Fitch Ratings has affirmed the 'A' rating on the Connecticut Airport Authority's approximately $109.33 million of outstanding series 2011 A&B airport revenue bonds, issued for the benefit of Bradley International Airport. The Rating Outlook is Stable.

KEY RATING DRIVERS

The rating reflects Bradley International Airport's status as a medium origination and destination (O&D) hub in a competitive air trade market; four consecutive years of enplanement growth, which have bolstered the airport's financial metrics and liquidity position; and a strong cost recovery framework under the hybrid airline use and lease agreement. The rating also considers the airport's five year CIP, which calls for no additional parity borrowing, the 100% variable-rate debt structure with some exposure to derivatives, and low leverage.

The 'A' rating also reflects Fitch's assessment of the airport's financial profile excluding customer facility charge (CFC) revenues, which are expected to be dedicated to the airport's ground transportation center going forward.

Improving Traffic at Medium O&D Hub - Revenue Risk (Volume): Midrange

The airport's traffic base of 3.12 million enplanements has shown signs of improvement, with four consecutive annual increases leading to a five-year compound annual growth rate of 2.6% through fiscal 2017. Traffic remains 99% origin and destination (O&D), though this strength is offset by the highly competitive New England airport environment and historical enplanement volatility at Bradley. Bradley continues to hold a well-diversified air carrier mix, led by Southwest Airlines and American, each at 26% of enplanements for fiscal year ending June 30, 2017. Year to date data through the third quarter of fiscal 2018 indicate continued enplanement growth and carrier diversification.

Hybrid Use & Lease Agreement - Revenue Risk (Price): Stronger

Bradley's airline use and lease agreement (effective from July 2015 to June 2020) is cost center residual for landing fees and compensatory for terminal rental. The agreement benefits from an extraordinary coverage provision, which ensures the airport's ability to generate sufficient revenues to meet rate covenant requirements. Bradley's airline costs are comparatively low with a CPE of $8.58 in fiscal 2017, down from $8.92 in fiscal 2016.

Manageable Capital Program - Infrastructure Development and Renewal: Stronger

The airport's five-year $284.9 million capital plan includes a $213 million ground transportation project that is expected to be entirely funded with rental car facility charge (CFC) revenues. Remaining capital needs are modest and will be funded with PAYGO revenue and from PFC reserves, with no need for additional parity borrowing in the next five years. A potential terminal expansion program is contingent upon future demand growth.

All Variable-Rate Debt - Debt Structure: Midrange

The current capital structure of the Series 2011 bonds exposes the airport to counterparty performance through swaps, as well as basis and refinance risks. 100% of the airport's debt is variable-rate, and synthetically fixed through two interest rate swaps. If underlying bonds are called earlier than swap maturity, swap termination fees may be payable by the airport. While the 2011 bonds do not benefit from a dedicated debt service reserve fund, the airport has set aside approximately $3 million in basis risk reserves as of fiscal 2017. Leverage remains low with net debt to cash-flow available for debt service (excluding CFC revenues) at 1.0x in fiscal 2017.

Financial Profile

Bradley maintains a sound financial position, with GARB debt service benefitting from a broad revenue pledge. In fiscal 2017, excluding CFC revenues based on the expectation of dedicating all CFC revenues toward the new ground transportation facility, debt service coverage levels were strong at 2.5x (including revenue enhancement reserves and PFC rolling coverage), or 2.2x excluding these accounts. DSCR excluding CFC revenues has remained above 2.0x when including rolling coverage accounts for the past four fiscal years. Bradley's liquidity position is healthy, with $92.8 million of unrestricted cash at March 31, 2018, equivalent to a Fitch estimated 628 days cash on hand based on estimated fiscal 2018 results.

PEER GROUP

Peers for Bradley Airport include nearby T.F. Green Airport (BBB+/Stable) and Albany Airport (A-/Stable), both with a smaller enplanement base (1.8 million and 1.4 million, respectively). In comparison to its peers, Bradley Airport (excluding CFCs) continues to have stronger coverage ratios (fiscal 2016 coverage of 2.5x versus 1.7x and 1.4x, respectively), stronger liquidity (576 days cash on hand in fiscal 2016 versus 397 and 250, respectively), and lower leverage (fiscal 2016 net debt/CFADS of 1.7x versus 6.1x and 2.9x, respectively).

