CHICAGO--()--Fitch Ratings assigns a 'BBB-' rating to Burlington, VT's (BTV, or the airport) approximately $26.4 million Series 2012A, 2012B, and 2012C airport refunding revenue bonds. In addition, Fitch downgrades BTV's outstanding $19.4 million Series 2003 airport revenue bonds to 'BBB-' from 'BBB'. The Rating Outlook is revised to Stable from Negative.
The downgrade reflects the airport's elevated risk profile resulting from anticipated traffic declines and concerns that traffic volatility can further constrain the airport's already limited operating and financial flexibility. Fitch views the current rating level to be more consistent with the airport's vulnerabilities to operating shifts and the pressure to manage airline charges while meeting covenanted debt service requirement levels.
The Stable Outlook reflects management's actions to address liquidity through cash funding of debt and operating reserves and Fitch's expectations that the airport is nearing a base level of traffic that is sustainable and can generate net revenues to comply with minimum coverage requirements.
KEY RATING DRIVERS
SMALL O&D TRAFFIC BASE WITH VOLATILITY: The airport's narrow enplanement base, at 653 thousand enplanements in fiscal year (FY) 2012 (ending June 30), has been subject to uneven traffic performance in recent years with further declines reported in the first three months of FY 2013. Most service offerings are provided by a mix of regional and commuter carriers. Canadian residents augment traffic at BTV but demand could shift back to airports within Canada depending on the competitiveness nature of airfares. Revenue Risk-Volume: Weaker.
LIMITED RATE-SETTING MECHANISMS: The airport does not currently operate under a multi-year use and lease agreement with its carriers and there is a considerable reliance on non-airline revenue sources to cover budgeted costs. Rate setting to airlines is based on a residual approach for the airfield cost center and a targeted rate for the terminal center, and with the use of revenue sharing credits, airlines receive a substantial high subsidy of approximately 40% towards terminal and landing fees. The reduced rate charged to carriers helps keep the cost per enplaned passenger (CPE) low (at $5.25 for FY 2012). Revenue Risk-Price: Weaker.
CONSERVATIVE DEBT STRUCTURE: Post-refunding, all of the airport's long term senior debt is fixed rate with a level annual debt service profile at $4.2 million through maturity in 2028. Debt Structure: Stronger.
ELEVATED LEVERAGE AND TIGHT LIQUIDITY: The airport's net debt-to-cash flow available for debt service (CFADS) is elevated at 6.91x. Debt service coverage increased to 1.37x in FY 2012, from 1.29x for FY 2011, based on improvement in operating revenues and containment of expenses. Liquidity levels have been historically weak and the airport has relied on annual revenue anticipation note issuances to maintain sufficient cash flow. Debt Service Counterparty Risk: Weaker.
MANAGEABLE INFRASTRUCTURE PLAN: The five-year capital improvement plan (CIP) is modest at $59 million and is expected to be funded through grants with minimal local proceeds. Infrastructure Development Renewal: Stronger.
WHAT COULD TRIGGER A RATING ACTION
-Material changes to passenger traffic levels some of which may be influenced by demand from Canadian based travelers;
-Improving or weakening trends in operating revenues, coverage levels or liquidity positions;
-Execution of an airline rate agreement with strong cost recovery mechanisms;
-Additional leverage to fund future capital improvement programs.
The bonds are special obligations of the city payable from a senior lien pledge from airport net revenues. The pledge of revenues includes a portion of PFCs and industrial park revenues to be used for designated projects.
BTV is issuing approximately $26 million in series 2012 refunding revenue bonds. The bonds will be used to refinance outstanding 1997A, 1997B, and 2000 bonds, as well as repay a $12 million bond anticipation note due in December 2012. There will be no change to the final maturity profile; debt service will be flat at approximately $4.2 million. Overall present value savings on the refinanced bonds are expected to be $389 thousand or 1.5%.
The airport has maintained a small but not concentrated carrier base of US Airways, United Airlines, JetBlue, and Delta with no single airline representing more than 32% 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 47% of total operating revenue. The airport expanded parking capacity on two occasions in the past to accommodate robust demand. However, management's intentions to limit upward adjustments to airline rates and charges effectively place an elevated reliance on parking revenues as well as other non-aeronautical revenues. Fitch views this strategy as potentially vulnerable to airport finances in light of the volatile nature in traffic.
FY 2012 operating revenue increased 6.7% to $15.1 million. Management expects revenues to increase in FY 2013 despite a decline in enplanements due to planned improvements in terminal concessions operating in pre- and post-security locations. Revenues should also benefit from an increase in the minimal annual guarantees associated with a new car rental agreement signed July 2012. Expenses increased in FY 2012 to $11.1 million, 2.0% higher than the prior year and well under the budgeted increase of 13.5% due to prudent cost cutting and service contracts savings due to a mild winter.
Fitch developed base and rating cases using more conservative traffic assumptions than those the sponsor provided. The base case projects a 6.4% decline in FY 2013 enplanements with a 1.3% compound annual growth rate (CAGR) recovery through FY 2018. The rating case sees declines in seating capacity persisting through FY 2014 and a return to a FY 2013 traffic base by FY 2018. In both circumstances, Fitch's results indicate higher airline costs would be necessary to maintain coverage levels that would meet rate covenant requirements. Fitch's assumed CPE grows to $7.38 in the base case and $9.29 in the rating case.
Management has taken actions over the past year to address the airport's most vulnerable issues in its financial profile. Historically, the airport has lacked adequate reserve balances to protect against shortfalls, but as of October 31, 2012 the airport has cash funded $4.4 million into its debt service reserve account as well as funding a $2.8 million operating reserve and a $215 thousand renewal and replacement fund. BTV's financial position remains challenged as noted by its ongoing reliance on annual issuances of revenue anticipation notes to manage cash flow needs. Indicative of this practice, BTV plans to issue a $3 million note at the end of November 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