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TEXT-Fitch rates Chicago O'Hare International Airport revs
July 25, 2012 / 3:34 PM / 5 years ago

TEXT-Fitch rates Chicago O'Hare International Airport revs

(The following statement was released by the rating agency)

July 25 - Fitch Ratings assigns an ‘A-’ rating to the city of Chicago (the City), O‘Hare International Airport’s (O‘Hare, or the airport) proposed $813.3 million general airport senior lien revenue refunding bonds (GARBs) series 2012ABCD and an ‘A’ rating to the $472.9 million passenger facility charge revenue refunding bonds series 2012AB. In addition, Fitch affirms the airport’s $369.3 million second-lien revenue bonds at ‘AA’ and $6.45 billion third-lien bonds at ‘A-'. Fitch also affirms the outstanding $778 million passenger facility charge (PFC) bonds at ‘A’. The outstanding general airport third lien revenue bonds will become the airport’s working senior lien credit at the closing of this refunding issue on the redemption date of the outstanding second lien bonds. In May 2012, the city redeemed all outstanding first-lien bonds and Fitch withdrew its then ‘AA+’ rating. Upon redemption and defeasance of the second-lien bonds, the rating on such lien of bonds will be withdrawn. The Rating Outlook on the general airport senior lien bonds remains Negative. However, Fitch revises the Rating Outlook on the airport’s general airport second lien bonds to Stable from Negative reflecting the planned redemption and defeasance of this lien level in conjunction with the proposed refunding. The Rating Outlook for the PFC bonds is Stable. KEY RATING DRIVERS SIZABLE TRAFFIC BASE SUBJECT TO CONCENTRATION AND CONNECTING EXPOSURES: O‘Hare is the primary airport within the Chicago metropolitan area and is well positioned to serve as a major domestic connecting hub and international gateway. The airport relies heavily on its two dominant carriers, United and American Airlines with a combined 82% market share. Connecting traffic captures just over 50% of the total 33.2 million enplanements. Traffic performance has been uneven in recent years and, while American has maintained much of its current scale of operations since it November 2011 bankruptcy filing, uncertainty remains with regards to future service levels. STRONG RATE SETTING MECHANISMS: The existing residual agreement runs through 2018 and provides for timely recovery of airport costs, including funding requirements for maintenance reserves. Airline costs per enplanement (CPE) are expected to rise from the current $13.49 level of fiscal 2011 to above $20 over the next five years as airport capital spending is captured in the airline rate base. CONSERVATIVE CAPITAL STRUCUTRE: Much of O‘Hare’s airport revenue and passenger facility charge debt is issued in fixed rate mode with conservative debt amortization. Following the issuance of the series 2012 refunding bonds, the airport will operate under a single lien of long-term airport revenue debt. STABLE FINANCIAL METRICS BUT VERY HIGH LEVERAGE: Debt service coverage and liquidity metrics have historically been sound. Excluding the use of fund balance transfers, debt service coverage was 1.11 times (x) in fiscal 2011. Liquidity is adequate based on 251 days cash on hand, however, high leverage remains a concern with a 19.1x net debt to cash flow available for debt service. This leverage will take a number of years to evolve closer to the 10x range. LARGE SCALE CAPITAL PROGRAM: Much of the airport improvements are focused on airfield improvements to enhance capacity for O&D and hubbing operations. To-date, the airport has been successful on project delivery while maintaining costs within its $3.28 billion OMP Phase 1 budget. PFC COVERAGE IS NARROWING: A sizable air traffic market supports a large annual pledged PFC revenue level in excess of $127 million. While the PFC lien has moderate leverage of 5.6x, PFC debt service coverage has fallen to 1.65x in fiscal 2011 as compared to over a 2x level in prior years. Projections indicate coverage levels to remain over 1.7x placing a small level of risk to the connecting traffic segment of enplanements. WHAT COULD TRIGGER A RATING ACTION --Traffic Contraction: Changing profile to the traffic base with a particular focus on hubbing operations from ORD’s leading carriers; --Sustained High Leverage: Increases to the expected size and debt requirements to address identified capital programs; --Rising Costs: Upward changes to the overall airport’s cost profile to carriers above the anticipated mid-$20 per enplanement level. TRANSACTION SUMMARY O‘Hare is planning to refund outstanding bonds for both its general airport and passenger facility charge credits. At current market conditions, the debt service benefits of both refundings are expected to be relatively substantial with net present value savings at 10% of the amount of refunded bonds. The general airport refunding will also allow the airport to redeem and defease all remaining second lien bonds. In May 2012, the airport utilized available funds to fully redeem the outstanding first lien bonds. The two actions will allow the airport to operate under a single senior lien general airport credit and to provide for a more streamlined and simplified flow of funds. Further, the airport intends to move existing cash and investments into its debt service reserve accounts in order to increase its cash-funded share of the reserve requirement while keeping existing reserve surety policies in place. 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 and international service. Local economic conditions have weakened over the course of the current recession but the metropolitan statistical area (MSA) is well supported by strong demographics and above-average wealth levels. Nearly 50 carriers operate out of O‘Hare to 144 domestic and 52 international non-stop destinations. In 2011, the airport handled over 33 million enplaned passengers with about 52% representing connecting traffic. Still, Fitch notes that the economic downturn has affected the overall traffic activity, with enplaned passengers dropping more than 12% below 2007 levels. Both O&D and connecting traffic were affected due to lower overall traffic demand and carrier rationalization of capacity and service levels. Operating data in recent months indicate greater stabilization in traffic volumes and the airport is indicating a 3.7% traffic rebound for the first five months of 2012. Both United Continental (Issuer Default Rating of ‘B’ by Fitch) and American (IDR ‘D’) contribute the largest shares of O‘Hare’s enplanements with approximately 48% and 36%, respectively. American’s bankruptcy situation poses a credit concern and serves as the primary reason for the credit’s Negative Outlook given American’s size and role at O‘Hare which heavily influences traffic performance during a period of significant capital investment and leveraging. A range of possible outcomes may emerge either during or after the bankruptcy process runs its course. Fitch assesses the airport’s cost and financial position based on a continuation of both existing and reduced activity. Additionally, the operations at nearby Midway and Milwaukee airports remain a moderate competitive threat for domestic-oriented traffic, particularly given those airports concentration of service from low-cost carriers. O‘Hare is close to completion of the first phase of the $3.28 billion OMP that includes new runways and 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. The smaller phase 2A component, at $943.3 million, has already been approved by the signatory carriers and much of the funding sources have been secur

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