Fitch Affirms Clark County, NV's Sr Airport Revs at 'A+', Sub & PFCs at 'A'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the ratings of Clark County (NV)'s Airport System (McCarran or the airport) as follows:

--$0.4 million senior lien revenue bonds at 'A+';

--$793.0 million subordinate airport revenue bonds at 'A';

--$246.0 million passenger facility charge (PFC) airport revenue bonds at 'A'.

The Rating Outlook on all bonds is Stable.

KEY RATING DRIVERS

Summary: The ratings reflect the large, predominantly origin and destination (O&D) base of 23.3 million enplanements underpinned by a diverse base of air carriers and supported through a solid airline cost recovery structure. These strengths are offset to some degree by the leisure orientation of the demand profile, relatively elevated leverage, and moderate risk inherent in the debt structure. Metrics are stable given the fully residual use and lease agreement and reasonable for a large hub airport that has completed a major capital program, but remain weaker relative to peers Orlando and Tampa.

Sizeable, Leisure-based Traffic [Revenue Risk - Volume: Midrange]: McCarran served 23.3 million enplanements in fiscal year (FY) 2016 of which approximately 89% was O&D traffic. Tourism is a dominant factor in the Las Vegas economy and, on a relative basis, has been more vulnerable to fluctuations. Still, the airport directly serves a substantial number of non-stop markets and enjoys a healthy airline market share diversity anchored by a strong presence of low-cost carriers.

Favorable Contractual Framework [Revenue Risk - Price: Stronger]: The airport's airline use agreement provides for strong cost recovery terms from airlines while preserving profits from certain non-airline revenues, namely gaming and car rental fees. FY2015 airline cost per enplanement (CPE) decreased to $11.60 from $11.74 in FY2014 primarily due to the increase in enplanements after the completion of Terminal 3.

Modest Capital Needs [Infrastructure Development & Renewal: Stronger]: The airport completed a major terminal-based capital program and is now operating with a manageable $442 million spending plan through 2021. Future debt borrowings are not anticipated to support currently planned capital projects.

Above-Average Risk Exposure [Debt Structure: Stronger (Sr); Midrange (Sub and PFC/Sub)]: The airport's senior lien is fixed rate and fully amortizing. The subordinate lien utilizes a relatively high mix of variable rate debt ($1.1 billion or 25% of total debt), although the majority is synthetically fixed. In total, the airport has $1.5 billion of derivative agreements. Though swap exposure has declined, Fitch still views the debt and swap portfolio as aggressive for a U.S. airport credit, exposed to both changing debt interest costs and counterparty performance risks.

Financial Metrics: Leverage rose substantially in recent years to support a primarily debt-financed $3.1 billion capital program, but remains reasonable for a large hub airport and is supported by an increased level of revenues pursuant to the residual agreement. Debt service coverage ratios (DSCR) for senior and subordinated debt are adequate on a net revenue basis though coverage of the airport's PFC obligations is weaker on a stand-alone basis.

Peer Analysis: Fitch-rated peers include Orlando ('AA-'/'A+', Outlook Stable) and Tampa ('AA-'/'A+', Outlook Stable) airports given their large traffic bases, with some underlying exposure to leisure traffic, and financial profiles that indicate sound metrics even with elevated levels of debt. McCarran has the highest leverage, partially accounting for the rating differential.

FACT Tool: U.S. Airports

https://www.fitchratings.com/site/fitch-home/re/876822.html

RATING SENSITIVITIES

Negative:

Volatility in traffic levels due to weakness in the underlying service area or carrier service changes causing enplanements to trend well below historical averages for a sustained period.

Increased level of capital spending resulting in future borrowings and weaker financial and airline cost metrics beyond current expectations.

Increase in risks associated with the airport's capital structure as it relates to debt interest costs or counterparty performance on existing swaps and variable rate liquidity agreements.

Positive: The airport's relatively high leverage position currently constrains the rating. Initiatives to measurably reduce the airport's debt burden may have positive rating implications.

SUMMARY OF CREDIT

Las Vegas is a well-established, premier tourist destination. Traffic trends are highly influenced by the national economic climate and the area's employment base, housing market, and commercial development. The sharp declines in traffic at McCarran following the recession demonstrate the volatile nature of the Las Vegas economy (declines of 11.8% and 3.8% in FY2009 and FY2010).

However, Las Vegas broke its annual visitation record in 2015, and as the economy and employment recover, enplanements grew 6.7% for FY2016 (year-ending June 30). This builds upon 3.1% growth for FY2015, and enplanements are up another 2.7% for the first month of FY2017, with growth coming from both domestic as well as international traffic, especially from the airport's low cost carriers - Frontier and Spirit. McCarran's enplanement growth exceeds that of the U.S., which is up almost 5% for the same 12-month period ending June 30, 2016. Current enplanements at McCarran remain just 1.2% below pre-recession levels, reflecting strong gains in international passenger traffic and continued solid increases in domestic traffic.

