NEW YORK--()--Fitch Ratings assigns a 'BBB+' rating to Austin, TX's (the authority) approximately $142 million rental car special facility revenue bonds, series 2013. The proceeds will be used to finance the construction of a consolidated car rental facility (ConRac) at Austin-Bergstrom International Airport. The Rating Outlook on the bonds is Stable.
KEY RATING DRIVERS:
Stable Long-Term Demand Profile: The consolidated rental car facility project serves a sizeable and growing metropolitan region, with 1.9 million visiting origination and destination (O&D) deplanements historically. Austin had 522,324 rental car transactions and 1.8 million transaction days in 2012, growing 2.1% and 2.6% respectively on an annual basis over the 10-year period since 2002. However, downside volatility in rental car transactions and transaction days is possible, as evidenced by a combined drop of nearly 20% in the 2008-2010 period. All major rental car brands operate at Austin, with the largest operator being Hertz at 27% of 2012 rental revenues.
Adequate Rate-Making Flexibility: The airport's current customer facility charge (CFC) rate of $5.95 is higher than that charged at other Texas airports, though rate increases in 2010 and 2011 do not appear to have negatively affected rental demand. The airport may increase rates at its discretion in the future if necessary, and the plan of finance assumes 5% increases in CFC rates every three years to meet project obligations, including operating expenses and reimbursements to the project lessee. Management may also levy contingent rent on the rental car companies.
Elevated Leverage Initially, With Adequate Financial Metrics: The project's leverage at or near 11 times(x) net debt-to-cash available for debt service (CFADS) based on 2012 CFC revenues is relatively high, but is expected to drop to the 7x-8x range by 2022. Debt service coverage ratios are estimated at around 1.4x excluding rolling coverage. Maintaining these leverage and coverage levels requires ongoing revenue growth in CFCs over the life of the bonds through CFC rate adjustments or higher annual level of transaction days, as annual gross debt service increases approximately 1.6% annually in the 2014-2042 period.
Strong Security Package: The structure is underpinned by a first lien on CFC monies and, if needed, contingent rent, a closed loop of funds, and cash-funded project reserves. In the event project leases are terminated, CFC receipts remain property of the trust and will continue to be remitted without set-off or abatement. Operating expenses, major maintenance and other items are subordinate to debt service.
Modern Infrastructure: Construction risk is largely mitigated by CFC revenues that are already in place, coupled with a guaranteed lump sum contract, 6% contingencies, 100% payment and performance bonds, and adequate cash reserves. When completed, the new single-site rental location will have modern facilities and no additional plans for parity debt. The close proximity of the new rental car facility to the existing terminal building will eliminate the need for bussing operations.
WHAT COULD TRIGGER A RATING ACTION:
-- Changes in rental car demand, or volatility in the underlying O&D traffic base, that lead to performance that is materially above or below indicated projections may change the rating.
-- Additional leverage to support project construction, including the use of completion bonds, may affect the rating.
-- Use of fund balances beyond those anticipated in the sponsor's forecast or imposition of contingent rents to rental car companies in order to fully support project cashflow requirements under the bond documents and rental car concession agreements may change the rating.
The series 2013 bonds are secured by a pledge of the Trust Estate, which includes revenues defined as new and prior CFCs paid by concessionaires to the Trustee under the new and prior concession agreements; contingent fees, if any, payable by the concessionaires; any amounts drawn under LOCs representing CFCs, contingent fees, or prior facility rentals; investment earnings for amounts held by the Trustee; and prior facility rentals paid by the concessionaires to the Trustee under prior concession agreements.
Austin-Bergstrom Airport is the main commercial facility serving the growing five-county Austin MSA, which has a total population of approximately 1.8 million residents. Opened in 1999 on a site that was previously an Air Force base, the airport is located about eight miles southeast of downtown Austin. The airfield consists of a pair of parallel commercial runways sufficiently spaced to handle simultaneous operations and capable of accommodating all commercial aircraft currently in service, and the 600,000 square foot terminal provides access to 25 aircraft gates.
Airlines serving the airport offer 135 daily departures and provide nonstop service to 37 markets. The airport is served by five traditional hub-and-spoke carriers, four low-cost carriers, and nine regional carriers, as well as four all-cargo airlines. Southwest Airlines (Southwest) is the largest carrier at the airport in terms of passenger activity, accounting for 37.4% of deplaned passengers in fiscal 2012, followed by American Airlines with 20.2%. There is some competition for passengers in the air trade area, with San Antonio and Fort Hood under 100 miles away and Houston area airports about 170 miles away.
