Fitch Affirms City of San Antonio, Texas' General Airport Revenue Bonds at 'A+/A'

CHICAGO--()--Fitch Ratings has affirmed the 'A+' rating on approximately $194.2 million of the City of San Antonio, Texas' general airport revenue system bonds (GARBs), series 2007, 2010 A&B, and 2012 and the 'A' rating on approximately $148.7 million of passenger facility charge (PFC) and subordinate lien airport revenue system improvement and refunding bonds, series 2005, 2007, 2010, and 2012. The Rating Outlook for all bonds is Stable.

In addition, Fitch Ratings has withdrawn its ratings for the following San Antonio (TX) bond due to prerefunding activity:

--Airport system improvement revenue bonds series 1996 (all maturities).

The ratings reflect the resilient traffic base served by a diverse set of carriers, the hybrid airline use and lease agreement (AUL) giving stable financial performance, and the airport's moderate leverage. Following four years of consecutive growth, enplanements have nearly recovered to pre-recession levels. In addition, revenue growth has outpaced expense growth and stabilized both the debt service coverage ratio (DSCR) at around 1.5x on a consolidated basis and cost per enplanement (CPE) at around $8, despite higher costs from the new Terminal B and increasing debt service obligations. Total leverage evolves to under four times on a net debt-to-cash flow available for debt service (CFADS) basis in Fitch's base case even when laying in an additional $46 million of new money bonds associated with the current six-year capital improvement program (CIP).

KEY RATING DRIVERS

Revenue Risk: Volume - Midrange:

Growing Economy, Carrier Diversity: The San Antonio Airport System serves a strong origination and destination (O&D) passenger base, which makes up 95% of enplanements, but the proximity of Austin-Bergstrom International Airport hampers San Antonio International Airport's (SAT) ability to grow regional market share. A diverse group of carriers serve SAT with no carrier accounting for more than 42% of market share.

Revenue Risk: Price - Midrange:

Lease Agreement Provides Stability: The hybrid AUL provides SAT with pricing flexibility and helps to 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.

Infrastructure Development and Renewal - Stronger:

Limited Capital Program: SAT's six-year CIP is fairly modest with limited future GARB borrowing at 10%-15% of anticipated funding requirements. No major projects are planned and Phase 2 of Terminal A renovations are scheduled to begin in fiscal year (FY) 2015. A new consolidated rental car facility (CONRAC), to be funded with customer facility charges (CFCs) that are already being collected, is in the design stages for construction to start at the end of FY2015. The CONRAC will require additional debt requirements in FY2016, although these bonds are anticipated to be CFC-backed and not to impact the senior or PFC subordinate bonds.

Debt Structure - Stronger:

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.

Financial Metrics:

Stable & Improving Financial Performance: Leverage is moderate for the rating category at 4.4x net debt-to-CFADS. Consolidated DSCR dropped to 1.5x in 2013 from 1.7x in 2012, yet this is still above the 1.3x-1.4x range seen prior to 2012. Fitch expects consolidated DSCRs to remain at or above 1.5x and senior DSCRs to average 2.0x under Fitch base case conditions. Liquidity has improved to 221 days' cash-on-hand (DCOH), yet remains low relative to peers. Flexibility in the airline use agreement and modest CIP partially mitigate this lower liquidity.

RATING SENSITIVITIES

Negative - 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.

Negative - 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.

Negative - 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.

CREDIT UPDATE

Enplanements have grown annually at a 1.3% CAGR since the losses suffered during the recession in 2009. FY2013 enplanements were 4.12 million, up 0.4% on the prior year, but still 1.2% off the pre-recession peak. Growth continues into 2014 with enplanements up 0.6% year-over-year in eight months through May. VivaAerobus discontinued services in August 2013, but was replaced by Volaris and Interjet services starting in December 2013. Management indicated that the expiration of the Wright Amendment should have marginal impact on its leading carrier at the airport, Southwest (42% market share), and will not result in any non-stop destinations being lost.

Total revenues decreased 4% to $81.3 million in FY2013 due to lower airline revenues, but remained sufficient to meet increasing O&M costs and debt service obligations. Opex rose 8.4% to $51 million, following growth of 6% in FY2012 and 11% in FY2011, primarily due to, amongst other things, the opening of Terminal B in November 2010 and higher baggage handling costs. Yet, this expense growth has been largely in-line with forecast estimates and should subside going forward. Lower airline revenues were offset by the revenue-sharing component of the hybrid AUL, expiring September 2015, and reduced FY2013 CPE to $7.68 from $8.27 in FY2012 and $8.94 in FY2011 - well within management's target to maintain CPE less than $10.

SAT's financial performance has been relatively strong and stable, fitting well within the rating category with a DSCR of 1.49x on a consolidated basis and 1.75x for senior debt based on calculations that treat PFCs as revenue. The airport reported a GARB DSCR of 1.88x as per the indenture which includes revenue transfer and PFCs as an offset to debt service. DSCRs improved in FY2013 due to the equitable revenue sharing provisions of the AUL and application of PFCs toward both senior and subordinate debt service obligations.

Fitch's base case scenario assumes 0.5%-1.5% enplanement growth annually and expenses leveling out and growing at a more moderate 4% per year. In this scenario, consolidated DSCR is forecast to be no less than 1.5x, with CPE remaining in the $8 range and leverage evolving to 3.8x including the addition of $46 million in GARB and PFC debt over the 2016-2019 timeframe. Fitch's rating case similarly layers in this additional debt, but assumes a 7% shock to enplanements in FY2015 (similar to the 6% recessionary loss experienced in 2009) followed by 2% recovery per year coupled with elevated expenses over the recovery period. Under this scenario, consolidated DSCR is no lower than 1.3x and CPE reaches $8.70 by 2019. Leverage drops marginally to 4.3x, but metrics still remain commensurate with the current rating levels.

SAT is owned by the City of San Antonio and operated by the city's aviation department. It is a FAA medium-hub airport located approximately eight miles from downtown San Antonio on over 2,600 acres. Over 13 airlines provide regular commercial service to over 30 non-stop domestic and international destinations from its two-terminal facility. Stinson Municipal Airport, 5.2 miles southeast of San Antonio, provides relief for general aviation traffic.

SECURITY

The GARBs are secured by a first lien on revenues generated by the airport system, which includes SAT and Stinson Municipal Airport, a general aviation facility. The PFC/subordinate bonds are secured by a senior lien on PFC revenues and a subordinate lien on general airport revenues.

Additional information is available at '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=842943

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Contacts

Fitch Ratings
Primary Analyst
Jeffrey Lack
Associate Director
+1-312-368-3171
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Scott Zuchorski
Senior Director
+1-212-908-0659
or
Tertiary Analyst
Emma Chapman
Associate Director
+1-312-682-2063
or
Committee Chairperson
Saavan Gatfield
Senior Director
+1-212-908-0542
or
Media Relations
Sandro Scenga, New York, +1-212-908-0278
sandro.scenga@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Jeffrey Lack
Associate Director
+1-312-368-3171
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Scott Zuchorski
Senior Director
+1-212-908-0659
or
Tertiary Analyst
Emma Chapman
Associate Director
+1-312-682-2063
or
Committee Chairperson
Saavan Gatfield
Senior Director
+1-212-908-0542
or
Media Relations
Sandro Scenga, New York, +1-212-908-0278
sandro.scenga@fitchratings.com