Fitch Ratings affirms Burlington, VT's (BTV or the airport) approximately $34.7 million of outstanding airport revenue bonds at 'BBB'. The Rating Outlook for all airport bonds remains Negative.
The airport is also the obligor for a $12 million Bond Anticipation Note (BAN) that is not rated by Fitch. The BAN was issued to repay the city for funds used to build the 2010 parking expansion.
KEY RATING DRIVERS
--Primarily O&D Traffic Base with Volatility: The airport had 644,000 enplanements in fiscal-year (FY) 2011 (ending June. 30), a 5.0% year-over-year decline on the heels of a nearly 9% decline in the prior year. The airport's traffic is up 1.2% through the first eight months of FY 2012. The airport is served by a diverse mix of carriers with US Air representing the largest share at 27.7% of enplanements.
--Adequate Legal Framework with a large subsidy to Airline Carriers: The airport has a fully residual use and lease agreement but offers a substantial subsidy of approximately 40% towards terminal and landing fees to manage the cost structure The airport subsidy to carriers allows the cost per enplaned passenger (CPE) to remain low relative to peers at $4.74 for FY 2011, and is projected to increase to $4.83 for FY 2012.
--Declining Debt Structure: All of the airport's senior debt is fixed rate with a declining profile. Annual debt service payments are level at $4.3 million through FY 2017 and drop to approximately $2.7 million in FY 2018 through FY 2020; however, the airport's Bond Anticipation Note (BAN) if refinanced in the near term will cause overall debt obligations to remain elevated. Payments fall to $1.8 million in FY 2021 and remain flat through maturity in FY 2028.
--Moderate Leverage and Liquidity: The airport's net debt-to-cash flow available for debt service (CFADS) is 6.35 times (x) and comparable with peers. In FY 2011, the airport's senior lien debt service coverage ratio increased to 1.37x from 1.18x for FY 2010. As of February 2012, the airport maintained low liquidity levels of approximately $2 million of unrestricted cash, which Fitch views as a credit risk.
--Manageable Infrastructure Plan: The five-year capital improvement plan (CIP) is modest at $49 million and is expected to be funded through grants with minimal local proceeds.
WHAT COULD TRIGGER A RATING ACTION
--Inability to refinance the BAN debt into a long term solution as well as control operating and maintenance costs;
--Material changes to traffic and operating margins which could impact coverage levels or the airport's already low liquidity position;
-- Management's continued reluctance to reduce the subsidy to improve financial flexibility.
SECURITY
The bonds are special obligations of the city payable from airport net revenues. The pledge of revenues includes PFCs and industrial park revenues to be used for designated projects.
CREDIT UPDATE
The airport has maintained a diverse carrier base of US Airways, United Airlines, JetBlue, Delta, and Continental with no airline representing more than 28% of market share. Porter Airlines began season service to Toronto Island Airport in December 2011.
The main source of revenue for the airport is generated from parking operations, which accounts for 43% of total operating revenue. The airport expanded parking on two occasions in the past to accommodate robust demand. However, management's hesitation to revise fees to carriers resulted in continued use of parking revenues to subsidize lower costs to airlines. Fitch views this strategy as unsustainable should higher parking tariffs curb demand for parking spaces and place more pressure on other non-airline revenue to meet financial obligations. Cost per enplanement for the past five years averaged $4.58.
FY 2011 operating revenue increased 8.5% to $13.0 million after remaining relatively flat in FY 2010. Management expects to add an additional 24.0% in operating revenue in FY 2012 due to increased parking revenues and renegotiation of land leases and concession contracts. Expenses increased in FY 2011 to almost $10 million, 5.3% higher than the prior year. This increase is due to a 25% increase in wages due to the city terminating the agreement with the parking operator and assuming operations. Property taxes paid to South Burlington for FY 2011 were also 16% higher than the prior year.
The City of Burlington issued a privately placed $12 million BAN for the airport in June 2011 which is due in December 2012. The airport plans to refinance this note, although management has not determined a formal strategy. The airport may pursue a long term issuance or roll the BAN. In either scenario, near-term financial flexibility may be pressured and significantly erode coverage levels well below the rate covenant. Fitch will continue to monitor this development to ensure coverage levels remain in-line with the investment grade category.
Management has taken actions to improve its financial profile but the airport's financial position remains challenged. In August 2011, management began to cash fund the portion of the debt service reserve fund that was covered by surety bonds. As of December 2011 the balance is $4.3 million. In addition, the airport funded a Renewal and Replacement Fund to $215 thousand. The airport established a line of credit with Key Bank secured by AIP funds in order to better manage their capital improvement programs and not use city funds in advance of grant receipts. In January 2012, BTV began funding O&M reserves and plans to fully fund it to $2.6 million by the end of the calendar year. Management has issued an RFP to rental car companies to increase the consolidated facility charge to $4.00 from $2.00 beginning July 2012.
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
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648832
Rating Criteria for Airports
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=656970
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.
Contacts:
Fitch Ratings
Primary Analyst
Daniel Adelman, +1-312-368-2082
Analyst
Fitch,
Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary
Analyst
Vanessa Roy, +1-212-908-0508
Associate Director
or
Committee
Chairperson
Chad Lewis, +1-212-908-0886
Senior Director
or
Media
Relations:
Sandro Scenga, +1-212-908-0278
Email: sandro.scenga@fitchratings.com