CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed its 'BBB+' rating on St. Louis, Missouri's approximately $624.1 million outstanding airport revenue bonds. The Rating Outlook remains Stable.
St. Louis also has $62.1 million of series 2012, 2013, and 2015 airport revenue bonds that are not rated by Fitch.
The rating reflects continued enplanement stability at Lambert-St. Louis International Airport (the airport) since the prior loss of its status as a hub airport for American Airlines. Stable financial metrics are evidenced by steady coverage levels, adequate liquidity, and moderate leverage ratios. Airline costs are high for a regional airport; however, management continues to maintain a high degree of control over its operating expenses while generating a consistent level of non-airline revenue growth.
KEY RATING DRIVERS
Revenue Risk - Volume: Midrange
Solid Underlying Demand: The airport is the primary air service provider for the St. Louis metropolitan statistical area with limited competition within the area. The airport's traffic profile has shifted over the past decade and currently serves as an origination and destination (O&D) airport, with O&D representing 86% of the approximately 6.25 million total enplanements. While elevated carrier concentration exists with Southwest Airlines (51% of total enplanements), it is partially mitigated by the airline's long-term commitment to serve the airport.
Revenue Risk - Price: Midrange
Favorable Airline Use & Lease Agreement: The airline use agreement, which expires in 2016, provides a hybrid compensatory rate-setting approach while ensuring all necessary operating and debt service costs can be recovered through a residual-oriented financial backstop. Airline costs are elevated at $13.89 per enplanement in fiscal 2014 (ending June 30), but are expected to decrease nominally in conjunction with a declining debt service profile.
Infrastructure Development & Renewal: Midrange
Short-term Planning: St. Louis maintains a one-year capital investment program (CIP) approved by the airlines each year when rates and charges are established. The fiscal 2016 CIP has received majority-in-interest (MII) approval from signatory carriers, and focuses on the maintenance, refurbishment, and modernization of airport assets. The CIP totals $23.9 million and is funded with the airport's development fund and other grants.
Debt Structure: Stronger
Conservative Debt Profile: All of the airport's debt is fixed-rate with a declining amortization profile. Maximum annual debt service (MADS) of $75 million is scheduled in fiscal 2017, with debt service then stepping down to approximately $66 million in fiscal 2019. Debt service continues to decline in subsequent years through maturity in fiscal 2034. Bond covenants and reserve requirements are satisfactory for an airport at this rating level.
Stable yet Limited Financial Flexibility: Some financial limitations exist due to relatively high leverage and modest coverage levels. Net debt-to-cash flow available for debt service remains comparable to peers at 7.16x, while debt service coverage (including passenger facility charges and a rate mitigation coverage account) remained flat at 1.36x in fiscal 2014. The airport has adequate levels of restricted cash balances along with unrestricted cash equivalent to 292 days cash on hand.
Peer Group: St. Louis' peers include Cleveland ('BBB+'/Negative Outlook) and Cincinnati/Northern Kentucky ('A-'/Positive Outlook). Each airport has previously been a domestic hub and has transitioned to a primarily O&D airport. Despite a lower traffic volume, Cincinnati has a more favorable financial profile, indicated by a lower cost per enplanement (CPE) and leverage. St. Louis compares favorably to Cleveland with regard to leverage, coverage, and CPE.
RATING SENSITIVITIES
Negative - Enplanement Declines: Reductions in traffic that lead to sustained CPE increases above $15 could lead to negative rating action;
Negative - Financial Stress: Initiation of debt-funded capital expenditures that are not supported by increasing revenue would be a credit weakness.
Positive - Deleveraging: Sustained traffic or non-aviation revenue growth coupled with a stable cost profile could lead to material deleveraging and positive rating action.
CREDIT UPDATE
Enplanements grew 1.1% in fiscal 2015 to 6.25 million, driven by increases in flight frequency by Southwest Airlines ('BBB'/Positive Outlook), Alaska Airlines ('BBB-'/Stable Outlook), and Air Choice One. The increase in fiscal 2015 helped offset a 3.3% decrease in fiscal 2014. While traffic in fiscal 2014 suffered largely from a harsh winter, enplanements at the airport have remained relatively flat since 2010.
The airport maintains a strong reliance on aviation-related revenue to support its debt service obligations, although management has shown its ability to increase non-aviation revenues in recent years. Aviation-related revenue decreased 4.7% in fiscal 2014 to $85.8 million, and is expected to remain flat in fiscal 2015 while non-aviation revenue increased 19.6% in fiscal 2014 to $61.8 million, driven by a 41% increase in loading-bridge rentals, as well as a one-time, $4.7 million sale of common and preferred stock holdings granted to the airport under a settlement agreement from prior years. Fitch views a potential for further increases in non-aviation revenue from the opening of a new surface parking facility which added 250 additional parking spaces to the airport. The airport also began its Reserved Parking Program, which set aside 26 parking spaces that can be reserved for a premium rate. Other forecast increases in non-aviation revenue include the opening of a new wine bar and a lease agreement for a cargo complex in development by a third party.
Management continues to prudently control its operating expenses, indicated by a growth rate of 1.0% from fiscal 2012-2014. The airport's expenses in fiscal 2014 increased by 7.4% to $83 million, driven by unforeseen winter-related costs. Fiscal 2015 expenses are projected to increase by 1.3% to $84.2 million.
Under Fitch's five-year base case forecast, which assumes marginal annual enplanement growth, escalating costs of approximately 2.5% annually, and coverage levels similar to prior years in the 1.3x range, the airport is able to reduce CPE to the low $13 range. In fiscal 2019 under the same conditions, CPE falls to the low $12 range, coinciding with a decrease in the airport's debt service obligation. Fitch's rating case assumes a near-term enplanement stress of 6%, with only slight recovery thereafter. Under this scenario, to maintain coverage in the 1.3x range, the airport would need to pass through additional costs to the airlines, resulting in CPE rising to the mid-$15 range, before decreasing to the upper $14 range in fiscal 2019.
SECURITY
The bonds are secured by net revenues generated from operation of the airport. In addition, the airport may pledge certain passenger facility charge (PFC) revenues for eligible projects.
Additional information is available on www.fitchratings.com
Applicable Criteria
Rating Criteria for Airports (pub. 13 Dec 2013)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725296
Rating Criteria for Infrastructure and Project Finance (pub. 12 Jul 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=991399
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