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Fitch Rates Memphis Airport Bonds 'A+'; Outlook Revised to Negative

Dépèche transmise le 26 mai 2011 par Business Wire

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A+' rating to the Memphis-Shelby County Airport Authority, Tennessee's (the authority) proposed $17.6 million series 2011B bonds, $20.8 million 2011C bonds, and $41.3 million 2011D bonds (collectively referred to as the 2011 issuance). The proceeds of the series 2011 B, C, and D issuance will be used to refund all or a portion of the authority's 1999D, 2001A, and 2001B bonds for economic savings. The Rating Outlook is revised to Negative from Stable.

In addition, Fitch has affirmed its 'A+' rating on the authority's approximately $443.5 million outstanding bonds secured by the net revenues generated by the operation of Memphis International Airport (MSCAA, or the airport).

The Negative Outlook is based on elevated traffic activity uncertainties over the next one to three years taking into consideration that Delta Airlines (Delta), which comprises 87% of enplanements, has already announced service reductions at Memphis International Airport. Delta announced a net reduction of 26 flights (approximately 13% of Delta flights at Memphis) starting in the fall of 2011. Fitch believes that fuel prices and route profitability are key drivers to this and future Delta service actions with the possibility that Memphis faces more vulnerability to reductions as compared to other larger Delta hubs. Fitch's evaluation of the authority's forecasts indicates the airport can adequately withstand the current level of announced Delta flight reductions while maintaining its current financial metrics. However, there is heightened uncertainty regarding Delta's long-term commitment to the airport given the challenging economic environment and the short-term tenor of the current residual nature airline use and lease agreement (through June 2012). Fitch will continue to monitor Delta's operating plans at the airport and the responses taken in such circumstances as well as management's ability to successfully extend the signatory airline agreements with favorable cost recovery terms. A full de-hubbing by Delta will likely lead to further credit pressure, however, the strong presence of FedEx coupled with moderate leverage provides strong mitigation to keep the airport's rating in the 'A' category.

RATING RATIONALE:

The 'A+' rating reflects:

--MSCAA has high carrier concentration with Delta representing 87% of enplanements and a high proportion of connecting traffic due to Delta's hubbing operations with origination and destination (O&D) representing only 37% of total enplanements.

--MSCAA's long-standing ranking as the world's busiest cargo airport by tonnage with the presence of Federal Express Corporation's (FedEx) Worldhub operations and major capital investment on airport property. Together, FedEx and Delta represent more than 50% of total airport revenues.

--The airport's residual methodology enables it to pass along all costs to the air carriers to the extent non-airline and cargo related revenues are insufficient. The airport is one of the few Fitch-rated airports that does not currently levy a passenger facility charge (PFC). The airport's current use and lease agreement expires at the end of June 2011 and is expected to be extended for only one-year.

--The airport's debt is fixed rate with a declining amortization profile.

--The airport has a moderate debt load with debt/enplanement of $97 and debt/CFADS of 6.08 times (x). The airport has 192 days cash on hand.

--Current capital projects are on-time and on-budget. Moderately scaled capital improvement program (CIP) with no anticipated future borrowing needs through 2015. CIP has been updated based upon Delta's recently announced reductions.

WHAT MAY TRIGGER A DOWNGRADE?

--Continued reductions of Delta flights with no likely backfill from other carriers.

--Reduction in FedEx's operations at the airport.

--Management's ability to control costs.

--Further volatility in enplanements.

SECURITY:

The authority's bonds are secured by net revenues of the airport.

CREDIT SUMMARY:

The airport is located approximately 13 miles from Memphis' central business district and serves the eight-county Memphis metropolitan statistical area. Enplanements through March 2011 are 2% below prior year and are currently projected to come in at 4.85 million for the fiscal year. The airport served 4.97 million enplaned passengers in fiscal 2010 (fiscal year ended June 30), down 3.6% from fiscal 2009 (the airport had projected a 7% decline in 2010), levels last seen in fiscal 1999.

With the merger of Delta/Northwest in late 2008, the airport effectively ranks as the fifth largest domestic hub in the combined network. Including its regional affiliates, the carrier is the airport's leader, representing 87% of total enplanements in fiscal 2010. US Airways Express is the next largest carrier at 3.7%, followed by American Airlines at 3.2%. Given this carrier composition, continued losses of connecting flights could result in a much lower traffic base with difficult recovery prospects and could pressure the rating.

The presence of FedEx balances the operations of the airport and provides some cushion against any decline by Delta. FedEx recently signed a 30-year lease agreement at the airport with two 10-year options, and the carrier accounted for 99% of total cargo volume at the airport in fiscal 2010, and has represented at least 92% of such activity since fiscal 1992. Through March 2011, cargo landed weight is up 4.6% at 6.5 million pounds. Long-term stability will be heavily influenced by Delta and FedEx's commitment to the airport.

The airport's airline agreement employs a cost center residual rate-setting methodology which expires in June 2011. The airport expects to enter into a one-year extension upon the expiration of the current agreement. The airport had previously indicated it expected to sign a new 10-year agreement beginning July 2011, which did not occur. The short-term nature of the existing agreement leaves the airport vulnerable to additional service cuts by Delta or negotiation of a completely new structural framework if economic conditions warrant.

While the airport's enplanements have declined 20% since 2001, expenses have continued to grow at a CAGR of 2.86% in the same period. The airport could have greater financial flexibility and cushion if it were to adjust expenses in line with enplanements.

The airport does not currently levy a PFC; implementation of a PFC could generate more than $20 million in annual receipts at the maximum $4.50 per passenger rate. While no near-term plans are in place to institute this commonly used charge, most of the collected funds would be available to defray debt-service costs on the airport's outstanding debt. Fitch views this revenue option as a potential source of financial flexibility.

The airport's net revenues, including the coverage carryforward account, have historically provided sufficient debt-service coverage ratios, ranging from 1.25x to 1.44x since fiscal 2001. Without including the coverage carryforward account, ratios have been closer to 1.1x. The airport projects debt-service coverage to remain at or above the rate covenant of 1.25x for the foreseeable future. Fiscal 2011 coverage is expected to be 1.27x. The residual nature of the current airline agreement enables the airport to continue to meet its coverage requirements.

In addition, the authority pays the debt service on approximately $3.92 million in outstanding general obligation (GO) bonds issued by the city of Memphis (GO bonds rated 'A+' by Fitch) that financed earlier airport projects. The GO bonds mature in 2012. The bonds are payable from excess net revenues of the airport authority, after payment of general airport revenue bond debt service. Coverage of total obligations has ranged between 1.13x and 1.34x since fiscal 2001 and is projected to remain at or above 1.2x through fiscal 2015.

The airport's modest 2011-2015 CIP is almost fully funded with no future borrowing anticipated through 2015. The program's total estimated cost is more than $265.6 million. Project costs are to be partially funded with federal and state grants (75%) and existing Capital Funds (25%). MSCAA has updated the CIP based on Delta's recently announced service cuts.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' Aug. 13, 2010;

--'Rating Criteria for Airports', Nov. 29, 2010.

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548345

Rating Criteria for Airports

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=578745

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