TEXT - Fitch rates San Diego Cty Regional Airport Auth. revs
Jan 7 - Fitch Ratings assigns an 'A+' rating to San Diego County Regional Airport Authority's (the airport, or the authority) approximately $411 million series 2013 senior airport revenue bonds. Fitch also affirms its 'A' rating on outstanding subordinate revenue bonds. The Rating Outlook on all bonds is Stable. The airport also has $56.1 million in outstanding subordinate commercial paper (CP), of which $35.4 million was recently issued to defease the series 2005 senior bonds. The CP is expected to amortize through 2030 at a variable rate, and is on parity with the airport's long-term subordinate revenue bonds. Fitch has withdrawn its ratings on the following bond due to prerefunding activity: --San Diego Regional Airport Authority (CA) revenue refunding bonds (AMT) series 2005 (prerefunded maturities only). KEY RATING DRIVERS: Primary Airport in Strong Service Area: The airport is the primary air service provider for the San Diego area with an enplanement base of 8.6 million in 2012. The airport's enplanement base is 93% origin & destination (O&D), and is serviced by a diverse group of airlines (Southwest 38%, United 17%, and Delta 12%). After seeing declines in 2009 and 2010, traffic has grown modestly for fiscal year (FY) 2012, increasing 1.6%. Fitch expects a gradual improvement in traffic given the economic recovery of the San Diego region. Revenue Risk-Resilience: Stronger. Hybrid Airline Agreement: The airport has a hybrid use and lease agreement, which is residual on the airfield and compensatory in the terminal. The current agreement expires in June 2013, and negotiations with the airlines are currently underway. The airport's cost per enplanement (CPE) was $8.33 in 2012, and management expects CPE to increase to the $11 range by 2015. Management seeks to keep its CPE below $12. Revenue Risk-Price: Midrange. Sizable Fixed Rate Debt Profile: The airport currently has $570.8 million of subordinate bonds outstanding, and is issuing $411 senior lien bonds to finance its capital improvement program (CIP) and completion of the Green Build Program. All bonds are fixed rate. The authority also has $56.1 million of CP outstanding, of which $35.4 million was recently issued to defease 2005 senior bonds. Debt Structure: Stronger. Considerable Leverage, Strong Financial Profile: Including the 2013 issuance, the airport is leveraged at 14.9 times (x) net debt to CFADS, though this is expected to drop to the 10x range by 2016 as borrowing is completed and rates and charges kick in. In FY2012, the authority had $103.1 million in unrestricted cash and equivalents, which equates to 316 days cash on hand (DCOH). However, DCOH was 522 when including unrestricted noncurrent investments, unrestricted cash designated for specific capital projects, operating & maintenance reserves, and renewal & replacement reserves. Senior and aggregate coverage for FY2012 was strong at 7.35x and 2.81x respectively, but will evolve to lower levels as the new debt is incorporated into airport costs. Debt Service and Counterparty Risk: Midrange. Sizable Capital Plan Nearing Completion: The authority is nearing completion on its Green Build Program at an estimated cost of $820 million (down from $864.6 million at last review). The project is expected to open in August 2013. The 2013-2017 CIP totals $596 million (includes $48 million in project costs prior to 2013). An additional $161 million in projects have been completed between 2005-2013. Total project costs are $1.577 billion, with 55% funded with revenue bonds, 19% with CFCs (including CFC bonds), 13% with PFCs, 12% with grants, and 2% cash funding. Infrastructure Development: Midrange. WHAT COULD TRIGGER A RATING ACTION --Lower enplanement growth leading to reduced PFC collections and lower concession spending may pressure revenues as the airport takes on debt related to its capital expansion program. --Material changes to the airline use and lease agreement affecting the airport's ability to recover costs may negatively affect the rating. --Changes to the overall scope of the authority's capital program or to plans for associated borrowing, including a proposed consolidated rental car facility, may result in negative rating action. SECURITY: The bonds are special obligations of the authority, secured by and payable from a senior lien on the net revenues of the airport system and, under certain circumstances, investment earnings and certain other funds and accounts. TRANSACTION SUMMARY The series 2013 bonds are being issued by the authority under the existing senior indenture, consisting of $112 million in 2012A bonds (Non-AMT) and $298 million 2012B bonds (AMT). The bonds are fixed rate, and have a final maturity in 2043. The bonds are being issued primarily to