Fitch Affirms Massachusetts Port Authority ConRac Bonds at ‘A-‘; Outlook Stable

Proquest LLC

The following is from Fitch Ratings on June 25:

Fitch Ratings has affirmed its long-term 'A-' rating of Massachusetts Port Authority's (Massport or the authority) approximately $208.3 million special facility revenue bonds series 2011A (tax exempt) and 2011B (federally taxable).

Bond proceeds were used to finance construction of a consolidated car rental facility (ConRac or the facility) at Boston Logan Airport (Logan). The Rating Outlook is Stable.

RATIONALE

The rating reflects the strength and resilience of Logan airport's large origin and destination (O&D) enplanement base which the facility serves. The structural enhancements built into the rental car concession agreement provide further credit protection by allowing the authority to adjust rental rates and charge a contingency rent if revenues fall short of projections. These strong credit features are somewhat offset by elevated leverage combined with the narrow revenue stream pledged to the bonds in the form of customer facility charges (CFC) and its inherent volatility due to its direct correlation with visiting O&D passenger volume and the duration of rentals.

Key Rating Drivers:

Large O&D Base With Diverse Rental Car Company Market: Massport serves a strong economic base, and is the dominant air transportation facility for the New England air service market. High origination/destination (O&D) traffic supports both ongoing demand for air travel and a high level of rental car transactions with nearly 14 million enplaned O&D passengers.

Concession Agreement Sets High Barriers to Entry & Provides Pricing Flexibility: The 15-year ConRac concession and lease agreements apply to all nine rental car companies expected to service Logan passengers. The airport is able to adjust the rate as needed to cover costs and meet coverage but the actual rates charged to on- and off-airport operators are currently different. The leases include a contingent rent provision allowing for additional rent to be collected from project tenants in order to meet obligations in the event of a shortfall in revenue, which Fitch views favorably. However, the CFC revenue stream supporting ConRac bonds is somewhat narrow, with direct reliance on car rental transaction activity to generate pledged revenue.

Protections in Place through Construction: Structural protections and project controls are in place to mitigate construction and associated delay risks. The ConRac facility is being built using construction manager at-risk agreements along with guaranteed maximum price (GMP) terms. To date construction is on-time and on- budget.

Strong Financials but Somewhat Elevated Leverage: The project benefits from strong net senior debt service coverage of 2.49x in fiscal 2013 (ended June 30), combined with strong levels of ongoing reserves, providing the ability to withstand operational stresses. The project has somewhat elevated senior leverage with net debt-to- cash flow available for debt service (CFADS) at 6.15x. CFC bonds represent about 60 percent of total sources for the project.

Rating Sensitivities

--Material declines in rental car activity supported by the O&D component of the airport's traffic base could weaken credit quality and result in negative rating action;

--Inability to maintain sound coverage metrics for the senior lien ConRac bonds as well as adequate CFC cash flow generation to meet all obligations would pressure the rating.

Security:

Series 2011 bonds are secured by a pledge of the CFC collections received or receivable by the authority and any contingent rent paid by the rental car companies as well as insurance proceeds and condemnation awards. In addition, the authority has pledged the amounts on deposit in the project fund, debt service fund, and reserve funds created under the terms of the CFC trust agreement.

Credit Update:

The ConRac project involves development of a consolidated facility in the southwest service area (SWSA) of the airport to integrate airport-related rental car operations and facilities into one, making for more efficient operations. Transportation from the airport terminals to ConRac will be served by a unified shuttle bus system. The facility will include a four-level 1.2 million square- foot garage that can hold up to 3,200 rental car parking spaces, a customer service center, and four rental car service and storage areas.

Construction began in June 2011 and ConRac officially opened in September 2013. The project will be closed out in September 2014. Fitch notes that the long-term nature of the 15-year concession agreement with the rental car operators, which took effect on the project date of beneficial occupancy (DBO) and is co-terminus with the lease agreement, is viewed as a credit strength.

The CFC debt is secured by a somewhat narrow revenue stream that is contingent upon strong performance in rental car activity. The current $6 per-day CFC rate is relatively high when compared to other airports with CFC secured stand-alone bonds. No additional CFC rate increases are planned over the medium term.

Fiscal 2013 visiting O&D enplanement growth was essentially flat remaining at 6.6 million following a 2.7 percent increase in fiscal 2012 and a 9 percent increase in fiscal 2011. Transaction days at the facility stood at 4.9 million, up 2.1 percent in fiscal 2013. Fiscal year-to-date through March, transaction days are up 2.2 percent. Transaction days have historically demonstrated a higher degree of volatility than O&D enplanements through economic cycles. However, Fitch notes that the authority has the ability to ensure that all obligations are met by charging a contingent rent to tenants and/or by increasing CFC rates, in addition to all the reserve funds supporting the project.

In November 2013, the authority made a $10 million loan to the ConRAC project. Interest on the loan is paid monthly from the CFC cash flow while $2 million in principal is expected to be repaid by the end of June 2014 and the remaining balance of the loan is expected to be repaid in June 2015.

Fiscal 2013 senior debt service coverage is strong at 2.57x on a net revenue basis and 2.87x including the rollover and supplemental funds. Under Fitch's base case forecast which assumes moderate growth through fiscal 2018, net senior debt service coverage is projected to be in the 2x range. Under Fitch's rating case scenario that assumes a 12 percent reduction in transaction days and no recovery thereafter, net coverage is estimated in the 1.7x range.

Additional information is available at '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 Infrastructure and Project Finance

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

Rating Criteria for Airports

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

Additional Disclosure

Solicitation Status

http://fitchratings.com/gws/en/disclosure/ solicitation?pr_id=836537