Fiscal 2012 destination O&D deplanements grew by 3.2%, reaching 1.97 million. This level, a new peak, represents the third year of growth following a decline of 8.8% in 2009. Transaction days at the facility stood at 1.83 million for 2012, up 13% since falling nearly 20% cumulatively in 2009 and 2010. Similar to other ConRacs, transaction days have demonstrated a higher degree of volatility than visiting O&D deplanements through economic cycles. It is Fitch's view that the authority has the ability to ensure that all obligations are met by charging a contingent rent to tenants and/or by increasing CFC rates in addition to all the reserve funds supporting the project.
The ConRac facility project consists of two five-level structures connected via vehicle circulation ramps. The facility will be walking distance to the airport's passenger terminal building, located behind the existing parking garage and accessible by a pedestrian walkway across the garage. The ConRac/parking facility will be 1.66 million square feet, including 790 public parking spaces on the ground floor, 1,840 ready/return rental car spaces on three levels of the garage, and 1,152 rental car storage stalls on the roof. The second floor will also include the rental car customer service area. There will be a multi-level quick turnaround facility for fueling and cleaning, including 48 fueling stations and 12 car wash bays. The facility is designed to accommodate 11 rental car companies upon opening; there are currently nine rental car companies operating at the airport. As a result of this ConRac facility, there will be no need for rental car bussing operations. The third level of the existing parking garage, which is currently occupied by rental car companies, will also convert to public parking.
Construction is anticipated to commence in March 2013 and September 2015 is the date of beneficial occupancy (DBO). Rental car companies currently operate under existing concession agreements, but have executed new concession agreements that will automatically supersede the existing agreements on the DBO of the ConRac, mitigating completion risk. The term of the new concession agreement is 11 years from the DBO, with the city maintaining the option to renew the agreement for two additional five-year periods. If the city chooses to terminate the lease, it must negotiate agreements with all of the rental car companies serving the airport, ensuring that CFC collections are uninterrupted. In addition, after the DBO off airports companies will be required to pick up and drop off at the ConRac and pay CFCs to do so.
The estimated project costs for the facility are $155.5 million of which 79% will be funded with series 2013 proceeds combined with 21% from previously collected CFCs. The CFC debt is secured by a narrow revenue stream that is dependent upon rental car activity. The current $5.95 per day CFC rate is relatively high when compared to other airports with CFC secured stand-alone bonds, and the plan of finance assumes 5% increases in CFC rates every three years in order to keep pace with annual gross debt service that escalates at 1.6% through maturity.
Fitch considers the structural features of the transaction as adequate based on the protections available to mitigate project completion and delay risk. The construction contract was awarded under a guaranteed maximum stipulated sum price of $133.6 million and includes $7.5 million in project contingencies. Liquidated damages are uncapped, and are payable after 760 days from the start date sized at $1,750 per day ($1,000/day to the city, $500/day to the developer, $250/day to master lessee). Performance and payment bonds are in place in the amount of 100% of the contract price. The project also benefits from substantial structural liquidity. Liquidity available to the project includes CFC cash on hand from prior collections, the rolling coverage account (funded at 25% maximum annual debt service [MADS]), and the debt service reserve fund (funded at 10% of par).
Management's plan of finance projects debt service coverage ratios (DSCR), excluding coverage and reserve funds, to average 1.43x over the life of the project. This coverage level assumes cashflow will be adequate to meet both bond debt service and all subordinate transfers and payments, including city payments and reimbursements for operations and maintenance, tenant improvements, and base rents. In order to achieve this, the plan of finance assumes 1.8% annual average growth for transaction days through 2042 and 5% increases in CFC rates every three years through 2027. Should growth in transaction days or CFC rates slow, Fitch notes that subordinate payments may not be met. Project leverage is also high initially at 11x net debt to CFADS, though this drops to the 7x-8x range over 10 years once principal repayment begins in 2017. Fitch ran several sensitivities to the plan of finance, including restricting transaction day growth to 1% per year, freezing CFC rates at the current rate of $5.95, and assuming a 10% increase to leverage to reflect the issuance of completion bonds. Under all scenarios, barring management action to levy contingent rent or raise CFC rates, coverage was below that seen in the plan of finance. Cash flow remained sufficient to meet bond debt service, though certain subordinate reimbursements would go unpaid. While the structure is dependent on growth in the long run, Fitch views the required levels of growth to be achievable given the strength of the Austin market.
Additional information is available on 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', July 12, 2012.
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance