Fitch Rates Minneapolis-St. Paul Airport (MN) 2014AB Sub Rev Rfdg Bonds 'A'; Affirms Outs. Bonds

Fitch Ratings assigns an 'A' rating to the Minneapolis-St. Paul Metropolitan Airports Commission's (MAC; Minneapolis, MN) $274 million subordinate airport revenue refunding bonds, series 2014 A and B. In addition, Fitch affirms MAC's $698.6 million outstanding senior airport revenue bonds at 'AA-' and its $704.6 million outstanding subordinate airport revenue bonds at 'A'. The Rating Outlook on all bonds is Stable.

The ratings reflect the airport's stable and improving enplanement profile serving a large metropolitan area of the Midwest, with stronger growth coming from the majority origination and destination (O&D) traffic base. Although some carrier concentration risk exists with Delta maintaining a majority enplanement share (74%), this is partially mitigated by their heavy investment at Minneapolis-St. Paul International Airport (MSP), the hubbing covenant, and a use agreement through 2020, with MSP being Delta's second largest hub behind Atlanta. Cost per enplanement (CPE) levels remain below $7.60 in Fitch's five-year base case forecast period with a total debt service coverage ratio (DSCR) no less than 1.53x, both appropriate for its rating categories.

KEY RATING DRIVERS:

Revenue Risk-Volume: Midrange

STRONG O&D BASE WITH HIGH DEPENDENCE ON DOMINANT CARRIER: The Minneapolis-St. Paul metropolitan statistical area is a well-established commercial center for the upper Midwest with no competing airport facility in the vicinity. Considerable demand for air service is generated from a broad-based local economy with an O&D enplanement base of 8.9 million passengers for FY2013. Delta maintains a dominant market share representing 74% of enplanements and connecting traffic represents nearly 45% of total traffic, leaving MSP susceptible to realignment of hubbing service. Enplanements increased modestly after several years of declines and are showing strong year-to-date growth.

Revenue Risk-Price: Stronger

HYBRID USE AND LEASE AGREEMENT RESULTING IN COMPETITIVE CPE: Carriers operate under a hybrid operating agreement with a compensatory methodology for Terminal 1 Lindbergh terminal costs and residual for the airfield. Airline charges for Terminal 2 (Humphrey Terminal) are set under an ordinance. The airport's CPE rose to $6.74 in 2013 with increasing debt service obligations, inline with the budgeted $6.68, and is expected to remain below $8 should enplanement trends continue. This range is competitive relative to MSP's ratings and peers.

Infrastructure Development Renewal: Stronger

MODEST CAPITAL NEEDS WITH NO FUTURE BORROWING EXPECTED: Having recently completed an approximately $3.2 billion capital program, the airport's future capital plans are modest, focused on airfield and routine terminal work as well as noise mitigation. The capital program will be funded from a combination of passenger facility charges (PFCs), proceeds from previous bond issuances, grants, and available cash. No new money long-term borrowing is currently anticipated.

Debt Structure: Stronger

CONSERVATIVE DEBT STRUCTURE: Comparable to other airports of its size, MSP has a moderate amount of leverage with $1.4 billion of debt outstanding (including $2.8 million of general obligation bonds). All of MAC's debt is fully amortizing and fixed rate. Additional senior bonds are subject to more restrictive conditions as parity obligations can be issued only with a backward-looking test of 1.10x based on maximum annual debt service (MADS) coverage for any 12 consecutive months out of the most recent 18 consecutive months immediately preceding the date of issuance of the proposed series of senior bonds or 1.25x MADS coverage (including the full-year effect of any partial-year rate increases) for the last completed fiscal year or 12-month period immediately preceding the date of issuance of the proposed series of senior bonds.

Financial Metrics

STABLE PERFORMANCE WITH MODERATE LEVERAGE: MSP has maintained strong and stable financial performance as traffic has continued to recover from the economic downturn. The airport maintains a diverse revenue stream with aeronautical revenues only accounting for 39% of operating revenues and additional revenues consisting of parking (27%), concession, PFC, CFC and other non-airline revenues. MSP's healthy balance sheet helps to manage the financial metrics given the size of its operations including net debt/CFADS of 6.1x; debt per O&D enplanement of $158; and days cash on hand of 587 days. Overall coverage metrics remain favorable following improved traffic and financial performance as well as the prepayment of general obligation debt. Coverage calculated using PFCs as revenues in Fitch's base case is forecast to remain at or above the 2.7x (senior)/1.5x (total) through 2019 with net debt/CFADS evolving to under 4.0x.

