Fitch Ratings assigns its 'A' rating on approximately $310 million of Broward County (the county) airport system revenue refunding bonds (GARBs) series 2012P-1 and 2012P-2 (2012P), issued on behalf of the Broward County Aviation Department (BCAD or the airport). In addition, Fitch affirms the 'A' rating on all of the outstanding GARB and convertible lien/passenger facility charge (PFC) bonds. The Rating Outlook on all bonds is Stable.
KEY RATING DRIVERS:
Traffic Anchored by Domestic Low-cost Carrier Service but Under Some Competition Risk: Fort Lauderdale-Hollywood International Airport (FLL) is the leading domestic origination & destination (O&D) airport for south Florida with nearly 12 million enplanements. Carrier service is exceptionally diverse among many low-cost carriers. Some historical volatility in traffic is evident given the more dominating leisure-oriented market FLL serves but passenger trends are largely positive. Competition risk exists from both nearby Miami and Palm Beach airports.
Rate Setting Structure is Sound: The airport currently utilizes a residual use agreement that runs through fiscal 2016. While current airline costs are very low at under $5 per enplanement, the dependence on volume-driven revenues to support a large-scale capital program could lead to higher than planned rates under weaker traffic conditions. Given the competitive nature of traffic in this region, Fitch views there to be some potential sensitivity to passing on a higher cost level to carriers.
Debt Structure is Conservative: All airport debt is fixed rate and is currently bifurcated between standard general airport revenue bonds and convertible PFC obligations. Pursuant to the relevant supplemental indentures, all of the convertible PFC bonds will become parity senior-lien GARBs as of Oct. 2, 2012. Fitch expects all of the new borrowings in conjunction with the identified capital programs to be similarly issued as senior GARBs, although the use of PFCs and grants are planned to offset much of the incremental costs.
Financial Metrics are Adequate: Due to the residual agreement, the airport maintains modest debt service coverage levels based on current operating revenues. Debt service coverage based on an indenture approach that includes coverage funds provided 1.59 times (x) coverage in fiscal 2011. Historical liquidity levels have been modest at 228 days cash on hand and airport leverage is expected to rise from a low of 6.6x in 2011 to over 9x in conjunction with the $1.87 billion capital program.
Significant Capital Spending Underway: The extension of the airport's second runway as well as terminal expansion and redevelopment will come at a cost of $1.87 billion. Most of these costs will be funded through borrowings. PFCs, grants, and additional commercial revenues are expected to fund a significant share of these added debt-related costs. However, traffic underperformance relative to the 2.5% annual growth assumed by the airport could translate to higher than planned airline charges.
WHAT COULD TRIGGER A RATING ACTION:
--A developing trend of weaker than expected traffic performance;
--Higher than expected costs or lack of successful execution of the capital program;
--Management's willingness to implement airline rate adjustments, if necessary to meet rising debt costs, increased expenses, or weaker than expected commercial revenues;
--Changes to the current airport cost and financial profile.
Pledged revenues consist of the net revenues of the airport system, which includes FLL and a small general aviation facility (North Perry Airport). PFC bonds have historically been secured by PFC annual collections, reserve balances, and state/federal grants. The airport's PFC bonds are scheduled to convert from a security pledge of PFC revenues to parity GARB bonds, payable from net revenues of the airport in fiscal 2013.
The series 2012P bonds will be issued to current refund or advance refund up to $362 million of outstanding GARB or convertible PFC bonds to generate debt service savings. The bonds are expected to be issued in fixed rate mode and no debt maturity extensions are planned with this refunding transaction. Upon issuance of the series 2012P bonds, the airport will no longer have convertible lien/PFC bonds outstanding. In conjunction with the refunding, the airport will include amendments to the bond resolution, subject to required bondholder approvals, to modify certain definitions as well as to allow for the concept of released revenues that is similar to those done at other airports.
The airport's traffic base is forecasted to grow as incumbent low-cost carriers continue to strengthen their presence at the airport, driven primarily by JetBlue, Spirit, Southwest Airlines, and AirTran. In fiscal year (FY) 2011, overall growth was approximately 7%, which is very strong relative to national enplanement performance. Estimated growth in FY2012, based on airline projected seats at FLL, is expected to be a more modest of 1.6% based on relatively flat year-to-date performance and new service announcements for the remaining months. Traffic growth in recent years has been driven by the continued growth of Port Everglades as the emerging largest cruise passenger port in the world, the continued migration of O&D passengers to FLL from neighboring airports primarily with expanding low-cost carrier service, and the up-gauging in aircraft.
Airline cost per enplanement (CPE) has been very stable since 2008 at or near $5.00. This is viewed positively given the volatility in traffic over the course of the recession. Revenues derived from airline rates and charges have historically accounted for approximately 30% of total operating revenues. The airport's estimate for CPE in fiscal 2012 is $4.10 and assumes that operating revenue will be 1.8% lower than FY2011 despite a nominal projected increase in passenger traffic. FLL currently enjoys a significant airline CPE advantage to Miami International Airport driven by Miami's investments for terminal development projects. This cost differential is expected to improve as Miami's CPE climbs over the next several years. Fitch believes that the airport has economic ratemaking flexibility on landing fees and terminal charges given its large O&D enplanement traffic base and diversity of carriers. Still, the upcoming capital program, which is expected to include $1.5 billion in additional debt borrowings may lead to some CPE adjustments. To the extent traffic significantly underperforms airport expectations, management will need to demonstrate its willingness to raise airline charges in a full and timely manner.
Fitch's calculations of senior lien debt service coverage ratios based on current-year net revenues have been below 1.20x. This is primarily due to the residual rate-setting approach. With the inclusion of rollover coverage funds, the coverage range was 1.44x-1.59x over the past three years. The airport's forecast, including future capital borrowings, indicate minimal changes to airline CPEs or debt coverage. Fitch's sensitivity analysis, which includes a combination of slower traffic growth, higher expense levels, and weaker than expected cashflow from non-aeronautical sources would indicate a need for increased cost sharing with airlines in order to produce coverage levels nearer the historical range and maintain adequate liquidity levels.
The airport's upcoming five-year capital program totals nearly $1.9 billion. The centerpiece of the capital plan is a runway expansion at a cost of approximately $791 million, with the remainder allocated to terminal redevelopments and extensions, installation of an in-line baggage security screening system, and airfield improvements. The airport anticipates issuing approximately $450 million in both GARB and PFC debt in fiscal 2013 as well as a combined $843 million in fiscal 2015-2016 in support of its CIP project. Fitch expects the current leverage ratio of net debt to cashflow available for debt service (CFADS) to rise from a modest 6.5x to nearly 10x following the issuance of all the debt.
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 Airports
Rating Criteria for Infrastructure and Project Finance
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