RATING SENSITIVITIES

Future Developments That May, Individually or Collectively, Lead to Negative Rating Action:

  • Traffic volatility and/or additional leverage leading to net debt/CFADS metrics above 4x.

Future Developments That May, Individually or Collectively, Lead to Positive Rating Action:

  • Additional clarity surrounding the scope of future borrowing needs over the medium term.

CREDIT UPDATE

Performance Update

Bradley's financial position remained healthy in fiscal 2017 (ending June 30), with an EBITDA margin of over 26%, in line with 27% in 2016 and 24% in both 2014 and 2015. Liquidity reached a new high point in 2017, with unrestricted cash of $87.7 million providing a very strong 628 days cash on hand. Growth in operating revenues (+3.3%) in fiscal 2017 was outpaced by growth in operating expenditures (+4.7%), though a significant portion of the increase was one-time in nature for marketing assistance for new route development (establishing European international service by Aer Lingus to Dublin).

Debt service coverage for GARBs remained strong in fiscal 2017. GARB pledged revenues (including PFC coverage account, rolling revenue enhancement account, and excluding CFCs) produced DSCR of 2.5x, equivalent to coverage in fiscal 2016. Absent the two coverage accounts, coverage was 2.2x in fiscal 2017 and fiscal 2016. DSCRs have seen an improving trend since 2009, due to continued debt amortization and generally improving financials.

Fiscal year-to-date 2018 (through March 31, 2018) airline revenues are down by 3.6% over the same period in fiscal 2017, while non-airline revenues are up by 3.7%, ultimately leading to stable total operating revenues. Operating expenses are up by 6%, which is well below the budgeted 20% growth rate, and in line with historical practice. Debt service coverage excluding CFCs is estimated at 2.2x for fiscal 2018 including rolling coverage (1.9x excluding coverage accounts).

Enplanements have now grown for four consecutive years, increasing by 4.8% to 3.12 million enplanements in fiscal 2017, following marginal 0.2% growth in fiscal 2016. Recent increases come from the authority's efforts to grow new airline routes, as well as improvement in the economy. Fiscal 2018 is poised to mark the fifth consecutive year of growth, with enplanement data through March 31, 2018 up by 5.4% over the previous year's period.

Fitch Cases

Fitch developed base and rating cases, spanning from fiscal 2018 to fiscal 2023, which reflect historical financial performance and Fitch-calculated stresses. Both cases begin with fiscal 2018 expectations, estimated based on year to date performance, and exclude CFC revenues given the plans to devote them to distinct capital needs.

The base case assumes enplanement growth of 4.5% in fiscal 2018, reflecting a slight cut from the year to date increase of 5.4%, followed by 1% growth in 2019 and 1.5% growth thereafter. Expenses grow by 3.5% annually, while revenues are grown at relatively conservative levels relative to historical average growth rates. Debt service coverage averages 2.2x (1.8x excluding reserve accounts) throughout the forecast period, with leverage averaging 0.0x, falling to -0.6x in fiscal 2023, reflecting unrestricted cash offsetting the outstanding debt balance. Cost per enplanement averages $8.50, reaching a maximum of $8.71 in fiscal 2023.

The rating case introduces a shock to enplanements of -11% in fiscal 2019, with recovery of 2.5% in fiscal 2020 and 2% thereafter. Airline revenue grows 4% in fiscal 2019 to offset the enplanement decline, followed by 3% annual growth. Expenses grow by 4.5% annually in the non-stress years. Debt service coverage averages 1.9x (1.6x excluding reserve accounts), with leverage at similar low levels as the base case. Cost per enplanement peaks at $10.16 in fiscal 2023, and averages $9.91 over the forecast range.

Asset Description

Bradley International Airport is located in Windsor Locks, CT, approximately 12 miles north of Hartford and 12 miles south of Springfield, MA. Bradley is the second-largest airport in New England after Boston Logan.