Fitch Rates Cleveland, Ohio's Airport System Revs 'A-'; Outlook Stable

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NEW YORK--(BUSINESS WIRE)-- Fitch Ratings assigns an 'A-' rating to Cleveland, Ohio's approximately $74 million series 2011A senior lien fixed-rate airport system revenue bonds and affirms the airport's $827 million senior lien airport system revenue bonds at 'A-'. The Rating Outlook is Stable

The airport system consists of Cleveland-Hopkins International Airport (the airport) and Burke Lakefront Airport.

Key Rating Drivers:

Concentration in Carrier Mix to Serve Traffic Base: High dependence on sustained operational service from United Continental Holdings (UAL, Fitch IDR 'B' with a Stable Outlook), with 70% of market share in 2010, and its related hubbing activity. This is somewhat offset by O&D passenger traffic (72% of the airport's 4.7 million total enplanements in 2010) and minimal competition for air service within the Cleveland metropolitan area. While the settlement agreement between UAL and the State of Ohio Attorney General provides some protection as to the levels of service UAL will maintain through October 2012, the airport remains at risk both in the intermediate and long term for a reduction in hubbing operations, which Fitch believes would be unlikely to be replaced by another carrier.

Above Average Cost Profile: UAL serves as the largest single source of the airport's operating revenues (at 38%); thus, the airport's above average cost structure ($13.08 cost per enplanement (CPE) in 2010) is highly sensitive to continued changes in the carrier's operating strategy. Near-term service and revenue protections through contractual minimum flight level commitments through 2015 (as outlined in the settlement agreement) and long-term special facility lease agreements provide some risk mitigation.

Improved Capital Structure: Relatively conservative debt structure consisting of approximately 82% fixed rate debt and 18% unhedged variable rate bonds, with reduced exposure to counterparty performance and basis risks as a result of the upcoming refunding and swap terminations.

Strong Liquidity and High Debt: Strong balance sheet liquidity (more than 800 days of cash on hand) in conjunction with elevated levels of financial leverage. Debt per enplanement will equal $193 and net debt/cashflows available for debt service (CFADS)) will be at 8.59 times (x) when series 2011A bonds will are issued.

Modest Capital Program: The airport's five-year capital improvement program (CIP) is estimated at $164 million and does not include any future borrowing plans.

What Could Trigger a Rating Action:

--Significant changes in UAL's operations at the airport, particularly a reduction in or elimination of connecting traffic. Traffic changes can also be affected by uncertainties in the economy and the air travel industry;

--Increases in the airport's cost structure resulting in both a less competitive CPE and a similar deterioration of financial flexibility and coverage of debt;

--Material changes in the airport's future debt needs.

Security:

The bonds are secured by a first lien on the net revenues of the city of Cleveland's airport system.

Credit Update:

The current transaction consists of the issuance of an estimated $74 million in airport system revenue bonds, including approximately $9 million refunding and $63 million new money (all non-AMT) bonds. Proceeds will be used to currently refund certain maturities of the airport's outstanding series 2008D variable rate bonds, to partially fund various airport's capital projects and to fund debt service reserve and renewal and replacement funds. All of the series 2011A bond debt service is expected to be supported by available passenger facility charge (PFC) revenues. In conjunction with the issuance of the series 2011A bonds, the airport will use available funds to unwind existing interest rate swaps associated with series 2008D and 2009D bonds.

Following four consecutive years of enplanement declines (down an aggregate 17% between 2007 and 2010), year-over-year declines continued in the first eight months of 2011 (through August), down 2.8%. Rating risks are centered on the continued uncertainty regarding UAL's operational commitment at the airport. UAL's departure levels currently exceed the minimum requirement level under the settlement agreement, averaging 175 daily departures this year.

The airport's finances continue to perform well, with no material changes in the airport's liquidity position from 2010. In the first six months of 2011, revenues exceeded prior year's revenues by 16% as a result of management's efforts to maximize non-airline revenues associated with the expanded concession areas. Operating expenses came in below budget during the first six months of 2011 demonstrating no growth over the same time period in 2010. The airport expects operating expenses to increase by a moderate 2.7% in 2011 from 2010.

Coverage of annual debt service is projected at 1.54x in 2011 (when including the airport's rolling coverage account). Excluding the rolling coverage account, debt service coverage is estimated to be a thinner 1.16x. Post new issuance, total debt service will increase from $50.3 million in 2011 to maximum annual debt service of $78 million in 2018, and declines until final maturity in 2033. The airport expects to use all annual passenger facility charge (PFC) collections to support annual debt service payments through 2021; PFC's will be treated as available revenues. Going forward, the airport expects to generate coverage levels ranging between 1.46x and 1.56x (when including the airport coverage account).

Under an updated stress case scenario reviewed by Fitch that assumes a 100% reduction in UAL's connecting activity, airline costs could be significantly higher, nearing the $20 per passenger range. The stress scenario also indicates that coverage would be maintained in the 1.46x-1.56x range when unspent PFC balances are applied to reduce annual debt service requirements. The surplus PFC account is expected to be maintained at about $19 million through 2015. While the airport would continue to rely heavily on PFC collections to support debt service payments, long-term traffic depressions may limit the airport's utilization of the PFC to offset debt service requirements.

Fitch downgraded the airport's bonds to 'A-' with a Stable Outlook from 'A' with a Negative Outlook earlier this year; for additional details please refer to Fitch's press release dated April 25, 2011.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--Rating Criteria for Infrastructure and Project Finance (Aug. 16, 2011);

--'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=648832

Rating Criteria for Airports

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

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