Feb 1 - Fitch Ratings has affirmed the underlying 'A-' rating on the city of
Houston, TX's $109 million airport system special facilities taxable revenue
bonds, series 2001 (the consolidated rental car project bonds). The bonds, which
mature in 2028, were originally issued to finance the construction and
maintenance of a consolidated rental car facility at Houston Intercontinental
Airport (IAH). The Rating Outlook is Stable.
Sizable Rental Car Market: Houston's sizable underlying origination and
destination (O&D) market of over 9 million enplanements support IAH's local car
rental market. Based on annualized results through October, rental car
transactions are expected to reach a new peak in 2012 of nearly 3.9 million, and
will signify a third consecutive year of growth after dropping to a low of 3.1
million in 2009. Rental car transactions have shown more volatility than both
O&D and total enplanements at Houston, with transaction days initially dropping
further but rebounding more quickly. IAH has strong diversity in rental
operators, with no one company holding more than 25% market share.
Rate Setting Flexibility: Houston's rental car customer facility charge (CFC)
has been effective since 2001 and covers all car rental operators whether
located on-airport or off. The CFC is assessed without cap or sunset by approval
of the airport director. The airport's adjustable CFC rate structure has been
increased twice in recent years (to $3.75 in November 2009 and to $4.25 in April
2011), generating higher CFC revenues while remaining in-line with CFCs charged
at other large hub airports and comprising roughly 8.2% of average daily rental
car rates. Management plans to reduce its CFC rate to $4.00 in April 2013 which
may stem future revenue growth based on recent transaction trends.
Adequate Security Package: The project benefits from good structural protections
including rental facility agreements executed with all operators serving the
airport running through the maturity of the bonds. Strong levels of unencumbered
reserves have greater relevance at the current rating level given the project's
lack of a cash funded debt service reserve fund or a highly rated surety
provider. Mitigating this concern is the $20 million in unreserved funds
currently held in its Facility Improvement Fund. Management currently expects to
be able to maintain these fund balances over time from ongoing surplus deposits
despite planned uses of up to $12 million for its capital program in 2013 and
Moderate Project Leverage and Debt Service Coverage: The project's overall
leverage equates to approximately 6.7 times (x) net debt to cash flow available
for debt service (CFADS), somewhat elevated relative to peer rental car credits
with ratings in the 'A' category. However, debt service coverage levels from
operating cash flows have improved to the 1.3x-1.4x range in the last two years
(1.6x-1.7x with coverage fund).
Modern Infrastructure with Limited Capital Needs: The project is completed and
has been operating since 2003. Capital program expenditures through 2014 are
expected to total $12 million, of which $8 million is expected to be spent on
new busses. There are no expectations for future borrowing.
What Could Trigger a Rating Action
--Material changes in rental car demand or volatility in the underlying O&D
--Declining trends in coverage ratios due to transaction activity or measurable
reductions in unencumbered reserves to support project capital needs. Timely
management action on CFC rates related to these potential scenarios will be key
for rating support give the lack of a cash-funded debt service reserve.
The bonds constitute a special limited obligation of the issuer payable solely
from the special rent payments received by the city pursuant to the Master
Special Facilities Lease. The special rent payments are the CFC collections.
Bonds are also secured by interest earnings on available funds and other pledged
The series 2001 Consolidated Rental Car Project bonds financed a 250-acre
consolidated rental car facility at IAH and are supported by CFCs imposed on
automobile renters at the airport. The rental car complex, opened in August
2003, also includes a bus maintenance facility and fueling station and currently
serves all eight rental car operators serving IAH. The CFC can be adjusted and
has been set at $4.25 per rental car contract day since April 2011. Prior to the
most recent increase, the CFC rate ranged from $3.00 to $3.75 per day. In April
2013, the rate will be adjusted down to $4.00 per rental car contract day.
IAH serves as the primary commercial airport for the metropolitan area with 20
million enplanements; United Airlines operates a hub at the airport, accounting
for 87% of passenger traffic. O&D traffic constitutes roughly half of IAH's
total enplanements. The sizable local economy, which has historically performed
well in terms of population growth and business activity, sustains the overall
demand for local air service and related rental car activity. The presence of
several major corporate headquarters in the Houston metropolitan area drives the
strong business orientation of the market.
Rental car demand has fluctuated over the past decade, moving with economic
cycles. Rental car activity at IAH peaked in 2007 at 3.77 million total
transaction days but fell 18% to a low of 3.09 million in 2009. This drop was
over two times the reduction seen in overall enplanements for the same period.
CFC revenue likewise fell by 15% for the same period, partially mitigated by
rate increases. From 2009 to 2011, both transactions and CFC revenues improved
(17% and 55% respectively), showing the full impact of rate increases in 2009
and 2011. The increase in transactions over 2010 and 2011 was more than double
the improvement seen in O&D traffic. 2012 has seen further improvement through
October, with transactions up 7.5% and CFC revenues up 11.8%. Given the
volatility of rental transaction levels historically, management's decision to
reduce the CFC rate to $4.00 removes some revenue flexibility vis a vis debt
service requirements. The rate may need to be adjusted upwards should rental
activity contract in future downturns.
CFC surplus funds held in the Facility Improvement Fund (FIF) are currently
maintained at roughly $20 million. Including the combined FIF and coverage
account but excluding the facility's surety debt reserve, total cash balances
translate to about 21% of the outstanding debt. FGIC, the airport's surety
provider, is in bankruptcy and, although the airport has arranged for
reinsurance agreements for the policy, management previously considered
replacing the surety in full with a cash reserve. As a result, IAH increased
cash to levels sufficient to cover the full $12.7 million surety reserve in the
event replacement of the surety should be necessary. However, in 2012 bond
counsel indicated replacing the surety with cash was not necessary; as a result,
cash will now longer be set aside for the debt service reserve in the FIF.
Instead, management has stated its intent to use the accumulated cash balance of
the FIF to fund capital improvements (anticipated to total $12 million over the
next two years. While this will reduce liquidity available to bondholders,
surplus CFC revenues generated through rental activity will be deposited in the
FIF, and are expected to be sufficient to allow maintenance of the FIF at around
$20 million going forward.
In 2009, CFC revenues were insufficient to meet coverage requirements (without
coverage fund and transfers, coverage was 0.9x), and a transfer from the Rate
Stabilization Account of $1.1 million was necessary to achieve coverage of 1.3x.
With the benefit of recent rate increases, coverage has rebounded. The year 2010
saw coverage return to 1.14x with no transfers necessary (1.43x including
coverage fund), and 2011 saw a further improvement to 1.34x (1.63x with coverage
fund). 2012 is expected to show coverage of 1.48x (1.77x with coverage fund),
and 2013 is projected to generate similar coverage levels even with the
reduction to a $4.00 CFC in April. Management's projected coverage levels under
a 2% growth scenario are consistent with or better than historical levels
without the need for increases in the CFC rate.
Under a conservative rental car transaction scenario, including a 10% annual
loss in 2014 followed by 2% growth through 2018 and 1% growth thereafter,
coverage is in the 1.6x range through maturity (including coverage account)
assuming no rate increases. Fitch notes that the current $4.00 CFC rate is
competitive with rates charged at other major airports that also have
consolidated rental car facilities financed as special revenue debt obligations
secured solely by CFC revenues.