SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed Spokane County, Washington's (the county) $6.14 million general airport revenue bonds (GARBs) series 2008 at 'A+'. The GARBs are secured by net revenues of Spokane International Airport (the airport). The Rating Outlook is Stable.
The rating reflects the airport's monopolistic position over an almost entirely (98%) original and destination (O&D) traffic base with low to moderate carrier diversification, and a fully residual airline use and lease agreement (AUL). Cost per enplanement (CPE) is consistently competitive at $5.44, and GARB leverage is historically low at -2.54x, with debt service cover ratio (DSCR) strong at 3.23x in 2015. These strengths are partially offset by a small enplanement base, a somewhat weak regional economy, and the expectation of future debt issuances. The airport's peers include Boise and Louisville (both rated 'A+'/Outlook Stable), which all share similar enplanement bases, carrier concentration, and financial metrics, though Spokane is noted to have much lower leverage.
KEY RATING DRIVERS
Revenue Risk- Volume: Midrange
Monopolistic but Limited Enplanement
Base: The airport benefits from low to moderate carrier concentration
and a monopolistic position over an enplanement base that is almost
entirely composed of O&D traffic (98%). However, the enplanement base is
small at about 1.56 million and the region's somewhat weak economic
profile renders the airport susceptible to heightened demand risk.
Revenue Risk- Price: Stronger
Residual AUL with Low CPE: Fitch
views positively the airport's low CPE and fully residual AUL, which
expires in 2017. Fitch's stronger assessment of the airport's price risk
is contingent on continued maintenance of an AUL that provides a
framework for recovering operational and capital costs that is at least
moderately insulated from underlying traffic performance.
Infrastructure Renewal and Development: Midrange
Sizeable CIP, Debt
Funding Yet to be Finalized: The airport's 5-year capital improvement
plan (CIP) is estimated at $171 million and is mitigated by substantial
use of pay-as-you-go resources, grants, and passenger facility charges
(PFCs). Management estimates roughly $93 million of the CIP to be paid
from debt, but the exact amounts and terms of the issuance, as well as
the capital plan, is tentative and subject to change.
Debt Structure: Stronger
Sound Debt Structure: All outstanding
GARBs are fixed rate, fully amortizing by 2018, and have cash-funded
debt service reserve funds sized to the maximum allowed by the IRS.
Strong Financial Metrics: The airport benefits from a solid financial profile, exhibited by high unrestricted cash of $27.9 million (476 days cash on hand) and a strong 2015 debt service coverage ratio (DSCR) of 3.23x. Fitch positively views the airport's negative leverage, indicating that available cash exceeds outstanding debt.
Peers: The airport's closest peers include Boise and Louisville (both rated 'A+'/Outlook Stable). The airports share similar enplanement bases, carrier concentration, debt structures, and overall sound financial metrics. Although Spokane's leverage is lower, the metric could change over the intermediate term as the airport solidifies the scope of its debt issuance plans.
RATING SENSITIVITIES
Negative: Material weakening of the airport's cost recovery framework should the airport's AUL be materially and negatively modified from its current version.
Negative: A larger than expected CIP and debt issuance could lead to negative rating action, should it result in weakening of the airport's financial metrics; DSCR below 1.3x, CPE well above the airport's sustainable economic level, or continued substantial increase in leverage.
Positive: The airport's small enplanement base and below average regional economic characteristics restrict the rating from higher levels.
SUMMARY OF CREDIT
Enplanements increased in 2015 by 4.9% with year to date (YTD) 2016 traffic 2.4% higher than the prior period. Recent enplanement gains mark a turnaround compared with the six-year period ended 2013 over which time enplanements fell by a cumulative 16% in the wake of the housing-led recession. Management expects enplanements will continue to rise modestly between 1.5% and 5% in the coming years- an outlook Fitch views as reasonable based on expectations of further economic expansion, increasing carrier capacity, and a rebound in business travel.
The airport provides a cost-competitive CPE of just $5.44, which supports its significant low cost carrier base. CPE would be somewhat lower at $5.23 if not for the addition of a fuel facility cost center that was added in 2015. Moving forward, CPE is not expected to rise significantly, despite an anticipated GARB issuance estimated at about $20 million in 2018, and a $73 million PFC bond issuance in 2019. However, it is difficult to quantify these effects as management is uncertain of the exact timing or scope of the potential debt issuances. Fitch notes that the amount of PFC bonds may be lower, as those CIP projects will be supplemented by PFC pay-as-you-go money. Fitch would view negatively a substantial and sustained CPE hike, leading to a demonstrable loss of competitiveness.
The airport's financial operations were strong in 2015 as expenditures and revenues grew at 3.3% and 9.1%, respectively. The debt service coverage ratio (DSCR) equalled 3.23x compared to 2014's 2.58x, and liquidity remained robust at 476 days cash on hand. Six month year-to-date operating revenues are up 6.9%, with expenditure up 8.1% due to previously deferred maintenance costs. Management expects operating expenses to stabilize after 2016.
Although the rated debt matures in 2018, Fitch's base case forecast extends through 2020 due to potential new debt in 2018, and assumes a modest 1.5% annual enplanement growth. Expenditures are assumed to grow by a reasonable 3% annually, as costs stabilize. Fitch assumed a $20 million GARB issuance in 2018 as well as a $73 million issuance of standalone PFC-backed bonds. Reflective of the residual nature of the AUL, the DSCR is held at a steady 2.55x, based on historical averages. Under these assumptions, CPE reaches a maximum of $5.43 in 2018 and decreases thereafter. GARB leverage hits a max of -1.26x in 2018, and total leverage including GARBs, the subordinate lien and the PFC bonds reaches a max of 5.71x in 2019, before decreasing the next year.
Fitch's rating case scenario is the same as the base case for 2016, but includes a hypothetical recessionary scenario that reduces enplanements by 10% in 2017, followed by 2% recovery thereafter. Expenditures are additionally stressed, growing 4.5% annually after 2016. DSCR is held steady as it was in the base case. Under the rating case, CPE grows to $8.91 in 2018, while GARB leverage remains the same as the base case. Total leverage will reach 6.11x in 2019, but falls thereafter.
The airport is the second largest in Washington State (general obligation bonds rated 'AA+'/Outlook Stable), serving eastern Washington and northern Idaho. The airport is located six miles southwest of downtown Spokane and is recognized by the FAA as a small hub. The airport is governed by the Spokane Airport Board, whose members are appointed by Spokane County and the City of Spokane.
Additional information is available on www.fitchratings.com
Applicable Criteria
Rating Criteria for Airports (pub. 25 Feb 2016)
https://www.fitchratings.com/site/re/877676
Rating
Criteria for Infrastructure and Project Finance (pub. 08 Jul 2016)
https://www.fitchratings.com/site/re/882594
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1010880
Solicitation
Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1010880
Endorsement
Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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