BRIEF-Boyd Group Income Fund significantly enhances credit facility
* Boyd Group Income Fund significantly enhances credit facility
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. SENSITIVITY/RATING DRIVERS 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 2014. 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 traffic base. --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. Security 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 funds. Credit Update 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.
* Boyd Group Income Fund significantly enhances credit facility
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