OREANDA-NEWS. Fitch Ratings has assigned a 'BBB+' rating to Cleveland, Ohio's approximately $151 million airport revenue refunding bonds series 2016. The Rating Outlook is Stable.

The rating reflects a midsize airport market with uneven traffic performance, high average airline costs, and leverage offset by modest capital requirements, sound liquidity and stable coverage metrics. The recent shift to a regional origination/destination (O&D) airport has been supported by the entrance of low-cost carriers which has helped diversify the carrier profile.

KEY RATING DRIVERS

Revenue Risk - Volume: Midrange
Midsize Market Transitioning: Cleveland's total traffic base is approximately 4 million enplanements and United remains the dominant carrier at Cleveland, although at lower concentration levels after its decision to eliminate its connecting-based operations as well as some O&D service. Low-cost carriers have entered the market, helping to backfill routes and lower average ticket prices. United Airlines (IDR; 'BB-', Outlook Positive) now comprises just 34% of enplaned passengers versus a 68% concentrated share back in 2013.

Revenue Risk - Price: Midrange
Above-Average Cost Profile: Airline revenues represent a relatively high share of airport operating revenues. The high average airline cost structure ($21.56 cost per enplanement [CPE] for 2014) is substantially a burden on United due to their special facility leases for Concourse C and D, through 2019 and 2027, respectively. The non-United carriers have more competitive CPE levels with which to operate from Cleveland. The existing airline agreement is residual-based rate-setting and provides ongoing cost recovery protections to volume fluctuations.

Infrastructure & Renewal Risk: Stronger
Moderate Infrastructure Plan: The airport's infrastructure is viewed to be in sound condition and the three-year capital improvement program (CIP) is estimated at $94 million funded through grants, existing bond proceeds, or private investment.

Debt Structure: Stronger
Conservative Debt Structure: The system's debt is approximately 86% fixed-rate debt and 14% unhedged variable-rate bonds. Bond documents provide for solid reserves and adequate coverage requirements.

High Debt and Strong Liquidity: The airport's total net debt-to-cash flow available for debt service (CFADS) is elevated at 8.53x. A strong balance sheet with reserves equating to 476 days cash on hand helps mitigate potential traffic and operating revenue volatility. Debt service coverage is stable in the 1.35x-1.40x range, including use of coverage funds.

Peer Group: The airport's peers include St. Louis, Missouri ('BBB+'/Stable Outlook) and Allegheny County, Pennsylvania ('A-'/Stable Outlook). Each airport had previously been a domestic hub and has transitioned to a primarily O&D airport. All three airports have a high CPE but Cleveland has both the highest leverage and CPE. Allegheny County's low leverage supported by a residual agreement separates itself into the 'A' category.

RATING SENSITIVITIES

Negative - Further traffic deterioration going beyond the connecting traffic;

Negative - Changes to the airline rate-setting methodology creating either weaker cost recovery terms or weaker financial metrics;

Negative - Significant uses in airport cash balances to subsidize airline charges or cover capital expenditures may impair financial flexibility;

Positive - Sustained traffic growth that allows for average airline costs to evolve to a more competitive range could support a consideration for a higher rating.

TRANSACTION SUMMARY

The authority is issuing fixed-rate refunding bonds in the amount of $151 million to advance refund the outstanding series 2000C and 2006A airport revenue bonds for debt service savings. The amortization structure of the refunding bonds will capture savings on the 2000C bonds in an equal basis in the years 2018-2022 with the same post-refunding debt service in years 2023-2031 as the prior debt service structure and the 2006A savings will be spread between each year. The total net present value savings are expected of around $17 million.

The master airline lease agreement expired on Dec. 31, 2015 and the carriers are currently operating under a month-to-month basis. The airport is cooperatively working with United to amend the special facility leases and will finalize the master lease renewal after negotiations complete on the special facility leases.