Peer Group

MSP's peers include Orlando (rated 'AA-' by Fitch) and Detroit (rated 'A-') airports given their similar enplanement numbers and trends, debt amount, liquidity, CPE, and leverage. MSP and Detroit also share the same major carrier in Delta, which accounts for more than 70% of enplanements at both airports.

RATING SENSITIVITIES

Negative-Reduction in the Delta hub resulting in 50% or greater loss of connecting traffic could pose downward pressure on the rating.

Negative-Additional new borrowings for non-revenue generating projects that would materially increase leverage would be viewed as a credit negative.

TRANSACTION SUMMARY

The series 2014 A and B bond proceeds, along with certain available monies of the commission, will be used to refund all or a portion of the subordinate series 2005A-C bonds maturing between 2016 and 2035 for debt service savings, without extending the maturity profile of the outstanding debt. The bonds are anticipated to price the week of September 8 and provide uniform annual savings estimated to total approximately $27.4 million, or 8.6% of the refunded bonds, on a net present value (NPV) basis, depending on market conditions.

Passenger demand continued its rebound in FY2013, growing 2.2% to 16.4 million enplanements. This is a return to 2008 levels, but still remains 9.0% below the 2005 peak. Notably, growth of the more stable O&D enplanement base has outpaced that of connecting traffic over the last 10 years (1.7% versus nearly flat) such that O&D traffic now accounts for a majority (55%) of MSP's traffic, making it more resilient than when connecting traffic accounted for 55% of traffic in 2004. Through six months of FY2014, enplanements have displayed strong growth (up 5.0%), coming from both O&D and connecting traffic. Delta Airlines (IDR 'BB-', Positive Outlook) remains the airport's main carrier, accounting for 74% of enplanements in FY2013, and remains committed to MSP, partially mitigating carrier concentration risk.

Operating expenses increased 7.5% in FY2013 largely due to personnel and maintenance costs as a result of winter clean-up as well as increased utilities expense from the cold winter. Fitch notes that management has prudently contained expenses to a 3% CAGR since 2008. Operating revenues increased a similar 7.4% in FY2013 due to increased airline rates and charges (from increased activity at Terminal 2; T2) and pass-through of harsh winter expenses noted above), concessions (increased parking transactions and longer stays, opening additional food and beverage concessions in T2, and growth in spending in Terminal 1), and rentals/fees.

Debt service obligations also rose slightly in FY2013 leading to net revenues providing 3.00x coverage of senior lien debt service and 1.67x coverage of total debt service, including the airport's $2.8 million of general obligation revenue bonds. When PFCs are treated as revenue instead of an offset to debt service, senior lien coverage was 2.65x with total coverage of 1.52x in 2013. While these are down slightly from 2012, coverage still remains robust and commensurate with the current rating levels and peer comparables. Given that the increase in airline revenues outpaced the enplanement growth in FY2013, CPE rose to $6.74 from $6.42, but was below the $6.90 projection and remains well within the range for its rated peers. Under Fitch's base case assumptions, with 3.5% enplanement growth in 2014 and 1% thereafter, the airport's CPE reaches a maximum of $7.56 by 2019, and its total DSCR ranges from 1.53x-1.94x. Fitch's rating case, which assumes a 10% decline in enplanements in 2015 followed by 2% growth thereafter, forecasts CPE to rise to a still competitive $8.18 by 2019 with total DSCR still strong at no less than 1.48x when treating PFCs as revenues.

Minneapolis-St. Paul airport is located in the middle of the twin cities, and a short driving distance from several other metropolitan areas. It consists of two terminals, Terminal 1- Lindbergh, and Terminal 2- Humphrey, connected by a light rail system. The airport consistently remains in the top 20 for busiest airports in America, providing non-stop service domestically and internationally.

SECURITY:

The senior lien bonds are secured by a first lien pledge of general airport revenue and subordinate bonds are secured by a second lien pledge of general airport revenue.

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

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance', July 12, 2012.

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

Applicable Criteria and Related Research:

Rating Criteria for Airports

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

Rating Criteria for Infrastructure and Project Finance

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=859214

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