Fitch Affirms City of San Antonio, TX Airport System Rev Bonds at 'A+ '/'A'

CHICAGO--()--Fitch Ratings has affirmed the 'A+' rating on the city of San Antonio, Texas' $220.8 million outstanding general airport system revenue bonds (GARBs) and the 'A' rating on the $158.8 million outstanding passenger facility revenue (PFC) subordinate lien bonds. The Rating Outlook on both the GARBs and PFC bonds is Stable.

Key Rating Drivers

Growing Economy, Carrier Diversity: The San Antonio Airport System (SAT) serves a strong origination and destination (O&D) passenger base with 92% of enplanements, though the proximity of Austin-Bergstrom International Airport hampers SAT's ability to grow regional market share. San Antonio International Airport (the Airport) is served by a diversified group of carriers, with no carrier accounting for more than 42% of market share. Revenue Risk: Volume - Midrange

Lease Agreement Provides Stability: The hybrid airline use agreement provides SAT with pricing flexibility and helps maintain a competitive cost profile via revenue sharing mechanisms. It is important to note that the agreement could exacerbate revenue and operating margin volatility, as reductions in non-airline revenue would not be covered through additional airline charges. The agreement has the potential to run beyond the September 2015 expiry through 2020 if optional extensions are exercised. Revenue Risk: Price - Midrange

Conservative Debt Structure: The Airport's debt is 100% fixed rate with declining amortization requirements at staggered, scheduled intervals. Debt service reserves are funded with a combination of cash and surety bonds. Debt Structure - Stronger

Stable & Improving Financial Performance: Leverage is relatively low for the rating category at an estimated 5.0x net debt to cash flow available for debt service (CFADS). Fitch expects consolidated DSCRs to exceed 1.5x and senior DSCRs near 2.5x under Fitch base case conditions. Liquidity is low at 149 days cash on hand (DCOH) compared to peers. However, the flexibility in the airline use agreement and modest CIP partially mitigate low liquidity. Debt Service - Stronger

Limited Capital Program: The Airport's capital improvement plan is fairly modest with limited future borrowing at 10% - 15% of anticipated funding requirements. No major projects are planned apart from the Terminal A renovations, which are currently underway. The Airport is in the initial design stages of a potential consolidated rental car facility, which SAT plans to fund with customer facility charges (CFC) within the next two years. Infrastructure Development and Renewal - Stronger

Rating Sensitivities

--Enplanement decline: A 10% reduction in the level of O&D traffic due to a weaker local economy could lead to a revaluation of the Airport's growth prospects.

--Weaker competitive position: Airline capacity or route cutbacks that result in reduced carrier diversity or a loss of market share to nearby competing airports could impair SAT's revenue profile.

--Persistent cost growth: Elevated levels of cost growth that cannot be passed along to air carriers could erode the Airport's long-term cost structure.

Security

The GARBs are secured by a first lien on the revenues generated by the airport system, which includes San Antonio International Airport and Stinson Municipal Airport, a general aviation facility. The senior bondholders are secured by a first lien on net revenues, while subordinate bondholders benefit from a second lien on net revenues and a first lien on PFC revenues.

Credit Update

SAT has experienced a favorable trend of enplanement recovery with three years of consecutive growth. Enplanements have continued to increase since Fitch's prior review with FY 2012 growth of 0.78% (5-year CAGR of 0.36%). Year-over-year growth through May 2013 amounted to 0.9%, consistent with FY 2012 results. The increase in enplanements was driven by additional international routes to Mexico, while domestic enplanements have contracted.

Revenues grew slightly with enplanements and remain sufficient to meet increasing O&M costs. The 2% increase in FY 2012 revenues was driven by concessions and higher parking fees. Lower airline revenues were offset by the revenue-sharing component of the hybrid airline use agreement.

O&M costs have grown at a relatively rapid pace (6% in FY 2012, 11% in FY 2011), primarily due to the opening of Terminal B and the performance of deferred maintenance activities. Fitch will continue to monitor cost management efforts as the Terminal A renovations reach completion. The Airport achieved a modest FY 2012 cost per enplanement (CPE) of $8.27, fulfilling SAT's stated objective of maintaining the CPE below $10. Taking into account the cost of Terminal B operations in FY 2012, SAT's cost profile indicates a stabilization of the CPE within the $8 to $9 range.

SAT's financial performance has been strong with DSCR of 1.74x on a consolidated basis and senior debt service coverage of 2.57x, based on calculations that treat PFCs as revenue instead of an offset to debt service. The Airport reported a DSCR of 1.99x as per indenture. DSCRs improved in FY 2012 due to the equitable revenue sharing agreement and the application of PFCs toward both senior and subordinate debt service.

The San Antonio Airport System primarily serves the San Antonio Metropolitan Statistical Area, which encompasses 7,340 square miles in south central Texas. SAT is owned by the City of San Antonio and operated by the City of San Antonio Department of Aviation.

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 - November 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=795050

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Contacts

Fitch Ratings
Primary Analyst
Christopher Joassin, +1 312-368-3166
Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, Illinois 60602
or
Secondary Analyst
Reed Singer, +1 312-368-3120
Director
or
Committee Chairperson
Scott Zuchorski, +1 212-908-0659
Director
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Christopher Joassin, +1 312-368-3166
Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, Illinois 60602
or
Secondary Analyst
Reed Singer, +1 312-368-3120
Director
or
Committee Chairperson
Scott Zuchorski, +1 212-908-0659
Director
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com