CHICAGO–(BUSINESS WIRE)–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
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.
Negative – Further traffic deterioration going beyond the connecting
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
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.
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.
For additional information, see Fitch’s press release ‘Fitch Affirms
Cleveland, Ohio’s Airport System Revs at ‘BBB+’; Outlook Revised to
Stable’, dated Nov. 11, 2015 available on the Fitch website, ‘www.fitchratings.com‘.
Date of Relevant Rating Committee: Nov. 11, 2015.
Additional information is available on www.fitchratings.com.
Rating Criteria for Airports (pub. 13 Dec 2013)
Rating Criteria for Infrastructure and Project Finance (pub. 28 Sep 2015)
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Elizabeth Fogerty, +1 212-908-0526