Fitch Affirms MassPort's Rev Bonds (BosFuel) at 'A-'.
The 'A-' rating reflects BosFuel's exclusive role in providing an essential storage and distribution fueling service to airlines at strong Boston Logan (BOS, the airport) airport, which largely mitigates against demand elasticity as costs rise. The rating further reflects BosFuel's strong Interline Agreement, which hedges against carrier delinquencies and defaults and provides the consortium with unlimited rate-making flexibility to fully recoup operating expenses and debt service costs. The rating is constrained by the financial structure of the bonds, specifically with regard to the credit's narrow revenue pledge, high leverage levels of roughly 11x and cash-flow sufficient coverage levels.
KEY RATING DRIVERS
ESSENTIAL SERVICE, LIMITED CONCENTRATION: BosFuel's Interline Agreement insulates the bonds from volume risk, as operating expenses and debt service costs must be paid regardless of volatility in fuel volumes. Fitch views positively the agreement's step-up provision, which provides for full step-up payments by member carriers in the event of default or delinquencies from non-performing carriers. Boston Logan's well-diversified carrier mix, with no one greater holding greater than 24% of fuel market share, also hedges the potential step-up responsibility from becoming financially debilitating to the remaining carriers. BosFuel benefits from being the sole provider of essential storage and distribution fueling service to the airport, resulting in low demand elasticity even as costs rise. Cost-per-gallon, at 3.07 cents (2.07 cents including non-member subsidization) in 2017, is competitive.
UNLIMITED RATE FLEXIBILITY, NARROW PLEDGE: BosFuel benefits from unlimited rate-making flexibility as a result of its strong contractual framework which allows for full recovery of costs through the airlines. The narrow revenue stream does, however, provide less protection to bondholders, as the bonds are solely supported by BosFuel facilities rental payments and do not have any recourse to Massport's general revenues (general revenue bonds rated AA/Stable) or fund balances.
ADEQUATE FACILITIES, MODEST CAPEX NEEDS: Fitch considers BosFuel's fuel storage and distribution assets as adequate to meet projected needs. BosFuel plans to issue approximately $65 million in new money bonds towards the end of 2018, the majority of which is expected to fund future capital projects totaling $25.8 million with a portion covering airline reimbursement of past project costs and a debt service reserve fund.
SUITABLE DEBT STRUCTURE: BosFuel's debt structure is conservative, with fully amortizing, fixed-rate senior debt. A cash flow sufficient rate covenant coupled with the absence of an additional bonds test (ABT) are considered weaker in comparison to other asset classes, albeit adequate for BosFuel's bonds given the strong contractual agreements in place. Adequate structural features are further mitigated by ample liquidity via a fully cash-funded 12-month debt service reserve fund (DSRF), airline reserve deposits, and unrestricted cash balances.
Fuel storage and distribution assets are adequate to meet current needs; however, additional bonds may be needed in the near term to meet the rapidly growing demand. Net member costs of 3 cents per gallon in 2017 are competitive compared to peer fuel facilities. Fitch estimates leverage on a net debt-to-cash flow available for debt service (CFADS) to be 10.3x for 2017.
BosFuel's closest Fitch-rated peer is SFO Fuel Co. (A-/Stable), as both facilities support strong airports with substantial fuel demand, though are constrained by cash-flow sufficient coverage levels and high leverage levels. BosFuel benefits from lower carrier concentration and a cash-funded DSRF, though SFO Fuel Co. has a greater number of carrier members and consequently higher fuel volumes.
Future Developments That May, Individually or Collectively, Lead to Negative Rating Action:
--Carrier defaults or delinquencies in lease payments to BosFuel that cause significant draws on available reserves;
--Significant, sustained shifts in airport operations that adversely affect fuel demand; and/or
--While unlikely under the current operating environment and planned investments of the facility, a significant and sustained upward shift in BosFuel's member cost profile.
Future Developments That May, Individually or Collectively, Lead to Positive Rating Action:
--Unlikely given the narrow revenue stream and sum sufficient financial profile.
The project's member volume growth exceeded Fitch's base case expectations in 2017, growing by 5.8% compared to 3.0%, due to additional domestic and international member carriers using the facilities. Member volume growth has continued on its upward trajectory through the first seven months of 2018, growing by 5.6%. Some international carriers have also begun to use the facilities as non-members, which has contributed to robust non-member volume growth of roughly 21% in 2017.
Member costs (excluding credits from non-members) also declined in 2017 due to a higher than expected generation of revenues from non-member carriers. Lower costs and higher than anticipated member volumes drove member costs per gallon well below expectations at 3.07 cents per gallon compared to base case expectations of 3.24 cents per gallon. The aforementioned non-member volume growth resulted in an even lower member cost per gallon of 2.07 cents when including non-member credits. While jet fuel prices continued to rise in 2017, BosFuel's costs per gallon do not reflect this trend as BosFuel is solely responsible for transporting and storing fuel; the airlines pay for their own fuel outside of their agreement with BosFuel.
In 2018, BosFuel expects to issue new money debt of roughly $65 million (including proceeds to fund a debt service reserve) to support capital needs. While the additional debt service will increase member costs slightly, the issuance is not expected to be credit adverse as costs and leverage levels should remain reasonable and in line with historical levels.
Fitch's base and rating case consider the $65 million new money issuance in calendar year 2018. Fitch's base case assumes flat expense growth of 3% and no growth in member volumes through 2022. Fitch's rating case assumes higher expense growth of 3.5%, with the exception in 2020, when a 10% decline to member volumes is assumed triggering a 7% decrease in costs. In both cases, member costs increase by no more than 1.34 cents from the current rate and leverage remains in the 10x to 12x range.
Given the essentiality of the service supporting a sizable traffic base with low carrier concentration, limited fueling competition and strong contractual provisions, the credit is viewed as commensurate with an 'A' category rating, though constrained to 'A-' as a result of cash-flow sufficient coverage levels, high leverage nearing 12x in the rating case forecast, and a narrow security pledge. In the event the facility supports a more limited traffic base with higher levels of carrier concentration, more fueling competition and weaker contractual cost recovery provisions, the credit could be considered commensurate with a lower rating.
DESCRIPTION OF ASSET
The BosFuel project consists of a consolidated fuel storage and distribution system at the airport to meet the fueling needs of all aircraft operators.
The bonds are payable solely from facilities rent derived from a lease between MassPort and BosFuel, a consortium of member carriers serving at Boston Logan International Airport.
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|Publication:||Daily the Pak Banker (Lahore, Pakistan)|
|Date:||Jan 8, 2019|
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