SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed its 'A+' rating on approximately $36 million in outstanding city of Albuquerque, New Mexico (the city) senior lien airport revenue bonds and its 'A' rating on approximately $16 million in outstanding city subordinate lien revenue bonds. The Rating Outlook on all debt remains Stable. Fitch does not rate the airport's approximately $26 million in privately-placed parity senior revenue bonds previously issued in 2011 and 2014.
The ratings reflect the Albuquerque International Sunport's medium-sized and predominantly origination/destination (O&D) market which serves as a monopoly within the state coupled with strong financial performance, competitive airline costs, extremely low leverage and a short debt tenor. The traffic outlook remains a primary concern as enplanements have steadily declined through the recession, continuing through the most recent fiscal year. In the near term, traffic stresses are likely in light of the forthcoming expiration of the Wright Amendment in Dallas Love Field later in 2014. The airport's stable financial performance, rapid deleveraging, and strong liquidity position mitigate the operational challenges facing the airport.
KEY RATING DRIVERS:
LIMITED COMPETITION BUT CONTINUED TRAFFIC DECLINES: Albuquerque International Sunport is the primary commercial service airport for the state of New Mexico, with limited regional competition. Elevated carrier concentration risk exists with Southwest Airlines (Southwest; Fitch IDR of 'BBB'/Stable Outlook) representing 57.3% of the 2.6 million enplanements in fiscal 2013 (ends June 30); this risk is somewhat mitigated by high O&D traffic profile, at approximately 90% of enplanements. Still, traffic has fallen by nearly 24% since the peak of 2008 and more losses are expected at least through 2015.
Revenue Risk - Volume: Weaker
HYBRID AGREEMENT WITH MODERATE COSTS: The hybrid airline use and lease agreement, which expires in 2016, provides relatively stable financial and operating results and airline cost per enplanement (CPE). Management's efforts to contain costs and maximize non-airline revenues resulted in a relatively competitive airline cost profile as compared to peers, with fiscal 2013 CPE at $8.40, and should remain under $9.00 in the next four years.
Revenue Risk - Price: Midrange
CONSERVATIVE DEBT PROFILE: All outstanding debt is fixed rate and with a relatively short maturity life; over 50% of total debt will be paid off by fiscal 2016. The aggregate debt service reserves are funded through a mix of cash and surety policies.
Debt Structure: Stronger
LOW LEVERAGE AND HEALTHY LIQUIDITY: Sufficient balance sheet liquidity (454 days of cash on hand) in conjunction with below-average levels of financial leverage (at about $38 per enplaned passenger or 1.58x net debt/cash flow available for debt service (CFADS)) and robust debt service coverage levels (at approximately 2.49x on senior bonds and 1.55x on all debt) in fiscal 2013. Strong coverage levels are expected to be maintained given the airport's declining debt service profile.
Debt Service and Counterparty Risk: Stronger
MODEST CAPITAL IMPROVEMENT PROGRAM: No additional debt financing is expected over the next five years to support the airport's $196 million capital program. Revenue collections from the increased passenger facility charge (PFC) rate in fiscal 2013 (raised to the maximum rate of $4.50) provide further financial flexibility to support the airport's capital improvement needs on pay-as-you-go basis.
Infrastructure Development and Renewal - Stronger
-- Material contraction in traffic volumes in excess of current expectations (10%) would likely signal additional credit weakness;
-- Declining operating margins due to declines in operating revenues or expense growth that impact coverage metrics;
-- Higher leverage metrics or a dilution of debt service coverage to support capital projects would have a negative impact on credit quality.
Sunport is owned by the city and operated by the city's department of aviation. The city also owns and operates a general reliever airport, Double Eagle II Airport, operated together with Sunport as the airport system. Net revenues of the airport system secure the senior lien bonds, with a subordinate pledge of net revenues securing the subordinate lien bonds.
Sunport has a mostly O&D traffic base but this characteristic has not adequately protected the airport's enplanement base during the recession or served to provide much of a recovery in recent years. The airport's enplanements have declined by an aggregate amount of 24% from fiscal 2008 to fiscal 2013, indicating the market's vulnerabilities to carriers' decisions to support the market. Departing seat capacity reductions have continued since June 2008 and contributed to enplanement declines of 8.3% in fiscal 2013. Enplanements decreased another 4.2% in the first nine months of fiscal 2014 (through March) compared to the same period last year, as Southwest continues to decrease capacity with flight cuts to several nonstop markets and multiple seasonal destinations. Future enplanement declines are imminent due to the expiration of the Wright Amendment. Management's initiatives to attract new service at the airport have resulted in Alaska Airlines (Alaska Air Group IDR of 'BBB-'/Stable Outlook) starting daily nonstop service between Seattle and the Sunport in September 2014. Management is in talks with other airlines to fill availability at the airport, offering an incentive program with reduced CPE to new entrants.
Despite the recent traffic performance trends and softening of passenger-related revenues, the airport's finances remain solid and are supported by a healthy balance sheet with a low debt burden coupled with a strong liquidity position. In fiscal 2013, operating revenues were essentially flat compared to the prior year, declining 0.1%, and the airport maintained strong liquidity at 454 days cash on hand with a low debt per enplanement ratio of approximately $38. The airport's sound balance sheet is evidenced by very low leverage which at least for the near-term mitigates the absence of a traffic recovery. Fiscal 2013 expenses declined by 1.6%, due to ongoing cost-cutting measures, including solar panel and LED lighting implementation to control rising energy costs.
Fiscal 2013 net revenues, which include a portion of the PFC revenues not applied for pay-go projects, provided approximately 2.49x coverage of senior airport revenue bond debt service, and 1.55x coverage of all debt service. Debt service coverage calculation does not include prior year's unencumbered fund balance of up to 20% of annual debt service, otherwise available under the bond ordinance. Based on the airport's 2014 budget, Fitch projects coverage on all debt service to be 1.44x in fiscal 2014. Assuming no additional borrowings, as currently anticipated, the coverage levels of total debt should improve significantly starting in 2015, when annual debt service requirements are substantially reduced from $24.2 million to $15.3 million when series 2008E debt matures and as a result of debt service costs savings from the 2014 refunding of series 2004B bonds. The total debt service coverage ratio (DSCR) has historically been much narrower as compared to the senior DSCR, and is expected to remain so during the remaining years of the debt.
Sunport's five-year capital program through fiscal 2018 is $196 million. Funding will come from a mix of airport equity (37%), federal grants (48%), and PFC revenues (15%). Management does not expect additional debt leveraging needs over the medium term. The city maintains a flexible capital plan and delays projects if federal grant funding is not received as expected. Short-term needs are well-defined, and a high level of excess cash flow in conjunction with grant funding is available. There are no capacity constraints in the near- to mid-term for either the terminal or landside.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria & Related Research:
--'Rating Criteria for Infrastructure and Project Finance'(July 11, 2012);
--'Rating Criteria for Airports'(Dec. 13, 2013).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
Rating Criteria for Airports