million in available reserves, equivalent to 397 days cash on hand. The airport's indenture-based debt service coverage ratio (DSCR), including a rolling coverage account and fund transfers from net revenue sharing with the carriers, marginally declined to 1.76x in fiscal 2015 from 1.80x in fiscal 2014. Without the coverage account and general fund transfers, coverage was 1.47x, consistent with the 'BBB+' category. Leverage remains elevated at 6.1x.

Peers: In Fitch's opinion, airports which have heightened debt and CPE levels, such as Birmingham (rated 'A-'; Negative Outlook) and Fresno (rated 'BBB'; Stable Outlook), respectively, serve as comparable peers to RIAC. Amongst these peers, RIAC's CPE and debt levels are relatively in line with Birmingham's though higher than Fresno's, while RIAC's underlying service area would be viewed as stronger than Fresno's.

RATING SENSITIVITIES

Negative - Traffic and Revenue Performance: Prolonged decline in enplanement levels which cause airline costs to become unsustainable would lead to the consideration of a rating downgrade.

Negative - Financial Capacity: Higher than anticipated debt issuance that materially increases leverage while diluting debt service coverage.

Negative - Debt Service Coverage: Cash flow coverage levels falling under the 1.2x level would likely lead to a lower rating, being mindful that coverage levels are expected to narrow with the planned bond issue.

Positive: The airport's traffic profile and size, coupled with vulnerabilities to economic conditions or competition, currently restrict a higher rating at this time.

CREDIT UPDATE
RIAC's financial and operational performance has remained stable despite continued weakness in traffic levels. Enplanements dropped 3.8% in fiscal 2015 as a result of capacity constraints by airlines. However, enplanements have shown signs of stabilization over the first three months of fiscal 2016, declining by a marginal 0.7%. Fitch notes that although traffic has continued to decline since 2006, the rate of decline has decreased, signifying that the airport may be reaching a base level of traffic in the near future. In fiscal 2015, operating revenue increased 3.8%, due to an increase in passenger airline revenue as result of the inclusion of debt service related to the Deicer Management System into the airline rate base. Fiscal 2015 operating expense increased 2.6% led by increased medical costs, increases in employee wages due to snow removal overtime pay, utility costs, and advertising expense. It is expected that this expense level may be maintained in future years.

The airport currently expects to issue approximately \\$40 million of parity bonds by the end of the year, majority of which will be used to fund a portion of the runway extension project, fully backed by PFCs. Fitch plans to meet with management in the upcoming months to obtain greater detail regarding the issuance and expectations for future performance.

In Fitch's five-year base case, Fitch assumes no enplanement growth following fiscal 2015's decrease, moderate airline revenue and cost growth, and the additional debt issuance previously identified. In this scenario, debt service coverage per the bond indenture hovers around 1.69x while CPE peaks in the mid-\\$14 range. Without the coverage account and general fund transfers, coverage averages 1.38x. In Fitch's five-year rating case, which assumes increased enplanement stresses and further cost escalation, debt service coverage averages 1.61x, while CPE levels rise to \\$15. DSCR remains slightly above 1.20x without the coverage account and general fund transfers. In both cases, leverage migrates down to 5x within five years. These financial metrics are consistent with the current rating category.

SECURITY

The bonds are payable from the net revenue of the airport's operations. PFCs are excluded from the definition of 'Revenue,' but have been pledged to the payment of a portion of debt service.