CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB+' rating on the city of Pensacola's (Florida) approximately $35.6 million in outstanding series 2008 airport capital improvement revenue bonds issued on behalf of Pensacola Gulf Coast Regional Airport (PGCRA, or the airport). The Rating Outlook is Negative.
RATING RATIONALE:
-- PGCRA's relatively small enplanement base of 720,000 is predominantly origination & destination (O&D) and supported by a mix of business (50%), tourism (25%), and a strong military presence (25%). Despite the BP oil spill in 2010, enplanements were up 2.7% for fiscal 2010 (ended September 30) and fiscal year-to-date 2011 (through May) are up an additional 11%. New service by Southwest Airlines (Southwest; rated 'BBB', with a Stable Outlook by Fitch) beginning in January 2012 may add to the current traffic although nearby competition still exists.
-- A relatively flat revenue bond debt service profile (approximately $5.4 million) through 2019 and declining thereafter. Recent facility renovations coupled with a relatively small five-year capital improvement plan (CIP) should result in no additional borrowings in the near- to medium-term.
-- A history of debt service coverage performance that is increasingly reliant on capital fund balances and passenger facility charge (PFC) revenues to adequately meet its rate covenant test.
-- Diverse revenue base with airline revenues accounting for approximately 30% of total operating revenues. However, budgetary pressures exist as operating expenses have risen sharply in recent years even in periods of enplanement declines.
-- Slightly above-average leverage (debt burden of $87 per enplaned passenger and 7.75 times [x] net debt/cash flows available for debt service), coupled with weak balance sheet liquidity (60 days cash on hand) remain credit concerns.
WHAT COULD TRIGGER A RATING DOWNGRADE:
-- Enplanement growth subsides or begins to decline;
-- The airport's inability to manage its operating expenses which results in debt service coverage levels that demonstrate continued reliance on capital fund transfers and PFC revenues;
-- Inability to make timely increases in aeronautical charges to meet full airport obligations taking into account the short-term nature of the current airline agreements.
SECURITY:
The bonds are secured by the net revenues of PGCRA's operations and certain funds under the bond resolution.
CREDIT SUMMARY:
PGCRA's enplanements have rebounded after two years of declines (totaling a 16.5% reduction from peak enplanements of 835,000 in fiscal 2008). Despite concerns over traffic given the BP oil spill last year, enplanements for fiscal 2010 were 720,000 (up 2.7%) and for the first eight months of fiscal 2011 are up an additional 11.1%. Since fiscal 2002, the compound annual growth rate (CAGR) for enplanements, including the 14% decline in fiscal 2009, is 1.5%. While the addition of Southwest may provide a boost to enplanements and help mitigate competition from nearby Panama City Airport, the enplanement base remains small, leaving it vulnerable to fluctuations in air service and ticket prices. Should enplanement growth weaken, the credit quality could be pressured.
The airport operates on a month-to-month basis under an extension of the prior airline use and lease agreement (which expired in 2008). The agreement is residual in nature, and historically, airline revenues account for approximately 30% of operating revenues. Parking is the largest component of the non-aero revenues, accounting for nearly 40% (28.5% of total operating revenues).
Airline landing fees historically decreased year-over-year from fiscal 2001 to fiscal 2009, reaching a low of $0.40/$0.53 (signatory/non-signatory); however, management has needed to raise rates in fiscal 2010 and fiscal 2011 as a result of decreased capacity and enplanement declines in fiscal 2009. The airlines may be reluctant to agree to these increases given the precedent of low and shrinking rates in prior years. Cost per enplanement (CPE) rose to $6.32 in fiscal 2010, up from $6.09 in fiscal 2009, and is projected to rise to the mid-to-upper $7 range in the near future. This level of CPE is slightly elevated relative to its peers.
Following the 2010 airport revenue refunding bond issuance, the airport was able to save $1.65 million net present value and reduce fiscal 2011 debt service to $3.4 million. Debt service plateaus at approximately $5.4 million for fiscal 2012 through fiscal 2019 (with maximum annual debt service in fiscal 2013) and declines thereafter. No additional airport revenue debt is expected to be issued in the near- to medium-term given the recent airport modernization and relatively small CIP.
Operating expenses have grown at an 11.4% CAGR since fiscal 2005, 12.3% in fiscal 2009, and more than 18% in fiscal 2010 to $13.6 million. While the growth in fiscal 2010 was extremely high, the growth in fiscal 2009 is also a concern, since enplanements were down 14% in that year. This demonstrates the airport's difficulty in managing costs. While management has indicated that expenses should be flat for fiscal 2011 and cost cutting measures have been taken, should the airport not be able to manage expenses in the future, a lower rating could be warranted.
With operating expense growth outpacing that of operating revenue, the airport's debt service coverage has become increasingly dependent on PFC transfers to cover the eligible portion of the series 2008A debt service. Additionally, PGCRA must continue to use its capital fund balance to meet its rate covenant test of 1.25x coverage. PGCRA's debt service coverage ratio (DSCR) for fiscal 2010 was 2.15x (including capital fund and PFC transfers) and 1.61x (including capital fund transfers only). While coverage is expected to be higher in fiscal 2011, coverage in fiscal 2012 onward could be stressed as debt service obligations increase by nearly $2 million. Fitch plans to continue to monitor DSCR and should coverage begin to decline, it could pressure the rating.
PGCRA's weak balance sheet liquidity and slightly above-average leverage are further concerns to the health of the airport. The airport's unrestricted cash balance position has historically been poor relative to its operating expenses, and for fiscal 2010 the airport only had 60 days cash on hand. The airport's debt/enplanement is $86.94 and its net airport revenue debt/cash flow available for debt service (CFADS) is 7.75x.
The airport is owned and operated by the city of Pensacola and is governed by the 10 elected members of the City Council. The airport is located on a 1,400 acre site approximately six miles northeast of downtown Pensacola and serves the western Florida panhandle counties of Escambia, Santa Rosa, Walton, Okaloosa, and part of Baldwin and Mobile Counties in Alabama. The economy has long benefited from the historical presence of the U.S. Naval bases, as well as strong tourism and healthcare sectors. However, the area's unemployment rate has risen above the national average in the past two years as a result of a slowdown in tourism and construction.
Additional information is available at 'www.fitchratings.com'.
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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