Fitch Ratings affirms the underlying 'BBB' rating on
approximately $34.8 million in outstanding Northwest Arkansas
Regional Airport Authority, Arkansas (the authority) fixed-rate
airport revenue refunding bonds, series 2003. The authority has
approximately $30 million outstanding in parity long-term
variable-rate bonds, series 2010 that are not rated by Fitch. The
Rating Outlook is Stable.
KEY RATING DRIVERS:
Small Hub with Concentrated Traffic Base: Northwest Arkansas
Regional Airport's (XNA, or the airport) small, origination and
destination (O&D) traveler base has experienced moderate levels
of enplanement fluctuations through the economic downturn. The
airport reported 562,747 enplanements in 2011, which represented a
1.4% decline from the prior year. American Airlines' concentration
at the airport is above average (Fitch Issuer Default Rating (IDR)
'D'), with 40% market share in 2011. The air trade area's
established business profile with large corporate presence, i.e.
Wal-Mart (IDR 'AA'/Stable) and Tyson Foods (IDR 'BBB'/Stable), is a
credit strength, but there is potential for ongoing economic
sensitivity of these industries that may result in some volatility
in enplanement activity.
Favorable Rate Setting Framework: The airline use and lease
agreement provides for strong cost recovery terms. The airport's
cost structure is comparatively low, with cost per enplaned
passenger (CPE) at $5.36 in 2011. Non-airline revenue sources (at
approximately 61% of operating revenues) are expected to continue
to grow, with anticipated concession revenue growth associated with
the addition of the new concourse.
Large Variable Rate Debt Component: The current airport capital
structure lends to some potential exposure to both counterparty
performance and to basis risk on debt interest costs. Approximately
46% of authority's total debt is in variable-rate mode with a
portion hedged through a synthetic fixed swap agreement.
Manageable Levels of Financial Leverage: The authority maintains
a relatively strong liquidity position evidenced by the
availability of restricted funds, with approximately $17 million
specifically set aside to cover debt service shortfalls after
payment of expenses. In turn, the airport currently has a favorable
5.8 times (x) net debt/cash flows available for debt service.
Historically stable financial performance has resulted in healthy
debt service coverage levels of 1.42x (excluding the coverage
account) or greater over the last five years (through 2011); XNA's
outstanding debt level is higher than most small hub airports at
$115 per enplaned passenger.
Modest Capital Program: The current capital improvement plan
focuses on a $30 million runway rehabilitation project that is
expected to be largely grant funded. There are no anticipated
future borrowings expected over the next several years; however,
limited bond financing may be considered for a construction of a
parking deck.
WHAT WOULD TRIGGER A RATING ACTION:
--Significant shift in enplanement base and downsizing of
service or capacity presently operating at the airport,
particularly the airport's largest carrier (American Eagle/American
Airlines);
--Changes to the airport's financial metrics or cost structure
for the airlines;
--Additional leverage that would meaningfully dilute coverage
levels.
SECURITY:
Bondholder security for both the series 2003 & 2010 bonds is
provided from airport revenues, including passenger facility
charges (PFCs). The bonds are also secured by certain restricted
fund balances held by the airport authority, currently totaling
$7.3 million. Fitch does not rate the series 2010 bonds which have
liquidity support from a letter of credit from Regions Bank (IDR
'BBB-/F3').
CREDIT SUMMARY:
AMR Corp. and its principal subsidiary American Airlines, Inc.
were downgraded by Fitch to 'D' from 'CCC' after the company filed
for Chapter 11 bankruptcy protection on Nov. 29, 2011. Since the
filing, the carrier has not changed service levels at the airport.
Should significant reductions in service levels occur, Fitch
believes this could have an impact on the airport's credit
rating.
The airport's enplanements decreased at a compound annual growth
rate (CAGR) of 0.8% between 2006 and 2011; the 1.4% decline in 2011
to 562,747 was attributed to continued economic weakness and the
associated frequency reductions by carriers, as well as several
days of heavy snow related service suspensions in the winter of
2011. The authority has forecasted flat enplanement levels for
2012.
The airport's airline agreement employs a cost-center residual
approach for landing fees and a compensatory approach for the
terminal facility. The agreement was extended in December 2011 with
no substantial differences and it will expire in December 2013.
Operating revenues have grown at a CAGR of 3.6% from 2006 to
2011, while costs have increased at a rate of 1.1% over the same
period. As per the authority's preliminary 2011 results, operating
revenues increased by approximately 4% to $11 million while
operating costs were reduced by 7.8% to $4.6 million. The authority
has been able to decrease operating expenses by maintaining cost
saving practices. Financial performance for 2011 was stable, with
approximately $2.9 million in unrestricted reserves (233 days of
unrestricted cash on hand) and a total liquidity position of
approximately $22.9 million, of which $9 million is restricted for
debt service and $7.9 million is set aside for operational and
maintenance expenses and debt service shortfalls.
Debt service coverage was estimated at 1.65x in 2011 (1.90x when
including the rolling coverage account), an increase from 1.44x in
2010. Both series 2003 and series 2010 refunding bonds are
scheduled to mature in 2027, with total estimated annual debt
service costs ranging between $5.8 to $6.3 million through
maturity. PFCs have traditionally contributed a minimum of $2
million to the revenue base. Fitch will continue to monitor
coverage levels and should coverage levels drop below its
historical band, downward rating action may be warranted.
In August 2011, the authority completed the expansion an upper
level concourse at the airport. The authority plans to repair its
runway that will be funded with approximately $30 million in AIP
grants and entitlement funds. A possible parking expansion project
potentially funded with bond financing supported by customer
facility charges is not included as part of the current capital
plan.
Additional information is available at 'www.fitchratings.com'.
The ratings above were solicited by, or on behalf of, the issuer,
and therefore, Fitch has been compensated for the provision of the
ratings.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance',
dated Aug. 16, 2011;
--'Rating Criteria for Airports', dated Nov. 28, 2011.
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648832
Rating Criteria for Airports
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=656970
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY
FOLLOWING THIS LINK:
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION,
RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE
AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM
THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY,
CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER
RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE
OF CONDUCT' SECTION OF THIS SITE.