NEW YORK--()--Fitch Ratings affirms the ratings of Clark County, Nevada, Airport System (the airport) as follows:
--$97.4 million of senior lien revenue bonds at 'A+';
--$1.32 billion of subordinate airport revenue bonds at 'A';
--$309.6 million of passenger facility charge (PFC) airport revenue bonds at 'A';
--$85 million of jet aviation fuel tax/junior lien revenue bonds at 'A-'.
The Rating Outlook on all of the airport's bonds is Stable. Fitch notes that the airport has nearly $4.5 billion in total long-term and short-term debt obligations outstanding and Fitch maintains ratings only for county airport long-term debt issued through 2008.
KEY RATING DRIVERS:
Sizable Leisure-oriented Destination Market With Historical Volatility: In fiscal 2012, McCarran airport served nearly 21 million enplanements of which approximately 90% represents origination and destination (O&D) traffic. Tourism is a dominant factor in the Las Vegas economy and, on a relative basis, has been more vulnerable to fluctuations. Still, the airport directly serves a substantial number of non-stop markets and enjoys a healthy airline market share diversity anchored by a strong presence of low cost carriers. Revenue Risk - Volume: Midrange
Strong Residual Based Rate Setting Framework: The airport's airline use agreement provides for strong cost recovery terms from airlines while preserving profits from certain non-airline revenues (i.e. gaming & car rental fees). Airline costs per enplanement (CPE) were moderate at $8.51 in fiscal 2012 but are expected to rise significantly to the $12-$13 level, starting in fiscal 2013, due to the costs associated with the recently completed 14-gate Terminal 3 (T3) project. Revenue Risk - Price: Stronger
Aggressive Capital Structure: The airport utilizes a relatively high mix of variable rate debt ($1.05 billion or 24% of total debt) and $2.4 billion of derivative agreements. Fitch views the debt and swap portfolio as aggressive for a U.S. airport credit and may be exposed to both changing debt interest costs and counterparty performance risks. Debt Structure: Midrange
High Airport Leverage But Supported With Satisfactory Coverage And Liquidity Levels: Leverage has risen substantially in recent years to support a primarily debt financed $3.1 billion capital program. Net debt to cashflow available for debt service covering all bonds of the airport was nearly 18 times (x) in fiscal 2012. Fitch views this metric to be the highest for a large hub airport but will moderate to under 12x starting in fiscal 2013 as airlines rates are adjusted to recover the full level of the financing costs. Debt service coverage levels of senior and subordinated debt is favorable at 1.88x on a net revenue basis although coverage of the airport's passenger facility charge and jet fuel obligations are weaker on a stand-alone basis. Debt Service/Counterparty Risk: Midrange
Extensive Landside And Airfield Infrastructure With Limited Future Borrowings: The airport completed a major terminal-based capital program and is now operating under a very manageable $442 million spending plan through 2017. Future debt borrowings are not anticipated to support the upcoming capital plans. Infrastructure Renewal/Development: Stronger
WHAT COULD TRIGGER A RATING ACTION:
--Volatility in traffic levels due to weakness in the underlying service area or carrier service changes.
--Increased level of capital spending that would necessitate future borrowings.
--Risks associated with the airport's capital structure as it relates to debt interest costs or counterparty performance on existing swaps and variable rate liquidity agreements. Also, any material changes in the par amounts of debt associated with each revenue bond lien could warrant a rating action.
--Weaker than expected financial or airline cost metrics.
Senior lien bonds are secured by a first lien on net revenues generated from the airport system, the principal asset of which is McCarran International Airport (McCarran, or the airport). Subordinate lien debt is secured by net revenues on a subordinated basis to the senior debt and by available PFC collections. The PFC airport system revenue bonds are secured primarily by pledged portions of PFC revenues as well as a backup subordinate net revenue pledge. Jet aviation fuel tax revenue bonds are secured with jet fuel tax revenues and a pledge of airport revenues junior to the liens securing the senior and subordinate bonds. All liens are open to additional leveraging subject to their respective additional bonds tests.
