Fitch Ratings has affirmed the 'A' rating on Kansas City, Missouri's (the city) approximately $165.7 million in outstanding senior lien Kansas City International Airport (KCI, or the airport) revenue bonds and its approximately $103.8 million in passenger facility charge (PFC) revenue bonds. Fitch also affirms the city's approximately $44.2 million in subordinate lien airport revenue bonds at 'A-'. The Rating Outlook on all bonds is Stable.
KEY RATING DRIVERS:
-- Trends in traffic performance and overall debt coverage levels. Following two years of declining debt service (DS) coverage and enplanements, senior general airport revenue bonds (GARB) coverage was 1.65 times (x) and total GARB coverage was up to 1.26x in fiscal 2011 from a low of 1.02x in fiscal 2010. Similarly, enplanements may have reached an inflection point ending the fiscal year up 0.1% following an aggregate 16.7% drop over fiscal years 2009 and 2010.
-- The airport's debt to enplanement of $44.68 is very low compared to its peers. Further, management does not expect to issue additional debt in the near term, as capital needs are modest. The debt service profile is declining beginning in fiscal 2014, with several steep drops through maturity.
-- Cost per enplanement of $5.06 is competitive and budgeted to remain flat. However, Fitch notes the airport may continue to face challenges to manage operating expense increases and to pass-through total airport cost requirements to the airlines given the existing hybrid use and lease agreement. A return of weak margins as a result of these limitations will likely pressure the rating.
-- Customer facility charge (CFC) and transportation facility charge (TFC) revenues account for 31% of revenues available for debt service yet are not pledged to any bond series and are used for other purposes. Mitigating this risk is the airport's relatively strong liquidity - $66.8 million unrestricted cash as of April 30, 2011 (313 days cash on hand (DCOH)).
-- KCI enjoys a 95% origination and destination (O&D) enplanement base without a competitive airport within 170-plus miles and maintains a stable carrier base, despite relative weakness in the MSA economy.
-- Healthy and growing PFC debt service coverage (over 2.1x) and PFC reserves balance ($42.4 million as of April 30, 2011) from existing collection levels, despite the narrow revenue stream and recessionary enplanement declines in fiscal 2009 and 2010.
WHAT COULD TRIGGER A RATING ACTION
--Management's inability to adequately pass through costs, resulting in lower coverage levels. The subordinate lien GARBs have much weaker coverage levels and could face more immediate credit pressures should coverage performance deteriorate.
--Declines in enplanements which will similarly lead to underperformance in non-airline revenues sources, including parking, CFC, and TFC receipts.
SECURITY:
The senior and subordinate bonds are secured by a first and second lien on the net revenues of the airport's operations and certain funds under the bond resolution. The PFC bonds are solely secured by a lien on the PFC revenues with no airport general revenue support.
CREDIT SUMMARY:
The airport's enplanements declined 14.3% in fiscal 2009 and experienced an additional 2.4% drop in fiscal 2010 due to the effects of the recession and decreased capacity at the airport. Fiscal 2011 (ended April 30) growth of 0.1% may signal enplanements have bottomed out and an inflection point reached. For the first two months of fiscal 2012, enplanements have increased 2.8% and 3.2% year-over-year. The airport currently maintains a passenger traffic base of approximately 5 million enplanements. Fitch believes that the airport may continue to face ongoing risk to economic conditions, which anchors its passenger base.
Historically, the airport has covered its operating costs and debt service from a diverse mix of revenues. Less than 30% of its total operating revenues came from airline payments due to the cost recovery terms of its hybrid airline agreement and the contribution from various non-airline revenues. Fitch notes that the airline agreement has limitations to recover the overall costs from the carriers due to compensatory terms as was evident by the marked declines in margins in fiscal years 2009 and 2010. Further, the rate covenant for the GARB debt requires only sum sufficient total coverage, which provides no meaningful coverage cushion and can constrain financial flexibility during downturn periods. Some mitigation to this risk is the airport's competitive CPE of $5.06 and its strong balance sheet liquidity (313 DCOH).
Operating revenues rebounded 4.1% in fiscal 2011 to $96.8 million, in large part due to parking rate increases. Parking revenue is the leading non-airline revenue source, contributing to more than 40% of operating revenues. Excluding CFC and TFC revenues ($11.4 million), operating revenues peaked at $99.6 million in fiscal 2008, but declined 1.6% and 5.1%, respectively in fiscal 2009 and 2010. Concerning Fitch was the slight growth in operating expenses over the same period. This growth came during a recessionary period of enplanement declines and cost-savings initiatives by management. Fitch notes, however, that as a result of these initiatives, in conjunction with a leveling out of enplanements, operating expenses declined nearly 2% in fiscal 2011. The improvements to both operating revenue and expense contributed to the airport's operating margin, which dropped to a low of 14.1% in fiscal 2010, rebounding to 19.1% in fiscal 2011, almost returning to pre-recession levels.
The airport's coverage levels of its senior and subordinate lien GARB debt improved in fiscal 2011 to 1.65x and 1.26x, respectively. Comparatively, fiscal 2010 performance was much weaker at 1.31x and 1.02x, respectively, reflecting the weakness in enplanements and challenges in managing operating expense in such an environment. In the most recent fiscal year, coverage levels came in slightly under budget but were in line with Fitch's base case analysis. On the other hand, the low leverage of the PFC credit has allowed its coverage to remain strong at 2.13x for fiscal 2011 and stronger coverage levels were consistently maintained during the enplanement downturn.
KCI's current leverage is manageable at $44.68 GARB debt/enplanement or 4.5x on a net debt-to-cashflow available for debt service basis. The five-year capital program totals $182.7 million with approximately $75.2 million being funded with airport funds and $25.6 million with PFC revenues. In the long term, the airport expects to review the possibility of building a new consolidated terminal facility, which is expected to be financed with debt.
Kansas City's Aviation Department is wholly controlled by Kansas City and operated as a financially separate enterprise fund. Missouri law requires voter approval for the issuance of airport revenue bonds. On Aug. 8, 2000, voters approved up to $395 million of issuance. Since that time the airport has issued $154.6 million, leaving $240 million of remaining issuance authority.
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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