NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings of Clark County, Nevada, Airport System (the airport) as follows:
--$89.1 million of senior lien revenue bonds at 'A+';
--$1.3 billion of subordinate airport revenue bonds at 'A';
--$294.8 million of passenger facility charge (PFC) airport revenue bonds at 'A'.
The Rating Outlook on all of the airport's bonds is Stable. Fitch notes that the airport has over $4.4 billion in total long-term and short-term debt obligations outstanding - Fitch maintains ratings only for county airport long-term debt issued through 2008.
RATIONALE
The affirmations reflect the large origin and destination (O&D) base of 21 million enplanements underpinned by a diverse base of air carriers and supported through a solid airline cost recovery structure. These strengths are offset to some degree by the leisure orientation of the demand profile, the above-average leverage, and moderate risk inherent in the debt structure. Enplanement and financial performance was in line with Fitch's expectations over the past year.
KEY RATING DRIVERS
--Revenue Risk - Volume: Midrange
In fiscal year (FY) 2013, McCarran airport served nearly 21 million enplanements of which approximately 90% was 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 - Price: Stronger
The airport's airline use agreement provides for strong cost recovery terms from airlines while preserving profits from certain non-airline revenues, namely gaming and car rental fees. Airline costs per enplanement (CPE) as expected rose above $12.00 from $8.50 in previous years due to the costs associated with the recently completed 14-gate Terminal 3 (T3) project.
--Infrastructure Development & Renewal: Stronger
The airport completed a major terminal-based capital program and is now operating with a manageable $526 million spending plan through 2018. Future debt borrowings are not anticipated to support currently planned capital projects.
Debt Structure: Midrange
The airport utilizes a relatively high mix of variable rate debt ($1.1 billion or 25% of total debt) and $1.5 billion of derivative agreements. Though swap exposure has declined this year, Fitch still views the debt and swap portfolio as aggressive for a U.S. airport credit, exposed to both changing debt interest costs and counterparty performance risks.
Financial Metrics: While leverage rose substantially in recent years to support a primarily debt financed $3.1 billion capital program, it is still at a reasonable level as revenues have risen pursuant to the residual agreement. Debt service coverage ratios (DSCR) for senior and subordinated debt are adequate on a net revenue basis though coverage of the airport's PFC obligations is weaker on a stand-alone basis.
RATING SENSITIVITIES
Negative - Traffic Declines: Volatility in traffic levels due to weakness in the underlying service area or carrier service changes causing enplanements to trend well below historical averages for a sustained period.
Negative - Additional Borrowings, Weakening Metrics: Increased level of capital spending resulting in future borrowings and weaker financial and airline cost metrics beyond current expectations.
Negative - Capital Structure: Increase in 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.
Positive - Reduction in Leverage: The airport's high leverage position currently constrains the rating. Initiatives to measurably reduce the airport's debt burden may have positive rating implications.
CREDIT UPDATE
Las Vegas is a well-established, premier tourist destination. Traffic trends are highly influenced by the national economic climate and the area's employment base, housing market, and commercial development. The Las Vegas metropolitan area's employment has recently shown sustained growth and improvement anchored by the tourism and gaming sectors, with employment having passed pre-recession levels. The housing market was among the hardest hit by the recession, and April 2014 home values, still half of pre-recession peaks, are up 22% above the prior year as reported by Zillow.com. Assessed values are projected to increase by 14% in 2015 and building permits have grown the past two years after having declined in six of the prior seven years.
The sharp declines in traffic at McCarran International Airport following the recession exhibit the volatile nature of the Las Vegas economy. Enplanements declined by 11.8% and 3.8% in FY2009 and FY2010, respectively, followed by a modest rebound through 2012 and a slight decline in FY2013. Enplanements saw a 1.7% increase in FY2014 (year-ending June 30), marked by sluggish domestic traffic offset by healthy international growth. Current enplanements remain 10.2% below pre-recession levels, but the previous peak also included traffic from a small connecting hub US Airways maintained at the airport prior to 2009.
In FY2013, CPE increased above $12 as expected with the debt and operating costs of the T3 project coming fully online. CPE was $12.22 in FY2013 compared to the $8.50 range the previous two years but was favourable to Fitch's base case projections. Also helping the CPE calculation compared to expectations was the third consecutive year of positive non-airline revenue growth, supported in 2013 by the opening of the T3 project. Fitch notes that airport management has taken firm action to reduce operating costs following the recession, which has helped keep airline costs reasonable, and plans further measures to control airline costs through 2018. The current residual agreement is in effect with the signatory carriers through June 30, 2017, having recently been extended two years. Fitch views positively the agreement's cost recovery framework in the face of a materially higher cost base at McCarran.
Future capital spending needs through 2018 appear manageable at $526 million and are not expected to require additional borrowing. Behind the overall existing debt and capital structure, the airport retains outstanding swap transactions with notional amounts of approximately $1.5 billion, down from $2.4 billion at FY2013. In November 2013, the airport terminated nearly $850 million in swaps by combining in-the-money and out-of-money transactions at no cost to the airport. This termination reduced counterparty exposure with Citigroup Financial Products, Inc. (IDR of 'A', Stable Outlook by Fitch)--still 65.8% of total derivative exposure but down from 75% previously--and resulted in a more closely aligned overall capital and derivative structure.
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) has been high in recent years, averaging 15.3x from 2008 to 2012 as the airport took on increased levels of debt for its previous 2008 to 2012 $3.9 billion capital plan. As the new terminal opened this past year, significantly higher debt service was chargeable to the carriers, which as noted increased CPE as airline payments grew to $255 million in 2013 from $178.3 million in FY2012. As a result, net debt to CFADS fell to 10.7x in FY2013, still slightly above the indicative range for the 'A' category. Some financial flexibility is noted given the airport's current liquidity position of approximately $308 million in unrestricted current assets as of March 31, 2014, translating to about 481 days cash on hand.
For FY2013, excluding rolling coverage accounts, the DSCR for senior lien bonds was 3.95x while the ratio for subordinated lien bonds was only 1.27x. These are down from the year prior as a result of increased debt service requirements, more consistent with the minimum levels required through the residual rate methodology. Fitch's calculation of total airport cash flow coverage to all of its debt obligations, excluding rolling coverage accounts, is a lower 1.17x. Debt service on the PFC bonds is only just covered from annual PFC collections of nearly $80 million, and a continuation of self-support would depend on a positive trend in traffic activity - otherwise, the PFC debt will require the use of excess airport general revenues, leading to rising airline costs.
Fitch's base case and rating case forecasts indicate satisfactory coverage levels although leverage metrics and CPE levels remain elevated. The base case assumes a 0.9% average growth rate in traffic to 21.8 million enplanements as well as a 3% average growth rate in expenses from 2013, which grew 5.3% above 2012 levels. Senior lien DSCR ranges from 3.49x to 4.01x (excluding coverage funds) while coverage of subordinate obligations are in the 1.25x-1.40x range. CPE peaks at $12.30 and net debt to CFADS evolve downward towards 9.1x, more moderate for a large hub airport but still slightly elevated. The rating case assumes a 10% traffic reduction phased in over two years followed by 2% annual recovery. DSCRs are similar to those in the base case; however, CPE rises to approximately the $15 level reflecting the airport's residual rate setting approach.
SECURITY
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. 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. All liens are open to additional leveraging subject to their respective additional bonds tests.
Additional information is available on www.fitchratings.com.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance', July 12, 2012.
--'Rating Criteria for Airports', Dec. 13, 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=842859
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