Fitch Affirms Rhode Island Commerce Corporation's Airport Revs at 'BBB+'; Outlook Stable

Fitch Ratings has affirmed the 'BBB+' rating on approximately $217 million in outstanding airport system revenue bonds previously issued by the Rhode Island Economic Development Corporation (now the Rhode Island Commerce Corporation) on behalf of the Rhode Island Airport Corporation (RIAC or the airport). The Rating Outlook is Stable.

KEY RATING DRIVERS

The rating reflects a small market airport that has experienced weakening traffic trends in recent years due to competition in the greater New England air trade service area. The airport is predominantly served by low cost carriers and maintains a higher than average cost per enplanement level (CPE), expected to be $12.50 in fiscal year (FY) 2015. In addition, the rating also reflects RIAC's relatively high leverage ratio, expected to increase to approximately 7.5x net debt-to-cash flow available for debt service (CFADS) in FY2015. Leverage and CPE are both considered elevated for an airport of its size and market position.

Revenue Risk - Volume: Weaker

Small Market with Competition: The airport serves a primary origination & destination (O&D) base of 1.9 million enplanements, but is also vulnerable to a competitive New England airport environment that has contributed to nine consecutive years of enplanements declines. Concentration risk exists with Southwest Airlines Co. (rated 'BBB' with Positive Outlook by Fitch) representing 46% of enplanements in FY2014 (ended June 30).

Revenue Risk - Price: Midrange

Strong Rate Setting Framework, Elevated Costs: The airport's hybrid use and lease agreement (expiring in FY2015) includes both a revenue sharing component and extraordinary coverage protection. Fitch notes that the strong cost recovery terms have led to a rising CPE level. Price flexibility is somewhat constrained by nearby competition.

Infrastructure Development and Renewal: Midrange

Near-Term Infrastructure Needs: The airport's $283 million capital improvement plan (CIP) is expected to be funded with a combination of grants, new debt and passenger facility charge (PFC) revenues. The airport expects to issue approximately $32 million in FY2015 for a runway extension project.

Debt Structure: Stronger

Conservative Debt Structure: All of the airport's outstanding debt is in fixed-rate mode with a level-to-declining amortization profile.

Healthy Liquidity, Moderate Coverage: Operations are supported by $48 million in available reserves, equivalent to 579 days cash on hand. The airport's indenture-based debt service coverage ratio (DSCR), which includes the rolling coverage account and fund transfers derived from net revenue sharing with the carriers, improved to 1.80x in FY2014. Without the coverage account and general fund transfers, coverage was 1.45x.

Peers: In Fitch's opinion, airports that provide secondary service or experience competition from larger nearby airports, such as Long Beach (rated 'A-' with Stable Outlook) and Dayton (rated 'BBB+' with Stable Outlook), respectively, serve as comparable peers to RIAC. Amongst these peers, RIAC's CPE level and leverage are on the higher end while its underlying service area would be viewed as stronger than Dayton.

RATING SENSITIVITIES

Negative:

--Traffic and Revenue Performance: Annual traffic levels falling below the 1.7 million to 1.8 million enplanement range are likely to place greater pressure on airline costs and would lead to the consideration of a rating downgrade;

--Financial Capacity: Higher than anticipated debt issuance that materially increases leverage while diluting debt service coverage;

--Debt Service Coverage: While coverage levels are expected to narrow with the planned bond issue, cash flow coverage levels falling under the 1.2x level would likely lead to a lower rating;

Positive:

--The airport's traffic profile and size, coupled with vulnerabilities to economic conditions or competition, currently restrict a higher rating at this time.

CREDIT UPDATE

RIAC's operational performance remains stable despite continued weakness in traffic levels. Enplanements in FY2014 held steady, falling only 0.4%, after a 3.2% decline in FY2013. Enplanements in the first three months of FY2015, however, are down an additional 5.3%. The airport's enplanement trends demonstrate a negative five year compounded annual growth rate (CAGR) of 4% through FY2014. Operationally, the airport has maintained its operating margin above 40% since FY2010. FY2014 operating revenue increased 2.4% from FY2013 led by an increase in non-aviation revenue of 2.8%. FY2014 operating expense increased 6.4% from FY2013 led by increased employer matches to the money purchase pension plan, scheduled wages, supplies and repair, and utility and fuel costs. It is expected that this expense level will be maintained in future years.

The airport has completed many capital improvement projects in the last decade, including a terminal improvement project, airfield maintenance facility, InterLink facility, and new terminal building at Block Island. The airport's current FY2016-2020 capital improvement program totals $283 million, funded predominantly by grants (64%), plus recent clean water loan proceeds (13%), new bond proceeds (10%) and PFCs (9%). Projects include the Deicer Management System (loan funded), runway safety areas (funded) and extension (anticipated new debt funding), and a noise mitigation program. A future PFC bond issue is planned for approximately $32 million in FY2015 ($28 million proceeds). The airport's clean water loan, provided by the Clean Water State Revolving Fund program, will total approximately $33.5 million once fully drawn.

In Fitch's five-year base case, Fitch assumes no enplanement growth following a FY2015 decrease, moderate airline revenue and cost growth and additional debt issuance. In this scenario, debt service coverage per the bond indenture hovers around 1.5x while CPE peaks in the high-$13 range. Without the coverage account and general fund transfers, coverage averages 1.2x. In Fitch's five-year rating case, in which Fitch assumes increased enplanement stresses and further cost escalation, debt service coverage is in the 1.4x range, and just above 1.0x without the coverage account and general fund transfers, while CPE levels hit $14. In both cases, leverage migrates down to 5x within five years. These financial metrics are approximately in line with Fitch's previous analysis and conservatively discount management's ability to cut costs during years of traffic stress.

SECURITY

The bonds are payable from the net revenue of the airport's operations. PFCs are excluded from the definition of 'Revenue,' but have been pledged to the payment of a portion of debt service.

Additional information is available at '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=904994

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