CHICAGO--(BUSINESS WIRE)--Fitch Ratings assigns an 'A+' rating to approximately $481 million Airport Commission, City and County of San Francisco, San Francisco International Airport (SFO, or the airport), second series revenue bonds series 2014 A and B. In addition, Fitch affirms the 'A+' rating on the outstanding $4.2 billion second series revenue bonds. The Rating Outlook is Stable.
The rating reflects SFO's strong operational and financial performance within the healthy, yet competitive air trade market in the San Francisco Bay Area. The airport's fully residual airline agreement and proven management team provide a solid framework for stable and competitive results, however the elevated leverage profile and additional borrowing needs create pressures on the rating.
KEY RATING DRIVERS
Revenue Risk-Volume: Stronger
STRONG OPERATING PROFILE AND POSITIVE TRAFFIC TRENDS: SFO serves as a major international gateway airport with a strong market share of passenger traffic within the San Francisco bay region (71% in fiscal year [FY] 2014). The airport has a well-balanced traffic profile, with 78% origination & destination (O&D) traffic in 2014, the remainder being a mix of domestic and international connecting traffic. United Airlines Inc. (United; 'B'/Outlook Positive) maintains a sizable presence at SFO, with a 46% share of the passenger market. United's share has fallen in recent years despite its increased seat capacity as growth has been driven by the increasing presence of low-cost carriers (24% in FY2014) and service expansion by foreign-flag airlines.
Revenue Risk-Price: Stronger
FAVORABLE RATE SETTING FRAMEWORK: The current airline use agreement (AUL), in place through 2021, is fully residual and provides for strong cost recovery with respect to all operating and debt service requirements. Airline charges were $14.88 per enplanement in FY2013 and have been relatively stable in recent years, although they are expected to rise in the medium term due to additional projected costs associated with the airport's capital improvement program (CIP).
Infrastructure Development Renewal: Midrange
LARGE, DEBT-FUNDED CAPITAL PLAN: Airport capital needs are well managed, but substantial infrastructure improvement is planned into the medium term. Recently completed terminal improvements together with planned development projects are considered necessary to allow the airport to adequately serve its growing user base. However, the new CIP totals over $4 billion and is expected to be predominantly funded through revenue bonds. Approximately $3.1 billion in new money issuance, funding $2.6 billion in projects, was factored into the forecast period through fiscal 2020.
Debt Structure: Stronger (revised from Midrange)
STABLE DEBT PROFILE: SFO has reduced its variable rate exposure from 19.8% of outstanding debt in 2008 to 11.5% in 2014 and has eliminated its mandatory tender exposure. Further, SFO's percentage of variable rate debt will continue to decline as new, fixed-rate bonds are issued to fund its CIP.
Financial Metrics
STRONG FINANCIALS, ELEVATED LEVERAGE METRICS: SFO's debt level is high at $4.2 billion ($175 per enplanement in FY2013) and contributes to the airport's high fixed-cost structure. The airport's current net debt-to-cashflow available for debt service (CFADS) ratio is similar to that of peer large-hub airports at 8.3x. Additional borrowings to support capital spending will likely cause debt metrics to remain at around the same level going forward. Nevertheless, the airport has a good liquidity position (341 days cash on hand in FY2013) and stable coverage levels, demonstrating it can adequately meet its debt service obligations. Fitch forecasts the debt service coverage ratio (DSCR) to remain in the 1.35x - 1.45x range through FY2021 including permitted transfers.
Peer Group
SFO's peers include Los Angeles International Airport (rated 'AA/AA-' Negative Outlook by Fitch), Miami International Airport (rated 'A'), and Atlanta International Airport (rated 'A+/A') given their similar function and importance as large hub, international gateway airports. All have elevated leverage related to large capital needs in support of their on-going operations. SFO benefits from the most positive enplanement trends over the last five years while LAX benefits from the highest DSCR given its hybrid AUL. CPE is expected in the $20 range for all but Atlanta, though SFO's CPE is projected to rise above $20 after FY2019.
RATING SENSITIVITIES
Negative: A larger capital program size or additional borrowings above current forecast parameters may lead to rating pressure.
Negative- Changes in the airport's traffic profile given the sizable presence of United and the presence of competing airports in San Jose and Oakland.
Positive: Upward rating migration is unlikely at this time given SFO's elevated leverage and large additional borrowing needs over the next 10 years.
