CHICAGO--(BUSINESS WIRE)--Fitch Ratings affirms the 'A' rating on the $1.18 billion airport revenue bonds issued by Broward County, FL, on behalf of Fort Lauderdale-Hollywood International Airport. The Rating Outlook remains Stable.
KEY RATING DRIVERS:
Growing Traffic Base Anchored by Domestic Low-Cost Carriers: Fort Lauderdale-Hollywood International Airport (FLL) is the leading domestic O&D airport serving south Florida with over 11.7 million enplanements in 2012. Carrier service is well-diversified across several low cost carriers, with none accounting for more than 20% of traffic in 2012. Some historical volatility in traffic is evident given the leisure oriented market FLL serves, but passenger trends are largely positive. The airport is exposed to potential competition from both nearby Miami International and Palm Beach Airports.
Revenue Risk: Resilience - Midrange
Sound Rate Setting Structure: The airport currently utilizes a residual use agreement that runs through fiscal 2016, which ensures that the airport can pass on all costs to customer airlines. While current airline costs are very low at $4.03 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. Nevertheless, Fitch estimates that in such a scenario, FLL's airline costs will still remain competitive versus competing airports.
Revenue Risk: Price - Stronger
Debt Structure is Conservative: The entire airport debt is fixed rate with a flat to declining profile and secured by a first-lien on general airport revenues.
Debt Structure - Stronger
Financial Metrics are Adequate: Due to the residual agreement, the airport maintains modest debt service coverage levels based on current operating revenues. Historically, FLL's liquidity position has been relatively tight, and airport leverage (defined as the ratio of net debt to cash flow available for debt service (CFADS)) is expected to rise in conjunction with the $2.3 billion capital program to around 13x before falling back in the medium-term to within the 7-10x range Fitch would normally expect for a mid-size 'A' category airport.
Debt Service and Counterparty Risk - Midrange
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 $2.3 billion. While PFCs, grants, and additional commercial revenues are expected to fund much of the additional debt-related costs, traffic underperformance could translate to higher than planned airline charges.
Infrastructure Renewal and Development - Midrange
RATING SENSITIVITIES:
--Weaker than expected traffic performance, translating to higher than planned airline charges, could negatively pressure the rating; conversely, improved and better than expected traffic performance would be viewed positively;
--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 traffic-driven commercial revenues;
SECURITY:
Pledged revenues consist of the net revenues of the airport system, which includes FLL and North Perry Airport, a small general aviation facility.
CREDIT SUMMARY:
The airport's traffic in fiscal year (FY) 2012 was largely flat on FY 2011, with a total increase of 0.6%, and although domestic traffic for the year was up by 1.3% growth was impacted by the 3.1% decline in international traffic. The first six-months of FY 2013 through March show growth has continued, with a 2.1% increase over FY 2012. The air trade service area covers not only Broward County but also extends south into the Miami-Dade County area as well as southern Palm Beach County. The MSA is relatively dependent on leisure travel to anchor traffic demand but is still among the 10 largest MSAs in the country, with a population base of approximately 5.7 million.
The airport's traffic forecast assumes enplanements to rise to 13.7 million by 2018, equivalent to a 2.6% compounded annual growth rate from 2012 activity. These expectations are based on management's belief that incumbent low-cost carriers lead by JetBlue and other low cost carriers will continue to build their presence at the airport. Low cost carriers currently have a 60% market share of passengers and, although Southwest/AirTran is the leading carrier, it holds just 20% of the market. Traffic growth in recent years has been driven by the continued migration of O&D passengers to FLL from neighboring airports attracted by its expanding low-cost carrier service as well as the expansion of Port Everglades as a leading cruise port.
Airline cost per enplanement (CPE) in FY 2012 was $4.01, lower than over the previous four years, in which period it had remained stable at or near $5.00. Revenues derived from airline rates and charges have historically accounted for approximately 30% of total operating revenues. The airport's estimate for CPE in FY 2013 is $4.29 and assumes that operating revenue will be 3.3% higher than in FY 2012, based on an assumption of 2.6% passenger traffic growth over the year. FLL currently enjoys a significant airline CPE advantage over Miami International Airport, whose CPE reflects investments related to its large-scale terminal development projects. This cost differential is expected to improve as Miami's CPE climbs over the next few years, despite FLL's anticipated CPE increases due to its planned debt issuances.
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 $1.1 billion in planned borrowings between 2013 and 2017, will lead to an increase in the CPE. 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. Assuming the sponsor's traffic forecast, the CPE would peak at a modest $6.97 level by 2016, assuming no changes to the capital program.
Fitch's calculations of the debt service coverage ratio based on current-year net revenues have been below 1.20x over the past four fiscal years. This is primarily due to the residual rate-setting approach. With the inclusion of rollover coverage funds, the coverage range was 1.38x - 1.59x over the same period. The airport's forecast, including future borrowing, indicate coverage levels that remain in the 1.3x to 1.4x range with fund transfers. With the benefit of irrevocably committed PFCs and grants to offset rising debt service payments, which are currently at over $100 million annually and expected to increase to over $157 million by 2017, airline costs as a share of total operating revenue should remain largely stable despite the significant increase in total leverage.
The airport's upcoming five-year capital program totals nearly $2.3 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 $1.1 billion in additional GARB debt by 2017 in support of its capital projects. Fitch expects the ratio of net debt to CFADS to rise from 10.98x in fiscal 2012 to 13.31x in fiscal 2013 and remain above 9x through 2017, following the issuance of all the debt.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--Rating Criteria for Infrastructure and Project Finance (July 12, 2012);
--Rating Criteria for Airports (Nov. 27, 2012).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867
Rating Criteria for Airports
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695600
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=794160
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