NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed its 'BBB+' rating on St. Louis, MO's approximately $592.9 million outstanding airport revenue bonds. St. Louis also has $54.9 million of series 2012, 2013, and 2015 parity airport revenue bonds that are not rated by Fitch. The Rating Outlook is revised to Positive from Stable.
RATING RATIONALE
The Positive Outlook reflects the expectation that continued enplanement growth in conjunction with a renewed airline agreement providing full cost recovery terms will allow Lambert-St. Louis to maintain stable debt service coverage ratios (DSCR) and experience moderate reductions in leverage and airline costs. Fitch will assess these metrics over the next two years, as favorable performance may reflect a positive credit development.
The rating reflects the airport's status as a medium hub airport with stable financial metrics, limited competition from other airports and modes of transportation, manageable capital needs in the medium term, and expected maintenance of coverage levels consistent with recent norms. The rating also reflects modest carrier concentration, with Southwest Airlines representing 51% of total enplanements. The airport's strong airline use and lease agreement (AUL) provides sound financial protection in the event of additional airline service reductions.
KEY RATING DRIVERS
Revenue Risk - Volume: Midrange
Solid Underlying Demand: The airport is the primary air service provider for the St. Louis metropolitan statistical area with limited competition within the area. The airport's traffic profile has shifted over the past decade and currently serves as an origination and destination (O&D) airport, with O&D representing 86% of the approximately 6.6 million total enplanements. While moderate carrier concentration exists with Southwest Airlines (51% of total enplanements), it is partially mitigated by the airline's long-term commitment to serve the airport.
Revenue Risk - Price: Midrange
Favorable Airline Use & Lease Agreement: The airline use agreement, which was recently negotiated and expires in 2021, provides a hybrid compensatory rate-setting approach while ensuring all necessary operating and debt service costs can be recovered through a residual-oriented financial backstop. Airline costs are elevated at $13.60 per enplanement in fiscal 2015 (ending June 30), but are expected to decrease nominally in conjunction with a declining debt service profile.
Infrastructure Development & Renewal: Stronger (Revised from Midrange)
Short-Term Planning: The new AUL includes a pre-approved five-year capital investment program (CIP) totaling $170 million. The CIP has received majority-in-interest (MII) approval from signatory carriers, and focuses on the maintenance, refurbishment, and modernization of airport assets. The airport may issue up to $86 million in general airport revenue bonds (GARBs) for the projects, with the remainder being funded with the airport's development fund and other equity sources.
Debt Structure: Stronger
Conservative Debt Profile: All of the airport's debt is fixed-rate with a declining amortization profile. Maximum annual debt service (MADS) of $75 million is scheduled in fiscal 2017, with debt service currently stepping down to approximately $66 million in fiscal 2019. Debt service continues to decline in subsequent years through maturity in fiscal 2034. Bond covenants and reserve requirements are satisfactory for an airport at this rating level.
Stable Financial Performance
Some financial limitations exist due to modest leverage and coverage levels. Net debt-to-cash flow available for debt service remains comparable to peers at 7.16x, while debt service coverage (including passenger facility charges and a rate mitigation coverage account) remained flat at 1.37x in fiscal 2015. The airport has adequate levels of restricted cash balances along with unrestricted cash equivalent to 183 days cash on hand (DCOH).
Peers
St. Louis' peers include Cleveland ('BBB+'/Stable Outlook) and Pittsburgh ('A'/Stable Outlook). Each airport has previously served as a domestic hub and has transitioned to a primarily O&D airport. St. Louis' leverage (7.16x) and cost per enplanement (CPE; $13.60) compares favorably to Cleveland's metrics of 8.63x and $18.37, respectively. Conversely, Pittsburgh has lower leverage (1.86x), and its airline costs are likely to reduce to a lower levels as debt rapidly amortizes.
RATING SENSITIVITIES
Positive: Favorable traffic and non-aviation revenue growth, coupled with a stable cost profile, yielding reduced leverage below 8x on a sustained basis will likely result in positive rating action.
