CHICAGO--(BUSINESS WIRE)--Fitch Ratings affirms its 'A+' rating on approximately $62 million in outstanding City of Albuquerque, New Mexico (the city) senior lien airport revenue bonds and its 'A' rating on approximately $24 million in outstanding city subordinate lien revenue bonds. The Rating Outlook on all debt remains Stable.
KEY RATING DRIVERS:
LIMITED COMPETITION BUT CONTINUED TRAFFIC DECLINES: Albuquerque International Sunport is the primary commercial service airport for the State of New Mexico, with limited competition posed by the state's nine other commuter oriented airports. A degree of concentration risk exists with Southwest Airlines (Southwest IDR of 'BBB'/Stable Outlook) representing 57.5% of the 2.8 million enplanements in fiscal 2012 (ends June 30); this risk is somewhat mitigated by high origination and destination (O&D) traffic profile, at approximately 88% of enplanements. Traffic recovery outlook remains a concern as declining enplanement trends observed through the recession have continued through the most recent fiscal year, with additional declines anticipated over the near term.
Revenue Risk - Volume: Midrange.
HYBRID AGREEMENT WITH MODERATE COSTS: The hybrid airline use and lease agreement, which expires in 2016, provides relatively stable financial and operating results and airline cost per enplanement (CPE). Management's efforts to contain costs and maximize non-airline revenues resulted in a relatively competitive airline cost profile as compared to peers, with fiscal 2012 CPE at $8.52.
Revenue Risk - Price: Midrange
CONSERVATIVE DEBT PROFILE: All outstanding debt is fixed rate and with a relatively short maturity life; over 50% of total debt will be paid off by fiscal 2016.
Debt Structure: Stronger
LOW LEVERAGE AND HEALTHY LIQUIDITY: Sufficient balance sheet liquidity (478 days of cash on hand) in conjunction with below average levels of financial leverage (at about $42 per enplaned passenger or 2.13 times (x) net debt/cash flow available for debt service [CFADS]) and robust debt service coverage levels (at approximately 2.48x on senior bonds and at 1.58x on all debt) in fiscal 2012. Strong coverage levels are expected to be maintained given the airport's declining debt service profile.
Debt Service and Counterparty Risk: Stronger
MODEST CAPITAL IMPROVEMENT PROGRAM: No additional debt financing expected over the next five years to support the airport's $177 million capital program. Additional revenue collections from increased passenger facility charge (PFC) rate (raised to the maximum rate of $4.50) provides further financial flexibility to support the airports capital improvement needs on pay-as-you-go basis.
Infrastructure Development and Renewal - Stronger
RATING SENSITIVITIES:
--A steepening level in enplanement traffic declines, greater than moderate single digit reductions currently anticipated by management, could pressure the rating.
--Additional debt for capital projects, not currently expected, leading to either higher leverage metrics or a dilution of debt service coverage would have a negative impact on credit quality.
SECURITY:
Sunport is owned by the city and operated by the city's department of aviation. The city also owns and operates a general reliever airport, Double Eagle II Airport, operated together with Sunport as the airport system. Net revenues of the airport system secure the senior lien bonds, with a subordinate pledge of net revenues securing the subordinate lien bonds.
CREDIT UPDATE:
Sunport's O&D traffic base provides a relatively stable base of service, but the airport is susceptible to both the changes in passenger demand and to the scheduling decisions of Southwest that continues to account for the majority of Sunport's enplanements. The airport's enplanements have declined at a compound annual growth rate (CAGR) of 2.8% from fiscal 2007 to fiscal 2012. Departing seat capacity reductions have continued since June 2008. Fiscal 2012 capacity cuts were in the upper single digits and enplanements dropped 1.9%. Enplanements decreased another 7.8% in the first nine months of fiscal 2013 (through March) compared to the same period last year, as Southwest continues to decrease capacity with flight cuts to several nonstop markets and multiple seasonal destinations. Although the addition of Jet Blue, which began service in late April 2013, could mitigate further traffic declines in fiscal 2013 and 2014, future enplanement declines seem imminent due to a combination of factors including the expiration of the Wright Amendment. Fitch views the combination of a high O&D base and low leverage as key offset factors that support the ratings on both the senior and subordinate lien revenue bonds.
Despite the recent traffic performance trends and softening of passenger-related revenues, the airport's finances remain solid and are supported by a healthy balance sheet with a low debt burden coupled with a strong liquidity position. In fiscal 2012, operating revenues grew 6.6% and the airport maintained 478 days cash on hand with a low debt per enplanement ratio of approximately $42. The airport's sound balance sheet and low leverage is expected to help to mitigate a slow traffic recovery and provide a degree of financial flexibility appropriate for the rating category. Although fiscal 2012 expenses grew 9.7%, due to increased electricity costs and increased employee benefit expenses, management has begun many cost cutting projects, including solar panel implementation to control rising energy costs.
Fiscal 2012 net revenues, which includes PFC revenues not used for pay-go projects, were sufficient to provide approximately 2.48x coverage of senior airport revenue bond debt service, and 1.58x coverage of all debt service. Debt Service coverage calculation does not include prior year's unencumbered fund balance of up to 20% of annual debt service, otherwise available under the bond ordinance. Based on the airport's 2013 budget, Fitch projects coverage on all debt service to be 1.46x in fiscal 2013, and assuming no additional borrowings, as currently anticipated, the coverage levels of total debt should improve significantly starting in 2015 as annual debt service requirements are substantially reduced.
Sunport's five year capital program through fiscal 2017 is $177 million. Funding will come from a mix of airport equity (49%), federal grants (38%), and PFC revenues (14%). Management does not expect additional debt leveraging needs over the medium term. The city maintains a flexible capital plan and delays projects if federal grand funding is not received as expected. Short-term needs are well defined and high level of excess cash flow in conjunction with grant funding is available. There are no capacity constraints in the near/mid-term for either the terminal or landside.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria & Related Research:
--'Rating Criteria for Infrastructure and Project Finance'(July 11, 2012);
--'Rating Criteria for Airports'(Nov. 27, 2012).
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=695600
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=791585
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.