NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A+' rating for the city of Houston, TX's outstanding $2 billion airport system subordinate lien revenue bonds (issued on behalf of Houston Airport). Fitch has also revised Houston Airport's (the airport) Rating Outlook to Stable from Negative. The airport also has approximately $450 million of series 2009A senior lien revenue bonds outstanding; Fitch does not rate the airport's senior lien revenue bonds.
Rating Rationale:
The 'A+' subordinate lien revenue bond rating reflects the broad economic base of the primary service area supporting over 24 million annual enplanements; strong historical demand for air carrier service at both Houston Intercontinental (IAH) and William P. Hobby (Hobby) airports, and limited future debt requirements to support the capital program through 2015. Historically, the airport system also exhibited consistently strong financial results evidenced by coverage levels at or above 1.7 times (x); sound reserve balances with 720 days cash on hand in 2010; and rising but relatively competitive airline costs.
Credit concerns include the dominant positions held by Continental Airlines (Continental) at IAH and Southwest Airlines (Southwest) at Hobby; exposure to fluctuations in enplanement levels due to 49% connecting traffic and the compensatory nature of the system's largest cost center; relatively elevated debt levels compared to peer airports, with 10.5x net debt/CFADS in 2010; and expected declines in margins and coverage levels in the near term projection period. Continental is rated 'B-' with a Positive Outlook and Southwest is rated 'BBB' with a Negative Outlook by Fitch.
The Outlook revision to Stable reflects the airport system's restoration of margins and debt service coverage in 2010 to levels consistent with historic norms. While annual debt service requirements will increase in the 2011 to 2015 period, previous concerns about declining enplanement levels and the associated revenues are mitigated by 2010's 2.1% increase in enplanements, and additional 2.1% improvement for the first six months of fiscal 2011. Fitch does not expect the recent merger of United and Continental as well as the proposed Southwest acquisition of AirTran to have material near-term impacts to the service levels at the airport system.
Financial projections indicate that airline cost levels should remain largely unchanged under reasonable traffic assumptions, and the debt service coverage levels on combined senior and subordinate lien revenue debt going forward, though expected to be below historic levels, should remain at levels consistent with the 'A+' rating. Forecasts reflect some softness in operating revenue performance under the airport's compensatory rate-setting methodology as well as the greater use of debt service offsets from recently enacted passenger facility charges (PFC). Fitch will look to the upcoming traffic trends over the next one to two years as well as monitor revenue performance and management actions on budget and debt that will together serve as key drivers to the airport's prospective financial position and cost profile.
Key Rating Drivers:
Healthy margins and coverage levels as senior lien debt service comes online will be integral in maintaining the current rating. Fitch recognizes that recent changeovers in management bring considerable experience and knowledge to the Houston Airport System, and expect that the airport will continue to manage its cost profile while executing on its current capital plan. The ability to maintain service and traffic levels despite recent mergers by the system's two biggest carriers will also affect the rating going forward.
Security:
The bonds are secured by a subordinate lien on the net revenues generated from the operations of the airport system that includes the two primary commercial aviation facilities, IAH and Hobby airports.
Credit Summary:
As a system, the Houston airports combined have shown reasonable resilience through the economic downturn. After exhibiting average growth rates of 3.2% through the decade leading up to the downturn, in fiscal 2009, both IAH and Hobby lost passengers (declines of 8.2% and 8.8% respectively). For fiscal 2010, IAH saw enplanements increase by 1.3% while Hobby saw more robust recovery of 5.7% to near-peak levels. At IAH, the recovery of international enplanements was more robust than that of domestic enplanements (5.6% for international vs 0.3% for domestic). For the first six months of fiscal 2011, Hobby enplanements are up 6.8% over the same period a year prior, while IAH enplanements are up 1.1%. Management expects 2% enplanement growth for fiscal 2011 systemwide.
The airport system's two largest carriers by enplanement have recently been party to mergers. IAH serves as the primary commercial airport for the metropolitan area and Continental Airlines operated its largest hub at the airport, accounting for 86% of enplaned passengers in 2010. In October 2010 UAL Corporation (the parent company of United Airlines) merged with Continental and changed its name to United Continental Holdings, Inc. Similarly, Southwest Airlines is the largest carrier at Hobby, and in September 2010, Southwest Airlines announced its plans to acquire AirTran Airways; the plan is pending shareholder and regulatory approval.