Negative: Higher leverage or operational volatility associated with enplanement declines or airline costs could lead to negative rating action.
CREDIT UPDATE
STL, a medium hub airport as designated by the Federal Aviation Administration, is owned and operated by the City of St. Louis. According to the Airports Council International North American Traffic Report, with 6.7 million enplanements in 2016, St Louis ranked 31st for busiest airport nationwide. While the airport is served by seven major and national passenger carriers, there is a modest degree of service dependency from Southwest Airlines, accounting for 51% of the airport's total enplanements. Origin and Destination traffic represents approximately 85% of total traffic.
PERFORMANCE UPDATE
Fiscal 2016 traffic increased by a sizable 6.7% (to 6.67 million enplanements) over the previous year. This exceeds a five-year compound annual growth rate of 1.2%. The increase was largely a result of Southwest Airlines adding multiple new daily service routes in the second half of the fiscal year. Southwest's expanded operations include daily service to Little Rock, AR, Pittsburgh, PA, Des Moines, IA, Wichita, KS, Cleveland, OH, Oakland, CA, and Portland, OR. Fiscal 2017 traffic through August reflects a 7.9% increase over the same time period in 2016.
Based on Fitch calculations, fiscal 2015 revenue decreased 4.1% from 2014. The decline was primarily driven by inflated revenues in fiscal 2014 pertaining to non-aviation revenue, particularly proceeds from the sale of airline stock from a settlement agreement with American Airlines following their emergence from bankruptcy protection. Airline revenue decreased 3.9% in fiscal 2015. Expenses decreased 4.4% in fiscal 2015 following a 9.1% increase in the prior year. The fiscal 2015 expense reduction was attributable to a decrease in supplies, facilities and grounds expenses, and contractual services. Preliminary results for fiscal 2016 show expenditure growth of 1.8%.Preliminary results from fiscal 2016 reflect a 1% increase in total revenues over the previous year.
In conjunction with the recent AUL renewal, the airport outlined a pre-approved five-year capital improvement program totaling approximately $170 million. The five-year CIP program consists of projects involving the maintenance, refurbishment, replacement, and modernization of existing airport facilities, infrastructure, and equipment. The city is looking at using up to $86 million in GARBs with a 30 year term to fund the cost remaining after PFC funds, Airport Improvement Program funds, Airport Development Funds, other equity sources. The city contemplates that approximately $58 million in GARBs would be issued in FY2018 and approximately $28 million in GARBs in FY2020.
FITCH CASES
Fitch's cases, which span from 2016 to 2021, utilize the issuer's consultant-based traffic and revenue assumptions, while adding its own additional stresses. Additional preliminary CIP debt was not included in the issuer's projections, but incorporated in Fitch's cases. Under the base case, traffic grows at a CAGR of 3% in fiscal 2017 followed by annual growth of 1.5%. Non-airline revenue growth rates follow annual traffic changes and inflationary growth, while airline revenues were adjusted to maintain debt service coverage consistent with historical norms. Fitch-calculated average DSCR on GARB debt is satisfactory at 1.35x, with CPE falling to $12.03. Leverage falls to an average of 6.48x as debt is repaid.
Under the rating case, traffic increases 3% in 2017 followed by an 8% decline in 2018. Annual recovery follows thereafter. Airline revenue growth follows annual traffic changes absent inflationary growth, and incorporates a 3% increase in 2018 to offset the 8% traffic stress, followed by a 3% decline in the subsequent year to reflect normalization of revenue trends. Operating expenses are stressed an additional 0.5%. Fitch-calculated average DSCR on GARB debt is average at 1.33x, while average CPE grows relatively high to $13.07. Despite projected debt issuance, average leverage is still manageable at 6.59x, while liquidity remained relatively unchanged from the base case at 151 DCOH.
Additional information is available on www.fitchratings.com.
Applicable Criteria
Rating Criteria for Airports (pub. 25 Feb 2016)
https://www.fitchratings.com/site/re/877676
Rating Criteria for Infrastructure and Project Finance (pub. 08 Jul 2016)
https://www.fitchratings.com/site/re/882594
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