TRANSACTION SUMMARY
The airport is issuing approximately $481 million in San Francisco International Airport second series revenue bonds, series 2014 A and B. The proceeds are anticipated to be used to finance committed projects as part of SFO's new CIP (including the repayment of $248 million of commercial paper notes used as interim financing). The bonds are expected to price during the week of September 15, 2014.
SFO is implementing a sizeable multi-year CIP of around $4.4 billion through FY2024, with a main focus on modernizing terminals 1 and 3, increasing safety and security, and enhancing passenger experience. Fitch notes that the projects will be undertaken on a demand-driven basis, with $1.6 billion that are deferrable. The program will be nearly all bond-funded.
Despite the magnitude of the CIP, SFO's moderate net debt-to-CFADS for a large-hub airport of approximately 8.3x for FY2013 is not expected to change materially given the rapid amortization of existing debt expected over the next decade.
SFO's traffic has continued to perform well in recent years (3.9% CAGR between FY2008 - FY2013), with strong enplanement growth every year except 2009. Furthermore, enplanements are estimated to have grown by 3.2% in FY2014 to a record 23 million enplanements. SFO is benefiting from international passenger traffic growth in addition to strong domestic performance driven by low-cost carrier expansion and United's increased service. United remains the dominant carrier with 46% of enplanements, though the share of low cost carriers increased to 24% in FY2014 from 13% in FY2007. Since the recent economic downturn, SFO's passenger traffic market share has increased relative to competing Oakland and San Jose airports, both of which have experienced notable contraction.
Debt service coverage in FY2013 was 1.44x, taking into account permitted contingency fund transfers of approximately $93 million as well as the use of designated passenger facility charge (PFCs) as revenues. On a stand-alone basis, excluding contingency rollover funds, coverage was 1.17x. This coverage level is in line with performance in recent years and is not unusual given SFO's residual rate-setting methodology.
Fitch notes that the airport commission utilized $45 million of PFC revenue to cover debt service in FY2013, down notably from the $73 million and $87 million used in FY2012 and FY2011, respectively. Going forward, PFC revenues are expected to be used to offset new debt service attributable to the CIP and as a tool to manage costs passed on to airlines, resulting in DSCR remaining at the 1.3x - 1.4x level through the forecast period as new debt is issued.
SFO's airline CPE grew to $14.88 in FY2013, up from the $14.18 seen in 2012, as debt service obligations ramp up but came in below the $14.97 estimate given the airport's strong performance. Continued growth in enplaned passengers as well as large increases in non-airline revenue sources and usage of PFC receipts as offsets to debt service payments together contribute to the recent stabilization of airline costs. The airport estimates that the FY2014 CPE will be around $16.
Even with continued growth in the airport's enplanement base, Fitch expects the average CPE to increase over the next few years to service rising annual debt service payments resulting from additional borrowings. CPE is forecast to rise to around $24 by FY2021 in Fitch's base case and to $28 in its rating case. Fitch believes that rising airline costs will affect SFO's overall financial flexibility, although it notes that such higher airline costs are supported by a relatively large component of high-yielding international and long-haul domestic travel. In addition, these costs facilitate necessary improvements to support the continued growth experienced at SFO and should remain in-line with and comparable to peer airports with similarly sized capital needs.
The revision of SFO's debt structure score to Stronger from Midrange reflects the airport's efforts to reduce its risk profile over the past several years. Variable rate debt has been reduced to 11.5% of the outstanding par and is synthetically fixed, put risk has been eliminated, multiple swaps were terminated reducing counterparty risk, and debt service reserves are now nearly 100% cash-funded and are funded in excess of the MADS requirement. SFO is left with a single, fully amortizing senior lien with sufficient covenant and reserves. These characteristics are comparable to other Fitch-rated airports with a Stronger debt structure assessment and in-line with criteria guidance.
SFO is located 14 miles south of downtown San Francisco, in San Mateo County, adjacent to the San Francisco Bay. The airport occupies approximately 2,383 acres on a 5,171-acre site; the remaining 2,788 acres are undeveloped tidelands. There are four intersecting runways, three terminals, and an international terminal. Nonstop service was provided to 76 domestic and 37 international destinations in FY2014, and the airport was the second busiest airport in California and ninth busiest in the country in FY2013.
SECURITY:
The bonds are secured by a net revenue pledge.
Additional information is available at '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=864975
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