CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A+' rating to City of Boise, Idaho's $14.6 million series 2012 airport revenue bonds. In addition, Fitch affirms the 'A+' underlying rating on approximately $28.2 million in outstanding City of Boise, Idaho (the city) airport revenue bonds, series 2011. The Rating Outlook on all bonds is Stable.
KEY RATING DRIVERS:
SMALL BUT STRATEGICALLY LOCATED ORIGIN AND DESTINATION (O&D) AIRPORT: Boise Airport's (the airport) unique geographic position and lack of material competition, as it is the only major airport within approximately 400 miles providing scheduled national service, as well as its 95% O&D traffic profile serve to mitigate the risk presented by the small scale of operations.
STRONG COST STRUCTURE: Even with flat to low enplanement growth, the airport has the ability to maintain very strong financial metrics and low airline costs. The airport's cost center residual methodology enables the airport to pass along the majority of its costs to the signatory air carriers to the extent non-airline related revenues are insufficient. Cost per enplaned passenger (CPE) level remains low at $4.49 compared to the airport's peers. The airport's access to diverse revenue sources serve to relieve pressure due to reduced enplanement levels.
CONSERVATIVE DEBT PROFILE: All outstanding and additional debt is fixed rate with flat debt service of $5.6 million through 2020, dropping to $1.2 million in 2021 and remaining flat through maturity.
VERY LOW LEVERAGE AND HEALTHY RESERVES: Low levels of financial leverage demonstrated with about $34 per enplaned passenger in conjunction with healthy balance sheet liquidity (470 days cash on hand), and extremely low net debt to cash available for debt service (CFADS) at 2.14x. Debt service coverage levels are strong, though lower than previous years, at 2.86x for fiscal year 2012. Passenger facility charges (PFC) and customer facility charges serve to meaningfully offset gross debt service requirements. Eligible PFCs covered 75% of debt service requirements in 2012, and will cover 60% of debt service requirements through the forecast period.
MODERATE CAPITAL PROGRAM: The airport has a manageable and diversified seven-year $132.7 million Capital Improvement plan, including the $18 million new parking garage facility financed mainly through the Series 2012 airport revenue bonds. Most near- term projects are expected to be cash funded and the city has no near-term plans to issue additional debt due to lack of demand for previously contemplated debt financed projects.
WHAT COULD TRIGGER A RATING ACTION:
--Reduction in service or capacity by individual airlines that does not result in corresponding increase in service by other airlines and would affect the cost structure resulting in rising rates and charges;
--Stability in airport traffic operations over the next two to three years coupled with cost controls and/or revenue growth necessary to generate healthy financial metrics;
--Additional leverage that would meaningfully dilute coverage levels.
SECURITY:
The series 2011 bonds are secured by a net pledge of revenues of the airport and a legal pledge of PFC revenues. Approximately 75% of the series 2011 bonds debt service is eligible to be supported with PFC revenues. The series 2012 bonds are also secured by a net pledge of revenues of the airport but do not have the additional pledge of PFC revenues.
TRANSACTION UPDATE:
The city of Boise is issuing $14.59 million in airport revenue bonds, series 2012. The bonds are being issued to acquire and construct parking facilities at the airport, to satisfy the debt service reserve fund requirement for the series 2012 bonds, and to pay costs of issuance. The bonds are being issued on parity with the outstanding series 2011 bonds, and are secured by a net pledge of airport revenues. PFCs may not be used to cover debt service on the series 2012 bonds. All 2012 bonds are fixed rate and mature in 2032.
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 (34%) and Horizon Air (20%), comprising 54% of the market share in 2011. Southwest Airlines (Issuer Default Rating of 'BBB'; Stable Outlook by Fitch) reduced service in fiscal year (FY) 2012 from the airport to three of its destinations by 33% as a result of the Southwest/AirTran merger completed in May 2012.
Additionally, American Eagle ceased serving the airport as of February 2012. Largely as a result of these service cuts, enplanements decreased by 4.5% in FY2012 as compared to FY2011.
Management anticipates that traffic will continue to decrease by 1.5% in FY2013, with some of the effects of the service cuts rolling over into the first few months of FY2013. However, going forward, management does not foresee any additional service cuts and believes enplanements will begin to slowly increase. 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 cost center residual rate-setting structure, has provided for relatively stable financial and operating results. Operating revenues have remained relatively flat at a compounded annual rate of -0.1% from FY2007 to FY2012, while costs have grown at a rate of 4.2% over the same period. The airport's finances in FY2012 were stable, with approximately 470 days of unrestricted cash. According to preliminary FY2012 results, operating revenues increased by approximately 4.3% to $25.1 million, while operating expenses increased by 3% to $17.9 million.
Management's cost saving practices resulted in an operating margin of 29% in FY2012, an improvement from 25% in the previous year. Although the airport suffered multiple service cuts and losses, management chose not to increase the rates and charges to airlines until July 2012 due to lower debt service requirements and cost containment measures. The average CPE for FY2012 was $4.49, slightly lower than $4.52 in FY2011. For FY2012, management forecasts a $5.13 CPE, planning to raise the CPE to maintain debt service coverage above 2.0x, including additional debt service from the series 2012 bonds. Leverage is relatively low at 2.14x net debt to CFADS.
FY2012 debt service coverage was estimated at 2.39x 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 2.86x debt service coverage in FY2012. Going forward, series 2011 and series 2012 coverage levels are expected to decrease as annual debt service requirements rise to $5.6 million in FY2013 from $4.4 million in FY2012. Debt service requirements will remain level at $5.6 million until FY2020, upon which the series 2011 bonds expire and debt service will decrease to $1.2 million and remain flat through the 2012 series maturity in 2032.
The airport's capital program calls for $132.7 million in capital projects through 2018. This includes the Parking Garage Expansion project financed primarily through the series 2012 bonds. The project involves expanding the additional parking facility at the airport, which is currently operating consistently at or above 90% occupancy, to include an additional 716 net parking spaces (the expansion is 1,013 stalls but 297 surface stalls will be replaced with the garage expansion). In addition to approximately $15 million to be funded by the Series 2012 bonds, the airport plans to contribute $3 million in cash to funding the project and maintains an additional $3 million in cash reserves specifically for construction cost overruns. The project is expected to be complete in the end of calendar 2013. 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, have been placed on hold and are not expected to move forward in the medium-term.
The airport is located about five miles southwest of downtown Boise, the capital and largest metropolitan statistical area in the State of 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' (July 12, 2012);
--'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=682867
Rating Criteria for Airports
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=656970
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