NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'A+' underlying rating on approximately $31.1 million in outstanding City of Boise, Idaho (the city) airport revenue bonds, series 2011. The Rating Outlook is Stable.
KEY RATING DRIVERS:
SMALL BUT STRATEGICALLY LOCATED ORIGIN AND DESTINATION (O&D) AIRPORT: Traffic levels at Boise Airport (the airport) have stabilized at 1.4 million enplanements in fiscal year (FY) 2011 (ended Sept. 30), although down over 15% since FY2007. Southwest Airlines (Fitch Issuer Default Rating 'BBB'; Outlook Stable) is expected to reduce service by 8-10% in the near term, adding to uncertainty over traffic recovery. The airport's geographic location and lack of material competition should insulate much of the O&D traffic profile even with the risk presented by planned Southwest flight reductions.
STRONG COST RECOVERY STRUCTURE: The airport's residual rate setting methodology enables it to pass along nearly all of its costs to carriers, regardless of performance of non-airline related revenues. Cost per enplaned passenger (CPE) level remains low at $4.52 compared to the airport's peers. The airport's access to diverse revenue sources serve to relieve pressure due to reduced enplanement levels.
CONSERVATIVE AND SHORT TENOR DEBT PROFILE: All outstanding debt is in fixed rate mode with an 8-year maturity profile and a flat debt service schedule.
VERY LOW LEVERAGE AND HEALTHY RESERVES: Financial strength is evidenced by low levels of leverage (at about $22 per enplaned passenger and 1.89 times [x] net debt/cash flow available for debt service [CFADS]). Further, balance sheet liquidity (321 days of cash on hand) is viewed by Fitch as a strong credit characteristic. Debt service coverage levels are robust (at approximately 3.78x for the series 2011 bonds in FY2011), and Fitch expects maintenance of still strong coverage levels going forward.
MODERATE CAPITAL PROGRAM: Additional moderate leverage is anticipated in the medium term as the airport pursues its $120 million five-year capital plan.
WHAT COULD TRIGGER A RATING ACTION:
--Material changes in airport traffic operations over the next two to three years with a specific focus on performance following reductions in service from Southwest Airlines;
--Changes to key financial metrics such as coverage and liquidity;
--Additional debt issuance as part of its capital plan financing. To the extent the city issues additional parity debt, such dilution in coverage levels may warrant a negative credit action.
SECURITY:
The series 2011 bonds are secured by a net pledge of revenues of the airport and a legal pledge of passenger facility charge (PFC) revenues. Approximately 75% of the series 2011 bonds debt service is eligible to be supported with PFC revenues.
CREDIT UPDATE:
While the airport's 95% O&D traffic profile provides a relatively stable traffic base, the airport is susceptible to both the changes in passenger demand that are largely based on economic environment and scheduling decisions of individual airlines. The airport's airline market share diversity is adequate, with two dominant airlines, Southwest Airlines (35%) and Horizon Air (20%), comprising 55% of the market share in FY2011. However, a market share shift is expected in the near term, due Southwest Airlines' 8-10% reductions in service in January 2012 and the expected increases in both Horizon Air and Delta service absorbing some of the service reductions.
The airport's enplanements declined at a compound annual growth rate (CAGR) of 2.9% between FY2006 and FY2011, with the largest decline of 14.9% in fiscal 2009. Enplanements were essentially flat (down only 0.1%) in FY2011 as compared to FY2010. Management anticipates traffic to remain flat in FY2012; October and November 2012 enplanements were down 1.5% and 0.7%, respectively. Fitch expects slower enplanement growth due to continued weak economic conditions and uncertainty over the near-term level of service provided by the airport's key carriers. The combination of a high O&D base and low leverage are key offset factors that support the 'A+' ratings on the bonds.
Despite enplanement volatility, the airport's five-year use and lease agreement (expires in Sept. 2015), which establishes a hybrid residual rate-setting structure, has provided for relatively stable financial and operating results. Operating revenues have grown at a compounded annual rate of 0.5% from FY2006 to FY2011, while costs have grown at a rate of 3.4% over the same period. The airport's finances in FY2011 were stable, with approximately 321 days of unrestricted cash. According to preliminary FY2011 results, operating revenues increased by approximately 3.5% to $23.2 million, while operating costs were essentially flat at $17.4 million (down 0.4%). Management's cost saving practices resulted in an adequate operating margin of 25% in FY2011, an improvement from 22% in the previous year. As a result of cost containment measures and lower debt service requirements, the airport decreased rates and charges to the airlines that resulted in a decrease in CPE to $4.52 in FY2011 from $4.81 in FY2010. For FY2012, managements forecast a $4.36 CPE, while operating expenses are conservatively budgeted to increase by 7%.
FY2011 debt service coverage was estimated at 3.78x for the series 2011 bonds, with coverage calculated based on available funds (net revenues plus eligible PFC revenues at 75% of debt service requirements). It should be noted that the airport uses all annual PFC collections to support annual debt service, resulting in an estimated 5.52x debt service coverage in FY2011. Going forward, series 2011 coverage levels are expected to decrease as annual debt service requirements rise to $4.4 million in FY2012 from $2.2 million in FY2010. Debt service requirements will remain level, at about $4.4 million through maturity in FY2020.
Fitch assessed a forecast rating case scenario, which contemplated a 15% loss in traffic followed by a four-year recovery. Under such assumptions, Fitch projects debt service coverage to be maintained at 1.6x or greater for the series 2011 bonds (when only eligible PFC revenues are included), while CPE is forecast to increase to $5.80-$6.00 range. Fitch acknowledges the airport's healthy liquidity levels of $15.3 million in unrestricted cash and investments and the availability of the PFC surplus account for payment of debt service.
The airport's capital program calls for $121 million in capital projects through 2017. Management's preliminary plans include additional leveraging needs over the medium term of $10 million for the expansion of the parking garage. New debt is expected to be issued on a subordinate lien level; however, the structure has not yet been finalized and it is subject to change. Other projects requiring debt financing, such as stand-alone car rental facility improvements, storage relocation for a new runway and a new cargo landside facility are demand driven, and are not planned for the medium term.
The airport is located about five miles southwest of downtown Boise, the capital and largest metropolitan statistical area (MSA) in Idaho. It is owned by the city of Boise and operated by the City of Boise Department of Aviation since 1939 as a self-sustaining enterprise fund of the city.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (Aug. 16, 2011);
--''Rating Criteria for Airports' (Nov. 28, 2011).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648832
Rating Criteria for Airports
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=656970
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