finance a portion of the costs of the Green Build Program and certain projects included in the 2013-2017 CIP. Following the 2013 issuance, no additional general airport revenue bonds are expected to be issued by the airport in the medium term. The projects in the Green Build Program include construction of 10 new gates on Terminal 2 West and the expansion of vehicle circulation serving Terminal 2 East and West through the construction of a dual-level roadway. The projects in the 2013-2017 CIP include improvements to the facilities in Terminal 2 East, concession facilities, certain airfield and landside utility projects, and various other maintenance projects. Enplanements increased by 1.6% to 8.575 million in fiscal 2012, and are budgeted to grow a further 0.4% in 2013. The airport is 93% O&D, and has benefited in the past year from recovery in the San Diego metropolitan statistical area (MSA). Air carrier service at the airport remains stable, with Southwest accounting for 38% of enplanements in 2012. The airport has international service to various cities in Canada and Mexico in addition to London-Heathrow and new service to Tokyo-Narita which commenced in 2012. The airport operates under a hybrid use and lease agreement which is residual on the airfield and compensatory in the terminal. Airlines also pay other fees and charges including security, terminal apron parking and overnight charges. The current use and lease agreement will expire in June 2013. Management expects negotiations will lead to a similar new five-year agreement by July 1, 2013. However, should the terms of this new agreement materially differ from the current agreement in a way that limits the airport's ability to cover its costs, credit quality may be negatively affected. Fiscal 2012 operating revenues were $153.6 million, a 6.6% increase from FY2011 and 0.6% higher than budgeted. This increase is primarily due to higher building rentals, concession revenues, and increases in the safety and security charge. Fiscal 2013 revenues are budgeted to grow by a further 13%. In 2012, nonairline revenues accounted for 54% of operating revenues, with concessions being the largest source of non-airline revenues. As non-airline revenues are dependent upon traffic levels, revenues may be pressured if enplanement growth falters, affecting financial performance. Coverage levels have remained strong in recent years as management has worked to contain operating expense growth. Operating expenses in 2012 were $119.2 million, a 1.1% increase over 2011. Management has proactively contained annual operating expenses through the economic downturn, with operating expense growth below 2% since 2009. Expenses are expected to increase in 2013 as the new terminal comes online. The airport is currently wrapping up its sizable Green Build program, with beneficial occupancy expected in August of 2013. Borrowing for the $820 million program has increased the airport's debt burden, and is expected to raise the airport's CPE to the $11-$12 range in coming years (from $8.33 in 2012). Senior coverage is expected to decrease from 7.4x to 4.8x. Senior and subordinate coverage is expected to decrease from 2.3x to 1.9x. When PFCs are incorporated as revenues rather than as an offset to debt service, senior coverage decreases to 3.4x and senior plus subordinate coverage decreases to 1.4x. Following the 2013 issuance, the airport will be leveraged at 14.9x net debt to CFADS. However, leverage is expected to decrease as PFCs applied to debt service come online and project costs make their way into the carrier rate base post-completion. Fitch expects a net debt to CFADS of closer to 10x by 2016. The airport's leveraged PFCs are relatively high in the forecast period, representing up to 80% of annual projected collections. As part of its 2013-2017 CIP, the authority expects to construct a consolidated rental car facility at the airport. This $264 million project and $30 million of enabling projects are expected to be funded with special facility bonds backed by customer facility charges (CFCs), collected by the rental car companies from their customers and subsequently transferred to the authority. In fiscal 2012, the authority collected approximately $11.5 million in CFC revenues, and has collected a total of $33.8 million of CFC revenues since collections began. In October 2012, the Board adopted an alternative CFC collection rate equal to $6 per transaction day, increasing to $9 per day by 2017 (limited to 5 transaction days per transaction). CFC revenues will be used to design, finance and construct the rental car facility, and fund certain enabling projects. Should the airport choose to finance this project with GARBs rather than CFC-backed special facility bonds, the credit rating of the airport GARBs may be affected.