CHICAGO--(BUSINESS WIRE)--Fitch Ratings has upgraded Kansas City, MO's approximately $29 million subordinated airport revenue bonds, issued on behalf of the Kansas City International (KCI) Airport, to 'A'. The Rating Outlook is Stable. Fitch does not rate the airport's outstanding $189 million senior airport revenue bonds.
The upgrade reflects the inherent residual strengths within the senior master bond ordinance executed in 2013 and the airport's recently revised airline use and lease agreement (AUL) that have bolstered the airport's total financial position. Total debt service coverage forecasts have been significantly increased while the airport's reasonable cost per enplanement (CPE) levels and liquidity position warrant the airport's placement within the mid-'A' rating category based on comparable peers.
KEY RATING DRIVERS
Revenue Risk - Volume: Midrange
Occasionally Volatile Service Area: The airport benefits from a 95% origination and destination (O&D) enplanement base with no competing alternatives within the MSA. In the last decade, enplanements have experienced years of elevated volatility, most recently in FY2013 with an 8% drop. However, traffic has since stabilized in the last 15 months. Moderate carrier concentration exists with Southwest servicing approximately half of enplaned passengers.
Revenue Risk - Price: Midrange (revised from Weaker)
Strengthened Cost Recovery Framework: With the amendments executed in KCI's hybrid AUL this year, the airport is able to greatly increase their ability to recover costs and bolster their airline revenue generation. CPE levels, forecasted to be in the mid-$6 range, are consistent with an airport of this size and rating category.
Infrastructure Development and Renewal: Midrange
Manageable Capital Improvement Program: KCI's five-year capital plan of approximately $153 million is funded by a combination of grants, passenger facility charges and airport funds with no additional debt. Management indicated that the planned future terminal redevelopment is very preliminary with no funding sources outlined at this time.
Debt Structure: Midrange
Streamlined Capital Structure: KCI's master bond ordinance restructuring streamlined its capital structure and added beneficial covenants that implicitly cushion the subordinate lien. The debt is fixed rate, fully-amortizing and supported by reserve covenants typical for a subordinate lien.
Low Leverage, Strengthened Financial Metrics: KCI's FY2014 total net general airport revenue bond (GARB) debt-to-cash flow available for debt service (CFADS) of 1.3x is very low compared to peers. Liquidity of 444 days cash on hand (DCOH) is viewed as a key offset to limited subordinate lien covenants. Including the new rolling coverage account at the senior lien level, total GARB coverage is forecasted to remain above 2x.
Peers: Amongst its peers in the mid-to-high 'A' rating category, such as Columbus (OH), Indianapolis (IN), Louisville (KY) and San Antonio (TX) airports, Kansas City demonstrates lower leverage and CPE levels, higher debt service coverage and softened susceptibility to economic activity given its revenue generation capabilities.
RATING SENSITIVITIES
Negative:
--Traffic Base: Measurable contraction or elevated volatility in passenger traffic as a result of airline services;
--Revenue Generation: Deterioration of the airport's non-airline revenue or reduced AUL terms in the future;
--Financial Flexibility: Dilution of total debt service coverage for a sustained period below 1.5x or a material increase in leverage due to future terminal redevelopment.
Positive:
--The airport's size and traffic profile, coupled with some vulnerability to economic activity, restrict the likelihood of a higher rating at this time;
--The proposed terminal redevelopment, and its funding uncertainty, currently restricts the likelihood of a higher rating at this time.
SECURITY
The bonds are secured, on a subordinate basis, by a pledge of the airport's net revenue including customer facility charges (CFCs).
CREDIT UPDATE
Traffic and service remain moderately volatile. Enplanements in fiscal year (FY) 2014 grew nearly 2% after a FY2013 decrease of 8% related to Frontier Airlines (Frontier) cutting most service at KCI. FY2015 YTD enplanements are up 1.3% and it is expected that Southwest Airlines (Southwest, rated 'BBB' with a Stable Outlook by Fitch), along with the other signatory carriers, will continue to backfill Frontier's routes. Further augmenting this effort, Spirit Airlines (Spirit) began operating as a signatory carrier in August 2014, providing daily service to Chicago, Dallas, Detroit, Houston and Las Vegas. Noteworthy, enplanement activity net of Frontier's service showed a 0.7% increase in FY2013 while FY2014 showed a larger 3% increase. With a strong enplanement showing in the next couple fiscal years, the airport will reverse its negative five-year compounded annual growth rate (CAGR) trend while servicing an enplanement base at its historical 10-year average.
Despite the traffic fluctuations, management at the airport continues to efficiently maintain operating performance. Operating revenue grew 3.5% in FY2014 compared to a 0.9% decline in FY2013. The 5-year CAGR for total operating revenue is 1.5% while its operating margin has remained steady around 27% over the last couple of years. Airline revenue historically made up approximately a quarter of total operating revenue at the airport, but with the revised terms within the newly extended AUL, airline revenue is now expected to comprise 30% of total operating revenue. The airport's non-airline revenue streams, both operating and non-operating, are stable and well-diversified.
Operating expense at the airport increased 3.9% in FY2014 after three years of decline. Consistent with peers within Fitch's portfolio, the airport conservatively budgets for increases of 8% annually, however its FY2014 operating expense came in 7% below budget. The airport's ample liquidity and recently implemented major maintenance surcharge requirement, reduced expense related to the Terminal A closing, and rolling coverage account should help soften any remaining effects of occasional traffic volatility experienced at the airport.
Fitch's Base Case scenario, which assumes moderate enplanement growth and reasonable cost escalation, results in total GARB debt service coverage above 2x through FY2019. The Rating Case assumes a near-term enplanement shock consistent with recent stresses and greater cost increases. This scenario results in total GARB debt service coverage that averages near 1.7x. In both cases leverage migrates to zero within five years as half of the airport's total GARB debt amortizes.
The revision of KCI's Revenue Risk - Price Key Rating Driver, to Midrange from Weaker, reflects the airport's strengthened AUL provisions and cost recovery framework that are more in line with similarly-rated peers within Fitch's portfolio.
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=866054
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