Fitch Downgrades Susquehanna Area Reg'l Airport Auth's (PA) Sr Airport Revs to 'BB+'; Outlook Stable

Fitch Ratings has downgraded the Susquehanna Area Regional Airport Authority's approximately $148 million senior airport revenue bonds to 'BB+' from 'BBB-'. At the same time, Fitch affirmed the authority's approximately $12 million subordinate airport revenue bonds at 'BB+'. The Rating Outlook on all bonds is Stable.

DOWNGRADE RATIONALE

The downgrade reflects Fitch's view that a 'BB+' rating is more consistent with a small-market airport that is operating at high cost per enplanement (CPE) levels, is highly levered and has constrained liquidity and revenue generation capability. These metrics, coupled with extremely low forecasted all-in debt service coverage, are not comparable to peers within the investment grade portfolio. The senior and subordinate lien ratings are now aligned as Fitch views the financial margins as largely comparable when assessed over their respective bond terms. After the subordinate lien bonds mature in 2017, the senior lien debt service payments immediately increase so that the aggregate payments remain almost constant, resulting in no material changes to the total coverage ratio.

KEY RATING DRIVERS

Revenue Risk - Volume: Weaker

Small Enplanement Base, Significant Competition: Harrisburg International Airport serves primarily as an origination and destination (O&D) airport within the state's capital region. State government, corporations and universities create a small, moderately stable traffic base that faces significant regional competition, particularly from airports in Baltimore, Philadelphia and Washington, D.C.

Revenue Risk - Price: Weaker

High Cost Structure: CPE levels in the $14 to $16 range limit the airport's pricing flexibility from an economic and competitive perspective, even though the airport operates under a hybrid use & lease agreement. The agreement is currently operating under a one-year optional extension allowing airport management to raise rates and charges to meet rate covenants. Negotiations for a new agreement are underway which may provide for stronger cost recovery terms.

Infrastructure Development and Renewal: Stronger

Modern Facility, Limited Capital Needs: Updated facilities allow the authority to maintain an internally funded five-year capital plan which totals $49 million, funded primarily by federal and state grants with no additional debt.

Debt Structure: Stronger (Senior Lien); Midrange (Subordinate Lien)

Conservative Debt Structure: The outstanding bonds are fixed rate, fully amortizing with aggregate level debt service through 2038. Both the senior and subordinate bonds are supported by cash-funded debt service reserve accounts as well as rate covenant triggers at 1.25x and 1.10x, respectively.

Financial Metrics

High Leverage, Thin Coverage: The airport's total net debt-to-enplaned passengers is $230 while the airport's total net debt-to-cash flow available for debt service (CFADS), excluding the coverage account, is nearly 11x. For a small-sized airport, the debt burden is high. On an indenture-calculated basis, which uses passenger facility charges (PFCs) to offset debt service, all-in debt service coverage in 2013 was 1.34x. In Fitch's view, debt service coverage will migrate closer to the 1.25x covenanted level for the foreseeable future. The airport's operations are moderately supported with 112 days cash on hand (DCOH).

Peer Group: Amongst its closest rating-level peers in the 'BBB' category, such as Burlington (VT), Fresno (CA) and Pensacola (FL), the airport demonstrates materially higher leverage and CPE, with weaker debt service coverage and liquidity.

RATING SENSITIVITIES

Negative:

--Traffic Base: Measurable contraction or elevated volatility in passenger traffic as a result of airline service changes or competition from larger airports operating within the region;

--Operating Performance: Deterioration of the airport's non-aviation revenue that pressures its CPE levels.

Positive: Material improvement in the airport's traffic base which generates higher operating revenue and stronger coverage levels may lead to a higher rating.

CREDIT UPDATE

Fitch notes the airport's relatively stable traffic base and management's abilities to efficiently manage operating performance. The airport's traffic base is slightly over 650,000 enplaned passengers and has remained relatively flat in 2013. The airport recently started service with Frontier and Allegient airlines, now contributing 12.6% of total traffic. These carriers have offset declines in passengers from two of the airport's larger incumbent carriers, US Airways and Delta Air Lines. In Fitch's view, challenging local economic conditions as well as competition from nearby larger Philadelphia and Baltimore airports will pose ongoing challenges to enhancing air service activity.

The authority's operating performance weakened only slightly due to a contraction in revenue of 2.5% and an increase in costs of 3.3%. However, the airport's operating margin grew at a five-year compound annual growth rate (CAGR) of 1.9% as growth in operating revenue outpaced that in operating expense. Notwithstanding, the airport's overall performance and financial metrics with very narrow coverage levels, which are marginally above 1x when excluding the coverage account and treating PFCs as revenue, preclude an investment grade rating.

Fitch's Base Case scenario, which assumes moderate enplanement growth and inflationary cost escalation, and Fitch's Rating Case, which assumes a near-term enplanement shock consistent with historical stresses and slightly greater cost escalation, both result in total debt service coverage near the 1.25x level with varying levels of reliance on the airport's rate covenant provision through 2019. Fitch notes that all of the PFCs collected are applied to debt service payments and any material reductions in traffic would create more financial strain on airport revenue. In the Base Case, CPE migrates toward $17 while the Rating Case's CPE peaks at $18. Leverage in both cases remains above 10x.

Additional information is available on www.fitchratings.com.

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (July 11, 2012);

--'Rating Criteria for Airports' (Dec. 13, 2013).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Rating Criteria for Airports

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725296

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=877834

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