Fitch Rates LAX (CA) Airport Sr Rev Bonds 'AA'; Affirms Sr and Sub Rtgs; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'AA' rating to the Department of Airports of the City of Los Angeles' (the department) $317 million senior revenue bonds series 2015D and 2015E issued on behalf of the Los Angeles International Airport (LAX, or the airport). Fitch has also affirmed its 'AA' rating on $3.31 billion parity senior revenue bonds, and its 'AA-' rating on LAX's$797.3 million subordinate revenue bonds. The Rating Outlook for all bonds is Stable.

The ratings reflect LAX's superior credit characteristics, including a strong underlying air trade service area, significant operational activity supported by a diverse mix of domestic and foreign-flag carriers, favorable rate agreements with airlines, and very strong financial metrics. However, the scale of the capital program is significant and additional borrowings will be required to provide portions of the funding. These concerns are well mitigated by the airport's strong and resilient market position in the Los Angeles region and favorable fiscal position.

KEY RATING DRIVERS

Revenue Risk - Volume: Stronger

Large Gateway Airport with Expanding Traffic Base: LAX exhibits extremely strong market economics, reflected in its status as the nation's largest origination and destination (O&D) airport as well as one of the largest (#3 ranking) international gateway airports. The airport benefits from a strong and well-developed diversity of domestic and foreign-flag air carriers. While there are alternate airports within the Los Angeles metropolitan area, growth constraints at competing facilities allow LAX to capture over 70% of the domestic market and almost the entire international market.

Revenue Risk - Price: Stronger

Sound Rate Agreements: The airport's current carrier rate agreements, which went into effect in 2013, have resulted in substantive progress towards greater equalization of its rates and charges using compensatory methodologies. These agreements with terminal tenants will also enhance the department's long-term control of most of the terminal spaces. Airline cost levels, estimated at $14.19 per enplanement for fiscal 2015, remain moderate for an international gateway airport while similarly providing financial flexibility.

Infrastructure Development and Renewal Risk: Midrange

LARGE-SCALE CAPITAL PROGRAM: The airport is undertaking an ambitious $5.8 billion capital program (ending in 2021) with the focus on a new midfield concourse as well as additional airfield and terminal improvement projects. Delivery on projects completed has been successful; however, the capex plan is expected to result in a higher leverage position in the near term and ultimately lead to rising cost per enplanement (CPE) levels.

Debt Structure: Stronger

CONSERVATIVE CAPITAL STRUCTURE: All of the existing senior and subordinated long-term airport debt is in fixed-rate mode, thus minimizing the risk of fluctuations in debt interest costs. Covenants for rates and additional borrowings are relatively standard for the sector.

STABLE FINANCIAL METRICS

Current financial metrics, such as debt service coverage (2x senior and subordinate debt) and liquidity, remain solid. Leverage metrics are moderate at slightly under 6x on a net debt-to-cashflow available for debt service (CFADS) basis while debt-to-enplanements is competitive at $114. As the full costs of the capital program, including an additional $2.3 billion in future debt borrowings, are phased-in over the next five years, coverage and leverage ratios are projected to remain close to their historically strong levels but could be pressured in the event the airport underperforms on traffic and revenues.

PEER ANALYSIS

Comparable Fitch-rated peers include Massachusetts-Boston ('AA'/Stable Outlook) and San Francisco ('A+'/Stable Outlook) airports. Both are international gateway, large-hub facilities with strong revenue risk profiles supported by large enplanement levels and competitive airline costs coupled with strong financial metrics.

RATING SENSITIVITIES

Negative: Given the commitment to the extensive capital program currently underway, a material downward trend in airport traffic as a result of economic factors or general adverse conditions in the aviation sector could pressure the airport ratings.

Negative: Trends that indicate weaker than expected financial metrics including aggregate debt service coverage, leverage, and liquidity.

Positive: Unlikely in the near term in light of the size of the capital program underway with additional borrowings expected.

TRANSACTION SUMMARY

The airport intends to issue approximately $317 million in senior revenue bonds for the purposes of funding various portions of its ongoing capital programs. The bonds are expected to be issued in fixed-rate mode with a final maturity in 2046.

LAX continues to demonstrate industry-leading traffic and financial performance. As expected with an international passenger and cargo gateway airport, LAX is served by a diverse mix of nearly 100 domestic, foreign-flag and all-cargo carriers. The largest passenger carrier, American Airlines, accounted for just 18.8% of the airport's total enplanements in fiscal 2015. This level of diversity is viewed by Fitch as a particular strength of the credit. FY 2015 traffic levels, at 36.1 million enplanements, continued to climb 5.2%, a rate well above most U.S. airports. Traffic growth is supported by new domestic and international services.

