SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed the City of Colorado Springs, CO's outstanding $8.8 million airport revenue bonds at 'BBB+'. The Rating Outlook has been revised to Negative from Stable. Fitch does not rate the airport's approximately $11.2 million in senior revenue refunding bonds issued in 2014.
RATING RATIONALE
The Negative Outlook reflects a continuation of downward traffic trends and the delay in negotiating a new airline use and lease agreement, and heightening cost recovery risk. Fitch notes the airport has made efforts to contain an already elevated cost per enplanement (CPE) level through debt reduction and cost containment initiative. Still, the on-going competition with nearby Denver International Airport (DIA) is clearly evident.
The airport's strong liquidity position and low leverage somewhat mitigates the airport's operational challenges. However, given the trend of enplanement declines almost every year since 2008, if traffic and service declines persist, Fitch may take the view that the airport may no longer be consistent with a 'BBB+' rating.
KEY RATING DRIVERS
Small Hub Constricted by Highly Competitive Market: Colorado Springs Municipal Airport (the airport) services a small origination and destination (O&D) enplanement base of 651,000. However, the airport faces strong competition from neighboring Denver International Airport (DIA) which is served by similar carriers and offers service to more destinations. Most recently, traffic at the airport has decreased considerably by 20.9% in 2013 as expected due to Frontier discontinuing service.
Revenue Risk- Volume: Weaker
Airline Agreement Status is Unclear: The airline use and lease agreement has been on a month-to-month extension since December 31, 2013, maintaining the existing hybrid rate-setting structure that provides for strong cost recovery terms. A new agreement is currently being drafted and will cover a more defined amortization and capital outlay policy, though management does not expect this to be finalized until possibly 2015. The airport's 2013 CPE is elevated for a small-hub airport at $8.96 but is expected to be lowered to about the $7 level through management rate adjustments. Economic flexibility to raise rates in an environment of further traffic declines may be difficult.
Revenue Risk- Price: Weaker
Modest Capital Program: The five-year capital improvement program totals $65 million, funded largely by grants and PFC revenues. Majority of the program is focused on repair and rehabilitation. Management has created a new plan of finance through passenger facility charges (PFCs), which completes necessary PFC projects and better matches PFC collections to PFC expenditures. There are no plans for new money borrowings anticipated in the near term.
Infrastructure Development and Renewal: Stronger
Fixed Rate Debt Structure: Debt outstanding is all fixed rate, fully amortizing and maturing by 2023. Annual debt service requirements are mostly flat at $2.3 million to approximately $2.6 million range through 2023.
Debt Structure: Stronger
Low Leverage, Strong Liquidity: Debt service coverage was healthy at 1.88x in 2013 and 1.62x when excluding pre-paid revenue account, taking into account additional revenues charged to the airlines in that year. Under conservative assumptions of additional traffic losses, Fitch projects the debt service coverage to potentially decline to 1.2x to 1.4x range while CPEs remains below $9.00. Excluding the benefit of pre-paid revenue account, coverage from current cash flows could even be narrower. However, leverage is very low with net debt to cash flow available for debt service (CFADS) at .29x. Following the repayment of series 2002A bonds, the airport has maintained a strong liquidity position with $28.5 million of unrestricted cash equivalent to 783 days cash on hand.
Peer Group: The airport's comparable peers are Manchester (BBB+, Negative) and Jackson (BBB+, Stable) due to small O&D base, on-going traffic stresses, and elevated CPE.
RATING SENSITIVITIES
--Negative: Further traffic declines without stabilization in the enplanement base;
--Negative: Coverage levels excluding prepaid revenue account approaching 1.0x or lower;
--Negative: Inability to negotiate a new airline agreement with adequate cost recovery terms or allowing for competitive airline rates;
--Negative: Significant erosion in the airport's strong liquidity balances
--Positive: Given the airport's lowered enplanement base and continued traffic volatility, positive rating migration is unlikely at this time.
CREDIT UPDATE
The airport continues to experience traffic declines as a result of rising airfares and high competition with DIA. Traffic at the airport decreased by 20.9% in 2013 due to Frontier's ending of service by April of 2013 and further declines are expected in the current year. The airport's traffic profile has a history of weak performance evidenced by multiple years of declines totaling 37% since 2007. United Airlines' concentration still remains elevated at 53% market share, though it is expected to decline due to reduction of seats.
The airport plans to continue to reduce debt service and operating costs to stabilize rates and charges to air carriers in light of the current challenging environment. Management has already defeased $16.5 million of series 2002A bonds using cash reserves and refinanced the remaining $11.2 million of such bonds with 2014 series refunding bonds, reducing annual debt service payments by approximately 55%. Additional debt reductions are under consideration, particularly with series 2007 bonds when the bonds become callable in 2016.
Separately, the airport is planning to draw on a $2.336 million loan with the State Infrastructure Bank (SIB), which is backed by PFCs. The SIB loan allows for reimbursement of $2.336 million previously applied for PFC eligible projects.
Airport expenses have been subject to downward adjustments following the Frontier announcement. Operating expenses in the revised mid-year 2014 budget are 2.1% lower than the original budget. However, budgeted expenses of $13.6 million are slightly higher than $13.3 million in 2013. Operating revenues under the revised budget of $16.6 million are 9.2% lower than the original budget and 32.8% lower than 2013 revenues. The steep drop in 2014 expected revenue is due to a decline in airline charges from debt service reduction and an exclusion of a one-time reimbursement from tenants for capital improvements in 2013.
The airport has limited financial flexibility in coming years with debt service coverage, excluding the prepaid account, dropping below the 1.62x level seen in 2013. Airline CPE of $8.96 is high for a small hub airport and the competitive environment somewhat limits the ability to pass on more costs to airlines. The airport's intentions to keep CPE below $9 may prove difficult if operating conditions do not improve. The airline agreement is currently operating in a month-to-month mode. This raises some concerns over the degree of airline support for airport costs given the volatile nature of traffic volumes.
The airport's operating revenue profile is also dependent on non-airline revenues (59% of operating revenues) which are largely driven by passenger volume. Key mitigating factors include the airport's low leverage and high liquidity.
Fitch's base case scenario assumes traffic declines 9.0% in 2014 followed by flat growth. Operating expenses are assumed to be similar to the revised budget. Under such scenario, CPE may rise over a couple of years to the $8 range in order to maintain cash flow coverage above 1.0x.
SECURITY
The bonds are secured by net revenues of the airport.
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=875154
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