CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+' rating to the City of Dayton, Ohio's approximately $28 million airport revenue refunding bonds, series 2014A & B. Fitch has also affirmed the 'BBB+' rating on the $3.2 million outstanding parity airport revenue bonds. The city's airport revenue bonds were issued on behalf of the James M. Cox Dayton International Airport. The Rating Outlook is Stable.
The rating reflects the airport's elevated traffic volatility, its vulnerability to economic factors in the air trade service area and, to a moderate extent, competition from larger airports in the state. Supporting the airport's rating is its low cost per enplanement (CPE) level, managed by a residual-style airline agreement, and its ample liquidity, leading to nearly zero net leverage.
KEY RATING DRIVERS
Revenue Risk - Volume: Weaker
Weaker Service Area, Moderate Competition: The airport serves a mostly origination and destination (O&D) market with approximately 1.2 million enplanements. The airport's enplanement base, however, has demonstrated a historically volatile profile with single year traffic shifts ranging from a positive 14% growth to 15% declines over the last decade resulting in a 10-year compounded annual growth rate (CAGR) of (0.5%). The airport mitigates some carrier concentration risk due its largest carrier holding only 31% market share.
Revenue Risk - Price: Midrange
Full Cost Recovery: Carriers operate under an annual operating permit with a cost-center residual rate setting methodology. Management has made a significant effort to improve its competitive position, reducing CPE to the $3 to $4 range in recent years from nearly $14 in fiscal year (FY) 2005.
Infrastructure Development and Renewal: Midrange
Manageable Capital Program: The airport's current capital program through FY2019 totals $103 million to be funded by grants (46%), passenger facility charges (16%), customer facility charges (7%), cash (20%) and parity revenue bonds (12%, or $12 - $15 million) to be issued in late FY2015. The program has flexibility regarding timing and is primarily focused on routine maintenance of the existing terminal and airfield.
Debt Structure: Stronger
Conservative Debt Structure: All outstanding debt will be fixed-rate and fully amortizing with aggregate level debt service payments under $3 million through FY2032. The aforementioned parity bonds are accounted for in Fitch's rating cases.
Low Leverage, Ample Liquidity: The airport has low leverage with current net debt to cash flow available for debt service (CFADS) of 0.3x. Debt service coverage of 2.76x in FY2013 is slightly lower than the prior year but provides ample financial protection. The airport has strong liquidity with $25.7 million of unrestricted cash, equivalent to 347 days cash on hand.
Peers: Amongst its peers in the 'BBB' rating category such as Manchester (NH) and Fresno (CA) airports, Dayton demonstrates lower leverage and CPE levels, higher debt service coverage and lesser susceptibility to airline market decisions given its diversification.
RATING SENSITIVITIES
Negative:
--Traffic Base: Measurable contraction or elevated volatility in passenger traffic as a result of airline services or competition from larger airports operating in the region;
--Operating Performance: Deterioration of the airport's non-aviation revenue that limits its ability to manage CPE levels;
--Financial Flexibility: The dilution of debt service coverage for a sustained period below 2x.
Positive:
--The airport's size and traffic profile, coupled with inherent vulnerabilities to economic activity, restrict the likelihood of a higher rating at this time.
SECURITY
The bonds are secured by a pledge of the net revenue of the airport's operations and certain funds under the bond resolution. Passenger facility charges (PFCs) are not pledged under the bond resolution but a portion of such receipts are applied to debt service.
TRANSACTION SUMMARY
The airport is issuing the bonds in order to refund the remaining series 2003 bonds for uniform debt service savings estimated at nearly $180,000 annually, or $2.3 million on a net present value basis. The issuer also anticipates applying the over-funded portion of the parity debt service reserve fund toward the refunding.
CREDIT UPDATE
The airport's enplanement base has contracted over the last 18 months, evidenced by a 4% drop in FY2013 and currently tracking an additional 9.5% loss through the first six months of FY2014. The airport continues to struggle in terms of consistent traffic performance directly attributable to the combination of underlying economic condition of its service area and the effects of airline consolidation. Frontier Airlines ceased all operations at the airport, however Southwest Airlines (Southwest, rated 'BBB' with a Stable Outlook by Fitch) has back-filled much of its former service. Fitch expects traffic volume to remain volatile, which is consistent with historic trends, but also assumes a floor level around 1.1 million enplanements over the next couple years.
In contrast to its traffic, however, the airport's operating revenue held strong with a 1.3% increase in FY2013 due to higher parking and concession revenues. Parking revenue represents nearly half of total operating revenue at the airport, the latter of which is generated from approximately 82% non-airline sources. Budgeted increases related to the new in-line baggage system and utilities led to an operating expense increase of nearly 12% in FY2013. Fitch expects this expense level to continue for the foreseeable future. Focusing on the airport's deteriorating operating margin is imperative to maintaining the airport's current rating if leverage is expected to increase in the near future.
For more information please refer to Fitch's New Issue Report to be released in the near future.
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=845836
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