CHICAGO--(BUSINESS WIRE)--Fitch Ratings affirms the 'A' rating on approximately $58.4 million outstanding Tucson Airport Authority's (TAA), Arizona, subordinate lien airport revenue bonds. The Rating Outlook is Stable.
KEY RATING DRIVERS:
--Small Hub with Diversified Carrier Base: Tucson International Airport (TIA or the airport) served 1.83 million enplanements in FY 2012, which represents a slight decline from FY 2011. Traffic remains approximately 17% below its peak FY 2008 level and is down another 8% for the first seven months of FY 2013. However, TIA's mainly origination and destination (O&D) traffic base and well-diversified carrier mix add some stability to enplanements. Still, TIA competes directly with Phoenix Sky Harbor International Airport, which serves more markets with greater frequencies.
Revenue Risk: Volume - Midrange
--Solid Rate-Making Flexibility: The airport operates under a residual airline use and lease agreement, which has allowed the airport to maintain a stable cost per enplanement (CPE) of $7.32 in FY 2012, produce consistently strong debt service coverage levels at or above 2.0x historically, and fund capital expenditures with surplus cash flows.
Revenue Risk: Price - Stronger
--Conservative Debt Structure: The airport maintains fixed-rate debt for all of its obligations with a level-to-descending debt service profile.
Debt Structure- Stronger
--Low Leverage Characterized by Strong Liquidity: The airport's debt burden is extremely low due to the airport's substantial cash reserves and minimal leverage. The airport's net-debt-to-cash flow available for debt service is negative and is expected to remain so in the future. TIA held approximately 1,346 days cash on hand with approximately $108 million in unrestricted cash and investments as of FY 2012.
Debt Service Risk - Stronger
--Manageable Capital Program: The airport's facilities are modern and its five-year capital plan is very modest at approximately $40 million. Projects are expected to be funded primarily from external grants, aid, and pay-as-you-go monies and are deferrable based upon availability of grant funding.
Infrastructure Development/Renewal- Stronger
RATING SENSITIVITIES:
--A significant change in the healthy liquidity balances, which provide a cushion to the airport's smaller scale of operation;
--Material shift to the traffic base or carrier composition which constrains the airport's financial flexibility;
--Additional borrowings or spending requirements above current estimates that would pressure the airline's cost position.
SECURITY:
The subordinate lien bonds are secured principally by a pledge of available passenger facility charges (PFC) and a subordinate pledge of general airport net revenues. The airport's senior bonds recently matured; however, additional senior-lien borrowings are still permitted under the bond documents.
CREDIT UPDATE:
TIA's enplanements continue to see modest declines evidenced by a 0.9% loss in FY 2012 that followed a 0.8% reduction in FY 2011. Together with an estimated additional decline of 8% in FY 2013, the airport may experience an aggregate 25% enplanement loss below FY 2008 enplanements of 2.2 million. While the airport's 98% O&D traffic base provides a stable base of service, the presence of nearby Phoenix Sky Harbor airport approximately 100 miles north, with sizeable low-cost carrier offerings and serving a greater variety of markets, will likely constrain strong traffic gains and/or any shifts in passenger market share. As a result, Fitch has modeled its base case with flat-to-1% enplanement growth through its five-year forecast period (FY 2014-2018).
Fitch views favorably the airport's carrier diversity. The airport's two dominant airlines, Southwest Airlines and American, have retained stable market share at 34% and 23%, respectively, and have a long history of serving the airport. Overall, the airport benefits from a balanced airline market share of legacy and low-cost carriers serving short- to medium-haul flights.
TAA's relatively low debt burden and strong non-airline generation has allowed the airport to maintain a largely stable CPE considering the tepid enplanement trends since 2009. CPE for FY 2012 remained unchanged from FY 2011 at $7.32. CPE is anticipated to rise to closer to $8.00 as a result of the FY 2013 enplanement losses but could stabilize at that level should passenger traffic begin to rebound.
In FY 2012, TAA generated an aggregate debt service coverage ratio of 2.52x. Similarly, in FY 2011, the airport's all-in debt service coverage was 2.34x. Senior lien coverage grew to 4.40x in FY 2012 and the senior debt has now fully matured. Subordinate lien coverage similarly grew to 3.85x in FY 2012, in-line with historical results, and is expected to remain at or near this level throughout the five-year forecast period, as the subordinate lien benefits from the senior lien's maturity.
Furthermore, TAA continues to benefit from sizeable balance sheet liquidity. The authority's unrestricted cash and investment balance of nearly $108 million equates to more than 1,300 days cash and translates to almost double its outstanding debt. As a result, leverage continues to be negative and compare favorably to peers.
The airport's five-year capital improvement plan is very modest at $39.8 million and no new borrowings are anticipated. Funding is expected to come predominantly from AIP grants (91%) with the remainder split between state (4.5%) and local funds (4.5%). In addition, most projects are deferrable, if necessary, to coincide with the availability of grant funding and TIA has a PFC reserve balance of $23.6 million.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria & Related Research:
--'Rating Criteria for Infrastructure and Project Finance', dated July 12, 2012;
--'Rating Criteria for Airports', dated Nov. 27, 2012.
Applicable Criteria and Related Research:
Rating Criteria for Airports
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695600
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=794413
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