Fitch Ratings has downgraded the long-term rating to 'A+' from 'AA-' on Hillsborough County Aviation Authority's (the authority) approximately $645 million of outstanding airport revenue bonds issued on behalf of the Tampa International Airport (the airport). Approximately $474 million of the authority's outstanding revenue bonds are secured by net revenues of the airport system, with the remaining $171 million secured by both a first lien on passenger facility charge (PFC) revenues and a back-up pledge of airport system net revenues.
Fitch has also revised the Rating Outlook on the airport's revenue bonds to Stable from Negative.
The downgrade reflects an operating and financial profile that has weakened over the course of the economic downturn. Debt service coverage levels have dropped as traffic fell by over by 1.2 million enplanements since 2007. Given the tepid traffic rebound through the end of 2011, which may continue in the near term, Fitch does not expect to see sustainable improvement in financial metrics consistent with the 'AA' category.
KEY RATING DRIVERS
Sizable O&D Market with Growth Pressures:
The airport benefits from a sizable origination and destination (O&D) market (88% of enplanements), and is served by a diverse mix of legacy carriers and low cost carriers (LCCs). However, the airport faces some competition from nearby Florida airports, and its enplanement levels have been slower to recover than peers.
Strong Cost Recovery Framework Supported by Diverse Revenues:
The airport's use and lease agreement covers the majority of airport costs. In periods of traffic growth, the authority can also generate a considerable level of unrestricted cash flow, allowing a build-up of reserves that can support funding for necessary capital projects with minimal borrowing needs. The airport also benefits from significant non-airline revenues which contribute to its low cost structure.
Conservative Debt Profile:
The airport's net debt to cash flow available for debt service (CFADS) of around 5 times (x) is comparatively low. The airport also benefits from a largely fixed-rate debt capital structure with a relatively short maturity profile. More than half the airport's current outstanding debt will mature in less than 10 years; however, additional leverage for demand-driven projects is expected at some point post 2019. Coverage levels are above the rate covenant requirements, though remain consistently lower than in pre-recession periods.
Flexible Capital Program:
The deferment of the North Terminal development project due to lower activity levels allows for a relatively flexible capital program with a primary focus on maintenance and refurbishment of the existing facilities.
WHAT COULD TRIGGER A RATING ACTION
--Material changes to traffic and operating revenues which can impact coverage levels and the liquidity position.
--Changes to the timing of the capital program and the degree of leverage needed to fund costs.
All revenue bonds issued by the authority are parity bonds and are payable solely from revenues, as defined in the trust agreement, after the payment of the cost of operation and maintenance expenses.
The airport is located approximately five miles west of Tampa's central business district and serves the four-county Tampa-St. Petersburg-Clearwater metropolitan statistical area (MSA), as well as a secondary service area which adds seven counties. The MSA had a 2010 population of 2.8 million and the larger service area had a combined population of 4.4 million. After increasing at an average rate of 5.8% from fiscal years 2003-2007, enplanement levels began to decline. The airport experienced enplanement declines of 2.9%, 8.5% and 2.6% for 2008, 2009, and 2010 respectively, ending 2010 with enplanement levels similar to those seen in 2004.
Fiscal 2011 enplanements showed modest improvement, increasing 0.9% over 2010. The first two months of fiscal 2012 show a slight decrease with enplanements down 0.8% through November 2011. While management has indicated an average traffic growth rate in the range of 3% over the next five years, Fitch views these assumptions to be aggressive in nature given the current environment in aviation, the uncertain economic climate, and the risk of traffic diversion to other airports.
The air trade service area supports a strong O&D base traffic of 88% in fiscal 2011. The airport is served by a mix of legacy and LCCs with Southwest Airlines as the leading carrier in the market, accounting for 32% of total enplanements in fiscal 2011, followed by Delta Air Lines' share at 18%. Approximately 57% of fiscal 2011 enplanements were served by LCCs, the same as in fiscal 2010 and up from 45% in 2008. The airport has moderate exposure to a sometimes volatile leisure passenger base, with leisure accounting for approximately 69% of enplanements in 2011 and business accounting for 31%.
Total operating revenues and operating expenses increased at a five year average annual growth rate (AAGR) from fiscal 2003-2008 of 6.3% and 8.1% respectively, resulting in an operating margin of 48.5% for 2008. However, in 2009 and 2010 operating revenues dropped 6.3% and 3.2% respectively; 2011 saw a return to growth with operating revenues up 5.7%. Management successfully controlled operating expenses through the downturn, leading to operating expense declines of 0.6% and 1.6% in 2009 and 2010 respectively. 2011 saw a modest increase in costs at 3%. Operating margins have dropped slightly in recent years, decreasing from the 50% range pre-recession to the 45% range from 2009 onwards.
As net revenues have been reduced in recent years, debt service coverage has similarly declined. From fiscal years 2000-2008, debt service coverage ranged from a low of 1.58x in fiscal 2003 to a high of 1.91x in fiscal 2005, finishing 2008 with coverage of 1.74x and with all years well above the authority's 1.25x rate covenant. However, in fiscal 2009 this level fell to 1.48x, and fiscal 2010 saw further erosion to 1.38x. 2011 saw a slight recovery to 1.48x, and management budgets 2012 to come in around 1.5x. While still comfortably above the rate covenant, Fitch expects coverage will remain at this level in the near to medium term, and views this level of coverage as more consistent with the high 'A' category. Cost per enplanements (CPEs) rose slightly in 2010 and 2011 to $5.04 and $5.10 (up from $4.93 in 2009), and are expected to remain in the $5 range going forward. The airport's comparatively low CPE level provides some ability to pass through additional costs and improve coverage levels.
In 2008, the authority anticipated that the $858.3 million first phase of the North Terminal Complex would be needed by the end of fiscal 2015. However, due to capacity reductions the authority re-evaluated its plans and determined that the project would not be needed until approximately fiscal 2023 when the demand for airport facilities is expected to reach the 25 million to 28 million total annual passenger level. As a result the near to medium term capital program is focused on maintenance and refurbishment of the existing facility. The current five-year capital program through 2016 totals $255 million, and is expected to be funded primarily with authority funds (62%), PFCs (10%), airport improvement program grants (10%), and Florida Department of Transportation grants (17%).
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' (Aug. 16, 2011);
--'Rating Criteria for Airports' (Nov. 28, 2011).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
Rating Criteria for Airports
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