FY2015's CPE reduction to $11.60 follows several years of decreases since its peak at $12.22 in FY2013. The variance between the FY2015 actual and budget CPE estimate of $11.92 is attributed to actual enplanements exceeding budgeted enplanements by 3.2% following the completion of the T3 project. The opening of the T3 project is also helping to offset some of the increased costs by generating positive non-airline revenue growth. FY2015 operating revenues increased 2.9% to $521.7 million from $507.1 million in FY2014. This overall increase is driven by a 3.8% increase in non-airline revenues, specifically terminal concessions as revenues from food and beverage sales increased 6.3% to $22.1 million, benefitting from new and improved concepts.

Airport management has taken firm action to reduce operating costs following the recession. This has similarly helped to keep airline costs reasonable and measures are in place to further control airline costs through 2018. The current residual agreement is in effect with the signatory carriers through June 30, 2020, having recently been extended for another three years beyond its fiscal 2017 expiration. Fitch views positively the agreement's cost recovery framework in the face of a materially higher cost base at McCarran.

Future capital spending needs through 2021 appear manageable at $442 million and are not expected to require additional borrowing. Projects are funded with grant funds, internal cash balances, and remaining proceeds from the 2014B notes. Overall, the airport has nearly $4.2 billion in total debt outstanding which is among the highest for a large-hub U.S. airport at about $196 per enplanement. Although Fitch only rates a portion of three of the airport's liens, McCarran has in total approximately $940 million of senior debt, $1.9 billion of subordinate debt, $900 million of PFC bonds, $415 million of third lien and BANs outstanding.

Fitch's calculation of net debt to cash flow available for debt service (CFADS) is beginning to evolve down from the 15x historically to the 9x range for FY2015 as the rates and charges to the carriers now reflect the debt service from the $3.9 billion capital plan. This level is still slightly elevated relative to the indicative range for the 'A' category, but should approach the 7x range in Fitch's base case by 2021. Some financial flexibility is noted given the airport's liquidity position of approximately $420 million in unrestricted cash and working capital funds translating to 650 days cash on hand for FY2015.

FY2015's senior lien DSCR, excluding rolling coverage, remained strong at 3.82x while the ratio for the subordinated lien was 1.54x, up from 1.35x the prior year. Fitch's calculation of total airport DSCR, excluding rolling coverage, is a lesser 1.36x. Given the positive enplanement growth and resultant increase to PFC collections in FY2015, coverage of the PFC/subordinate bonds rose to 1.11x from PFC revenues alone, up from 1.05x in FY2014. Continuation of self-support will depend on a sustained positive trend in traffic activity (which has been the case for FY2016); otherwise, the PFC debt will require the use of excess airport general revenues, leading to rising airline costs.

Fitch's base case and rating case forecasts indicate satisfactory coverage levels although leverage metrics and CPE levels remain somewhat elevated. The base case assumes a 1.2% average growth rate in enplanements through 2021, as well as a 1.5% average operating revenue growth and a 3.9% average growth rate in expenses. Senior lien DSCR remains relatively constant at around 4.20x (excluding coverage funds) while coverage of subordinate obligations is in the 1.35x range. CPE falls to and remains in the $11 range. Net debt to CFADS evolves downward to 7x by 2021, which is more moderate for a large hub airport. Fitch's rating case assumes a 6.0% traffic reduction in 2017, followed by a three year recovery period of 2% annual growth and 1.2% growth in 2021. DSCRs and leverage are similar to those in the base case given the airport's fully residual use and lease agreement; however, CPE rises to approximately $12, reflecting weaker non-airline revenues associated with a lower enplanement base.

SECURITY

Senior lien bonds are secured by a first lien on net revenues generated from the airport system, the principal asset of which is McCarran. Subordinate lien debt is secured by net revenues on a subordinated basis to the senior debt and by available PFC collections. The PFC airport system revenue bonds are secured primarily by pledged portions of PFC revenues as well as a backup subordinate net revenue pledge. All liens are open to additional leveraging subject to their respective additional bonds tests.

Additional information is available at '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

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Fitch Ratings, Inc.
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or
Secondary Analyst
Seth Lehman
Senior Director
+1-212-908-0755
or
Committee Chairperson
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+1-312-606-2339
or
Media Relations
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Contacts

Fitch Ratings
Primary Analyst
Jeffrey Lack
Director
+1-312-368-3171
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Seth Lehman
Senior Director
+1-212-908-0755
or
Committee Chairperson
Greg Remec
Senior Director
+1-312-606-2339
or
Media Relations
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com