Fitch Affirms Burlington, Vermont's $44MM Airport Revs at 'BBB-'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed its 'BBB-' rating on Burlington, VT's (BTV) approximately $44.2 million outstanding airport revenue bonds. The Rating Outlook remains Stable.

The 'BBB-' rating reflects a volatile enplanement base serving a small regional market at BTV combined with limited operating and financial flexibility. BTV has a history of reliance on annual revenue anticipation notes to maintain sufficient cash flow, but recent strides have enhanced their financial profile as seen in recent improvement in net revenue generation and debt service coverage ratios.

KEY RATING DRIVERS

PRIMARILY O&D TRAFFIC BASE WITH VOLATILITY: BTV is the primary air service provider for the Burlington metropolitan statistical area (MSA) with no domestic competition within 150 miles. Approximately 30% of enplanements are driven by demand from Quebec, Canada due to significantly cheaper fares. Enplanements are slightly over 600,000 and have declined 19% from a peak of 743,000 in fiscal year ended (FYE) June 30, 2007.

Revenue Risk-Volume: Weaker

ADEQUATE LEGAL FRAMEWORK WITH A LARGE SUBSIDY TO AIRLINE CARRIERS: BTV has a hybrid use and lease agreement on annual renewals that offers a substantial subsidy of approximately 40% from full recoverable costs towards terminal and landing fees. BTV subsidy to carriers allows the cost per enplaned passenger (CPE) to remain moderate relative to peers at $6.86 for FY 2013 but adverse developments in either traffic activity or non-airline revenues could stress this rate setting practice.

Revenue Risk-Price: Weaker

MANAGEABLE INFRASTRUCTURE PLAN: The five-year capital improvement plan (CIP) is modest at $55 million and is expected to be funded through grants with minimal local proceeds.

Infrastructure Development Renewal: Stronger

CONSERVATIVE DEBT STRUCTURE: All of BTV's senior debt is fixed rate with a level profile at approximately $4.0 million through maturity in 2028. The debt also contains sound coverage tests and reserve requirements .

Debt Structure: Stronger

MODERATE LEVERAGE AND LOW LIQUIDITY: BTV's net debt-to-cash flow available for debt service (CFADS) is 6.77x which is elevated for a small airport of its size. In FY 2013, BTV's senior lien debt service coverage ratio increased to 1.45x from 1.37x for FY 2012. Liquidity levels remain low with 105 DCOH at the end of FY2013.

RATING SENSITIVITIES

-TRAFFIC TRENDS: Material changes to passenger traffic levels, some of which are currently influenced by Canadian based travelers, may pressure the rating;

-FINANCIAL METRICS: Inability to maintain debt service coverage ratios or unrestricted levels of fund balances consistent with recent performance may result in a lower rating;

-RATE SETTING: Execution of an airline rate agreement with strong cost recovery mechanisms would be supportive to the current rating;

-BORROWINGS: Given the current financial profile, additional leverage to fund future capital improvement programs may pressure the rating.

SECURITY

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.

CREDIT UPDATE

BTV has maintained a small but reasonably diverse carrier base consisting of US Airways, United Airlines, JetBlue, and Delta with no single airline representing more than 32% of market share. BTV had 604 thousand enplanements during FY2013; this represents a 7.4% decline over the previous year's 653 thousand enplanements. Through the first 10 months of FY 2014, enplanements have recovered 2.2%.

The main source of revenue for BTV is generated from parking operations, which accounts for 44% of total operating revenue. BTV 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.

Operating revenues have grown at a 6.3% five-year compounded annual growth rate (CAGR), while operating costs have increased at a CAGR of 4.6% over the same period. FY2013 operating revenue grew 5.8% from the prior year to $16 million, reflecting significantly higher airline revenues and a new agreement for off premises lessees. FY2013 operating costs increased 1.2% to $11.4 million. BTV has taken steps in recent years to grow non-airline revenues: notably, it added new restaurants, retail concessions and amenities.

Management has taken actions over the past year to address BTV's most vulnerable issues in its financial profile. Historically, BTV has lacked adequate reserve balances to protect against shortfalls. However, as of June 30, 2013 BTV has cash funded $4 million into its debt service reserve account as well as funding a $3.1 million operating reserve and a $215,000 renewal and replacement fund. BTV's financial position remains challenged as noted by its recent reliance on annual issuances of revenue anticipation notes to manage cash flow needs. No revenue notes were issued for FY2014 and none are budgeted for FY2015.

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' (Dec. 12, 2013).

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=725296

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=832376

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Daniel Adelman, +1-212-368-2082
Analyst
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Seth Lehman, +1-212-908-0755
Senior Director
or
Tertiary Analyst
Sam Marsico, +1-212-908-7810
Analyst
or
Committee Chairperson
Scott Zuchorski, +1-212-908-0659
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Daniel Adelman, +1-212-368-2082
Analyst
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Seth Lehman, +1-212-908-0755
Senior Director
or
Tertiary Analyst
Sam Marsico, +1-212-908-7810
Analyst
or
Committee Chairperson
Scott Zuchorski, +1-212-908-0659
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com