A current terminal rate-setting framework for carriers serving at LAX began its implementation in phases at the start of calendar year 2013. The key revision is the establishment of an equalized and uniform rate schedule using a commercial compensatory methodology which will measurably enhance the recovery of most of LAX's operating and capital financing costs at the terminals (other than American's preferential-use Terminal 4 facility). Further, those carriers entering into 10-year rate agreements under the revised terminal tariff framework will be entitled to discounted terminal rates over an initial period of years while also receiving revenue-sharing credits generated from terminal concessions. The airport will be able to begin funding a new Terminal Renewal and Improvement Fund (TRIF) with deposits of up to $125 million per year.

LAX's capital program is significant in size, even for a large-hub airport, having a current estimate of $5.8 billion. The largest project includes a new 11-gate midfield satellite concourse at a cost of approximately $1.4 billion. The remaining CIP comprises other terminal and airfield projects. Capital expenditures for the entire program, which runs through 2021, are expected to be funded at nearly 60% with debt (including up to $2.3 billion of future senior and subordinate bonds), supplemented by LAX funds, grants, and passenger facility charge (PFC) pay-go receipts.

Longer-term projects, including a new car rental center and automated people-mover system may add an additional $4.5 billion to $5.5 billion in costs, although the plan of finance is not developed at this time. Fitch notes that management has demonstrated a solid history of executing on its capital plan while controlling costs at budgeted levels. To the extent the program costs migrate higher, and are unable to be passed on to carriers or necessitate more leverage, the rating could be pressured.

LAX's recent financial performance has been largely stable with coverage of total debt service at 2.54x based on indenture-derived fiscal 2015 preliminary results. Fitch's calculation of coverage, treating PFC receipts as revenue rather than debt service offsets, generated a still healthy 2.0x. Both passenger growth and solid increases in non-aeronautical operating revenues have allowed financial performance to remain very high over the last several years even with the debt burden growing to support the capital plans underway.

LAX leverage metrics have been somewhat elevated for the 'AA' category on a historical basis; however, Fitch notes that the net debt-to-CFADS is evolving lower to the 6x range for fiscal 2015 and should remain in that range over the next five years. In Fitch's view, a combination of the new rate-setting methodology, strong cash balances, as well as growth in airport concession revenues under recently revised agreements should collectively help stabilize the airport's fiscal and leverage position in the coming years.

LAX's liquidity position is viewed as strong taking into consideration the substantial unrestricted revenue fund balances of nearly $555.2 million that are also supplemented by a high PFC balance of $507.7 million and a maintenance reserve of approximately $173.8 million.

The latest sponsor traffic and financial forecasts assume the full implementation of the capital program. Fitch reviewed the underlying assumptions, including moderate traffic growth that averages 1.8% through 2021 coupled with revenues and expenses growing at 7.4% and 6.6%, respectively, to be applied as the Fitch base case. Under this scenario, CPE is expected to be around $24 in 2021 as debt costs are incorporated into the airline rate base. However, airline costs at these levels would not be a credit concern. Leverage is also expected to remain moderate at the 6x level through the forecast period.

Considering the history of some traffic losses in past recessions, Fitch's rating case assumes a flat average traffic growth rate through 2021 by assuming a 5% reduction in 2017 followed by modest recovery. The results indicate that CPE levels will peak at slightly over $26 while total debt service coverage levels remain at 1.7x or higher when treating PFC receipts as revenue, in lieu of debt service offsets. Airport leverage is not expected to be materially different than the Fitch base case.

The recently announced settlement agreement letter of intent between the cities of Los Angeles and Ontario, which is intended to transfer the ownership and control of the Ontario International Airport (ONT) from Los Angeles back to the city of Ontario, through the Ontario International Airport Authority (OIAA), should resolve a longstanding dispute and ongoing litigation over ONT's governance and operations. At the current time, Fitch does not expect this action to have a material impact on LAX's operations or finances, nor should the change in ownership create any significant shifts in its traffic profile. Given its location, the degree of regional competition, and the underlying economy of its air trade service area, bringing in more airline services will be an ongoing challenge for ONT. Ontario is a reliever airport for the Los Angeles metropolitan region, serving a traffic base primarily in the Inland Empire region.

SECURITY:

The senior revenue bonds are secured by the net revenues of the Los Angeles International Airport. The subordinate revenue bonds are secured by subordinate net revenues. The airport expects to utilize both lien levels to address future capital developments.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (Sept. 28, 2015);

--'Rating Criteria for Airports' (Dec. 12, 2013).

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. 28 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=870967

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Contacts

Fitch Ratings
Primary Analyst:
Seth Lehman, +1-212-908-0755
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Jeffrey Lack, +1-312-368-3171
Director
or
Committee Chairperson:
Yvette Dennis, +1-212-908-0668
Senior Director
or
Media Relations:
Sandro Scenga, +1-212-908-0278
New York
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Seth Lehman, +1-212-908-0755
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Jeffrey Lack, +1-312-368-3171
Director
or
Committee Chairperson:
Yvette Dennis, +1-212-908-0668
Senior Director
or
Media Relations:
Sandro Scenga, +1-212-908-0278
New York
sandro.scenga@fitchratings.com