While the city cannot predict what impact, if any, that either merger may have on the airport system, Fitch expects the impact to be neutral to positive. Published reports from Continental and United officials have stated that Houston will remain the combined airlines' largest hub and gateway to Latin America. Fitch views both Continental and Southwest's ongoing commitment to the Houston market as an important credit consideration. Any significant service reductions or departure by either anchor carrier would likely have substantial adverse effects on the airport's connecting traffic and financial profile and may result in Fitch taking negative rating action.
The airport system's use and lease agreements utilize a strong compensatory methodology for setting fees and charges in the terminals and airfield facilities which have resulted in sound financial operations during years of traffic expansion. The compensatory terminal agreements have allowed the airport to control most concession revenues, thus providing the system to build high debt service coverage levels and substantial liquidity balances. However, Fitch notes that approximately 60% of total operating revenues are derived from airline charges, a level generally high for a large-hub airport.
Concession revenues contribute approximately 32% of airport revenues. The compensatory nature of the airport's largest cost center exposes the system to higher financial impacts should fluctuations in enplanement levels occur. PFCs have only recently been introduced to both airports; Hobby in November 2006 and IAH in December 2008. Both airports charge $3 per enplanement, a level that is low relative to PFC rates charged at most other major U.S. airports. An increase to the current maximum $4.50 per passenger level would be a notable revenue addition particularly since the combined airports rank among the largest markets in the nation with 24 million enplanements. While the PFCs are not pledged to the payment of the airport revenue bonds, PFCs are used as debt service offsets and provide for additional funding sources for capital spending requirements.
In recent years the cost per enplanement (CPE) at both airports has trended upward due to terminal and airfield improvements in the capital improvement program. Fiscal 2010 saw relatively a flat CPE at IAH ($11.06 vs $11.04 in 2009), while Hobby increased to $9.44 from $8.20 the prior year. Hobby's CPE has increased modestly since 2006, with current levels 15% above those charged in 2005; this has largely been due to the capital improvements that have been made at Hobby. IAH's rates increased in 2005 and then remained stable around the $11 level. 2011 CPEs are expected to be flat or lower; although maintenance of these levels is dependent upon use of PFCs and grants to offset up to 37% of total annual debt service through 2015.
Historically the airport's financial profile was consistently strong; coverage levels of outstanding subordinated revenue debt were 1.80x or higher through 2008. In fiscal 2009 coverage dipped to 1.70x, but recovered to 1.99x in 2010 after using unpledged PFCs and LOIs as direct debt service offsets. Treating these offsets as revenues, total coverage levels were at a lower but still healthy 1.61x. Looking forward, under a scenario with 1% enplanement growth in 2011 and 3% average growth thereafter, debt service coverage levels for the combined senior and subordinate lien obligations are projected to fall into the 1.5x range when treating PFCs and grants as debt service offsets.
Assuming these funds as revenues rather than debt service offsets results in coverage levels ranging between 1.33x and 1.36x. Under this scenario airline CPEs remain in-line with current levels. In a more stressful scenario with a 5% enplanement decline in 2012, CPEs would need to rise $2-$3 in order to maintain the same coverage levels. Should debt coverage ratios fall and remain below these levels due to traffic and revenue declines, negative rating action would likely be warranted.
Airport unrestricted cash reserves have remained strong with $483 million of unrestricted fund balances in December 2010, equivalent to 720 days cash on hand and covering 20% of total long-term debt. Some use the airport's internal liquidity will be drawn on for capital spending in upcoming years. The updated five-year capital improvement program (CIP) for 2011 through 2015 totals approximately $535 million, in-line with 2010-2014 projections.
Terminal design and construction and apron renovation and expansion projects make up 48% of CIP appropriations, while airfield projects represent 18%, and airport support facilities represent 12%. This program supplements the continuing projects of $121 million from fiscal 2010. The overall program has been scaled back and deferred to those determined to be priority projects given the economy and traffic situation, and totals $695 million from 2007-2015. Comparatively, the 2008-2013 CIP was about $1.9 billion. 81.5% of current plan will be funded from the Airports Improvement Fund, with 10% from prior bonds and commercial paper proceeds, and the remaining 8.5% from grants and other funds. No additional borrowing is anticipated as a part of the five-year program.
Applicable criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (Aug. 16,
2010);
--'Rating Criteria for Airports' (Nov. 29, 2010).
Applicable Criteria and Related Research:
Rating Criteria for
Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548345
Rating
Criteria for Airports
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=578745
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