CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A' rating on approximately $307.4 million of outstanding airport revenue bonds issued by Lee County, Florida on behalf of Southwest Florida International Airport (SWFIA). Fitch has revised the Rating Outlook on the bonds to Stable from Negative.
The outlook revision reflects traffic levels that are beginning to show signs of improvement amid a recovery within the airport's greater service area. The airport's rating is based on a well-balanced mix of major carriers serving leisure travel with competitive cost per enplanement (CPE) levels, $7.09 in fiscal year (FY) 2013. The rating is further supported by a recently renewed airline agreement, as well as manageable capital needs and robust liquidity as compared to peers.
KEY RATING DRIVERS
Revenue Risk - Volume: Midrange
Tourism-Based Traffic: SWFIA serves an origination and destination (O&D) enplanement base of approximately 3.86 million passengers, with considerable dependence on discretionary leisure traffic. The airport enjoys a diverse carrier mix with no airline holding more than a 30% market share and low cost carriers collectively representing nearly half of all enplanements. SWFIA faces little competition in the region with the nearest comparable airport 125 miles away.
Revenue Risk - Price: Midrange
Standard Cost Recovery Framework: The airport is able to recoup a majority of its costs under the current hybrid airport use and lease agreement (AUL). However, because 57% of its operating revenue is non-aviation based, SWFIA's financial performance is exposed to enplanement volume and management's ability to contain costs. CPE is expected to remain competitive.
Infrastructure Development and Renewal: Stronger
Manageable Capital Program: The five-year capital improvement plan (CIP) totals $146 million, funded from a mix of grants, passenger facility charges (PFCs) and surplus funds, with no additional borrowing anticipated. All projects are demand-driven with some having been deferred over recent years.
Debt Structure: Stronger
Conservative Debt Structure: The airport's debt is fixed rate and fully amortizing, with aggregate level debt service of approximately $25 million annually through FY2033.
Moderate Leverage, Strong Liquidity: The airport's net debt to cash flow available for debt service (CFADS) of 5.1x is reasonable for a medium hub airport. The debt service coverage ratio (DSCR), taking in to account a PFC transfer, was 1.41x in FY2013. SWFIA retains relatively strong financial flexibility based on extremely robust balance sheet liquidity of $117 million in unrestricted cash, equating to 768 days cash on hand (DCOH) as of July 1, 2014.
RATING SENSITIVITIES
Negative:
--Traffic Base: Significant declines or volatility in the enplanement base;
--Operating Performance: Management's ability to maintain and grow non-aviation related revenue while managing cost escalation;
--Financial Flexibility: Sustained use of extraordinary coverage to maintain the rate covenant.
Positive:
--The airport's size and traffic profile, reflecting inherent vulnerabilities related to leisure travel, restrict the likelihood of a higher rating at this time.
SECURITY
The bonds are secured by a pledge of the net revenues of SWFIA's operations and certain funds under the bond resolution. PFCs are not pledged under the bond resolution but such receipts can be transferred to reduce debt service requirements and to stabilize rates to airlines. The airport also has the ability to impose an additional airline charge through the extraordinary coverage protection provision to support the rate covenant.
CREDIT UPDATE
The Negative Outlook assigned in July 2012 reflected Fitch's concern that weakening traffic levels would subject the airport to tighter levels of debt service coverage and an increase in airline costs based on its rate setting methodology. SWFIA's reliance on transfers to meet its 1.25x debt service covenant as well as forecasted $8-$9 CPE put pressure on its rating level at the time. Furthermore, the airport was experiencing escalating costs relating to maintenance expenses and personnel as well as declining revenue due to depressed traffic levels affecting non-aviation revenue. In subsequent months, however, the airport's traffic and operations have recovered to the extent that the factors that warranted the Negative Outlook are now a less material concern.
FY2013 and year-to-date (YTD) FY2014 traffic has nearly recovered all traffic losses experienced since FY2008. Enplanements YTD have grown nearly 3%, following a nearly 5% increase last fiscal year. Airlines have begun adding or increasing the frequency of routes to various destinations as they iron out consolidation plans. Additionally, airlines are experiencing 85% load factors as demand builds on the back of record high population levels in the county. Both enplanement and population growth are projected to continue, moderately, in the near future. However, the airport remains vulnerable to discretionary spending related to the travel and leisure industry.
The airport's operations have strengthened in the last 18 months. FY2013 revenue increased nearly 7% and is currently forecasted to increase an additional 9% based on YTD results due to higher non-aviation revenue, which makes up a majority of the airport's total operating revenue. Being mindful of its operating margin, management has begun phasing in various deferred maintenance items in light of stronger revenue performance, leading to a 5% increase in FY2013 operating expense. It is expected that management will continue practicing conservative cost-budgeting as expenses are forecasted to increase nearly 7% in the current fiscal year.
The eight signatory airlines (to be consolidated to six) extended the five-year hybrid compensatory AUL in September 2013 which includes a 60/40 revenue share between the authority and airlines. In FY2013, signatory airline revenue accounted for 34% of total operating revenue. CPE has hovered around $7 for the last five years and is forecasted to remain in the high-$6 range this fiscal year. CPE is appropriate for the rating category, notably amongst its Florida peers, and is supported by non-aviation revenue generation that allows the airport to pass through less operating expense to airlines.
Under Fitch's base case forecast, which assumes incremental enplanement growth and escalating costs, DSCR remains in the mid-1.3x range with little-to-no need for the extraordinary coverage protection while CPE stays in the $7 range. Fitch's rating case assumes a near-term enplanement stress of 7%, with only slight recovery thereafter, and an additional increase in costs. Under this scenario, CPE peaks at $8 while moderate support is required by the extraordinary coverage covenant to maintain a 1.25x level. While such an outcome would almost certainly lead to rating action, a 7% stress is considered reasonably extreme as the airport has only experienced one such drop (8% in FY2002) in its 30-year history. Furthermore, this scenario does not factor in management's ability to reasonably cut costs or defer maintenance in the face of weakening traffic performance. Leverage in both cases migrates below 5x.
Additional information is available on www.fitchratings.com.
Applicable Criteria and 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
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=842868
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