Las Vegas is a well-established and premier, tourist-based destination market. However, traffic trends are highly influenced by the national economic climate as well as the area's employment base, housing market, and commercial development. Since 2008, traffic activity at McCarran has seen relatively sharp downward movements (i.e. enplanements declined by 11.8% and 3.8% in fiscal years 2009 and 2010, respectively) followed by modest rebounds through 2012. However, enplanements are slightly lower by 1% during the first five months of fiscal 2013 (through November 2012) which indicates some challenges for near term future growth.
Volatility in passenger activity has affected the airport's ability to sustain positive growth in non-airline revenue sources, such as PFCs and concessions. Fitch notes that airport management has aggressively taken action to reduce operating costs, which has helped keep airline costs reasonable at approximately $8.50 per enplanement for the past two years. Overall airport debt levels are amongst the highest for a large-hub U.S. airport at about $215 per enplanement. Fitch's calculation of net debt to cash flow available for debt service (CFADS) is also high at 17.8x but is expected to decline to below 12x level as charges to carriers are measurably increased to recover the added debt related costs. Some financial flexibility is noted given the airport's current liquidity position of approximately $231 million in unrestricted current assets, translating to about 410 days cash on hand.
For fiscal 2012, excluding rolling coverage accounts, the debt service coverage ratio for senior lien bonds was 4.38x while the coverage ratio for subordinated lien bonds was only 1.88. These coverage figures are a measurable improvement over fiscal 2011 results but were influenced in part by the airport's actions to reduce debt service requirements in 2012 in order to contain passenger airline charges. Fitch's calculation of total airport cashflow coverage to all of its debt obligations, excluding rolling coverage accounts, is a more moderate 1.42x. Debt service on the PFC bonds is marginally covered from annual PFC collections of nearly $80 million but a continuation of self-support would depend on a positive trend in traffic activity. Otherwise, the PFC debt would require use of airport general revenues. The jet aviation fuel tax collections have not been sufficient to meet its annual debt service requirements based on recent receipts; however, a recent increase in the jet fuel tax rate to three-cents per gallon will enhance revenues for self-support. Fiscal 2012 coverage levels were 0.81x and the jet aviation fuel tax bonds required draws on the airport's general revenues following payments on senior and subordinate obligations.
Fitch's base case and rating case forecasts indicate a satisfactory coverage levels although leverage metric and CPE levels would remain elevated. The base case assumes a 0.9% average growth rate in traffic to 21.9 million enplanements as well as a 3.8% average growth rate in expenses. Senior lien coverage ratios remain in the 4.24x-4.84x range (excluding coverage funds) while coverage of subordinate obligations are in the 1.25x-1.30x range. CPE would peak at $13.69 and net debt to CFADS evolve downward towards a still elevated 10.6x level. The rating case assumes a 10% traffic reduction phased in over two years followed by 2% annual recovery. The coverage metrics are similar to those in the rating case; however, the CPE would elevate to approximately the $15 level based on the residual rate setting approach. The net debt to CFADS ratio would be at or above 11.4x through fiscal 2017.
The airport's prior capital program focused on the construction of a new $2.4 billion, 14-gate terminal (T-3) that was be completed in mid-2012. Much of the terminal and other airfield improvements were debt funded over the past several years with total issuance of $2.6 billion. Future capital spending needs through 2017 appear manageable at $442 million and are not expected to require additional borrowings. Behind the overall existing debt and capital structure, the airport retains more than outstanding swap transactions with notional amounts of approximately $2.4 billion, of which nearly $917 million is classified as variable-to-variable basis swaps. Fitch notes that several of these swaps do serve as traditional interest rate hedges for specific variable rate bond issues. Based on the Sept. 30, 2012 interim financial report, the associated termination values on the entire swap portfolio is $181 million against the airport, thus making it a challenge for economical swap terminations under current market conditions. Over 75% of the entire notional par is engaged with Citigroup Financial Products Inc. (rated with an IDR of 'A', and a Stable Outlook by Fitch) as the counterparty.
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.
--'Rating Criteria for Airports', Nov. 28, 2012.
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
Rating Criteria for Airports