Fitch Rates Manchester, NH $77MM Airport Revenue Refunding Bonds 'A'; Stable Outlook

Business Wire, June 7, 2005

NEW YORK -- Fitch Ratings assigns an 'A' rating to the City of Manchester, NH (the city) approximately $16 million airport revenue refunding bonds, series 2005A (non-AMT) and $61 million multi-modal airport revenue refunding bonds, series 2005B (non-AMT). The series 2005 A and B and parity revenue bonds are special obligations of the city payable from net revenues and pledged funds generated from operations at Manchester Airport (the airport). The Rating Outlook is Stable.

Fitch also affirms the 'A' rating and Stable Outlook on the city's outstanding $250 million airport revenue bonds.

The series 2005 A and B bonds will be sold via negotiation during the week of June 20 by Bear, Stearns and Co. Inc. and are expected to be insured by a monoline insurance provider rated 'AAA' by Fitch. The series 2005A bonds have a final maturity on July 1, 2027 and will fund elements of the city's airport capital improvement program. The series 2005B bonds and have a final maturity on July 1, 2030 and will refinance approximately $58 million of the city's outstanding series 1998 and series 2000 revenue bonds. The series 2005B bonds are multi-modal bonds, initially bearing interest at a fixed-rate through Jan. 6, 2010 and at a variable-rate mode thereafter. Concurrent with the issuance of the series 2005B bonds, the city plans to enter an a forward interest rate swap whereby the variable-rate on the series 2005B bonds will be synthetically converted to a fixed rate beginning on Jan. 6, 2010. The interest-rate swap underlying the series 2005B bonds is expected to reduce future debt service by $6.9 million but also exposes the city to several risks that may affect its long-term credit rating. However, Fitch believes that the city has taken prudent steps to mitigate associated risks.

The 'A' rating reflects the strong growth in passenger service at the airport in recent years, the airport's consistent operating performance, and the overall stability of the airport's service area. Credit concerns center principally on the competitive New England airport environment and on the airport's high debt burden. The Rating Outlook is Stable based on recent increases in service by incumbent and new air carriers.

Fiscal 2004 marked a return to double-digit passenger growth rates at the airport, with the 1.9 million passengers enplaned in fiscal 2004 marking a 10.5% increase on the prior year. Additionally, enplanements through April 2005 (June 2005 fiscal year-end) show a 10.2% increase on fiscal 2004. The fiscal 1999 entrance and subsequent service expansion of Southwest Airlines (Southwest, rated 'A' by Fitch) has brought additional destinations and lower fares, which have served to stimulate passenger demand and establish the airport as a viable competitor to nearby Logan International Airport (Logan). Southwest's percentage of the total market increased to 41% in fiscal 2004 and should increase in fiscal 2005 as a result of new service. The increasing reliance on a single carrier presents some credit concern, but the air service market at the airport remains moderately diverse, with the next largest carriers, US Airways, Delta Airlines, and United Airlines holding a respective 19%, 12%, and 12% share of the market.

The airport's hybrid agreement and revenue contribution by non-airline sources such as parking (52% of operating revenue) continue to provide the basis for stable financial operations. Fiscal 2004 net operating revenues, combined with pledged funds and debt service offsets, provided 2.08 times (x) coverage of debt service. The airport's consultant forecasts that net revenues and pledged funds should provide at least 2.00x coverage of debt service through 2010. The airport's overall airline costs remain moderate and stable, with the airport's 2004 cost per enplaned passenger (CPE) equaling $5.51 and peaking near $6.00 in 2010.

The airport's high debt burden, at approximately $132 per enplaned passenger, is significantly above the median of $57 for similarly sized airports. While management has successfully offset its debt service with non-airline revenue sources such as federal grants and passenger and customer facility charges, the airport's high debt load could constrain future management decisions in the event of a significant drop in passenger demand or restructuring within the airline industry. The airport's large and nearly complete master capital improvement program somewhat mitigates the high debt burden, as little additional revenue bond debt is anticipated in the near term.

An additional credit concern is the airport's proximity (55 miles) to Logan International Airport (Logan). Given that Logan is New England's principal airport for long-haul domestic and for international service, it is unlikely that the airport will attract similar service in the near-term. Additionally, it is possible that the airport will be negatively affected by the launch of JetBlue Airway's service at Logan. The competitive environment is mitigated by the region's geography and dense population, which has served to define specific air service areas for each of the New England commercial airports.