Fitch Affirms Tucson Airport Authority, AZ's Sub Airport Revs at 'A'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has affirmed Tucson Airport Authority, Arizona's (the authority) $50.6 million of outstanding subordinate lien airport revenue bonds at 'A'. The Rating Outlook is Stable.

The 'A' rating reflects Tucson International Airport's (TUS, or the airport) very strong financial metrics in terms of coverage and leverage, affordable capital program, and revenue and cost recovery protections that benefit from the fully residual airline use and lease agreement (AUL). These strengths are somewhat offset by the airport's recent contraction in its enplanement base and competitive pressures from Phoenix Sky Harbor International Airport (PHX). Financial metrics are strong with robust cash balances, a high fiscal 2015 debt service coverage ratio (DSCR) of 4.32x (excluding airline transfers), and unrestricted cash in excess of gross outstanding debt. The airport's closest peers are other small airports, such as Reno, Nevada and El Paso, Texas. Compared to its peers TUS has stronger financial metrics but a somewhat higher cost per enplanement (CPE).

KEY RATING DRIVERS

Revenue Risk- Volume: Midrange
Small O&D Hub with Diversified Carrier Base: The airport's carrier base is moderately diversified with an origination and destination (O&D) traffic base equal to 98% of enplanements, providing a degree of stability compared to airports with higher connecting traffic loads. These strengths are balanced by TUS's small enplanement base of 1.6 million that contracted more than 25% from its fiscal 2008 peak levels and continued declining into fiscal 2015. Also, TUS operates in a competitive environment, with PHX serving more markets with greater frequencies.

Revenue Risk- Price: Stronger
Solid Cost Recovery Framework: The airport operates under a residual AUL, recently extended two years through fiscal 2018, which has allowed the airport to fully recovery operating costs, fund capital expenditures with surplus cash flows, and maintain reasonable CPE levels despite recent years' escalation in excess of inflation.

Infrastructure Development & Renewal: Stronger
Manageable Capital Needs: TUS's facilities are modern and its five-year capital improvement plan is affordably sized to $104 million with the vast majority of funding sources derived from federal, state, or restricted local sources. Beyond the five-year horizon, the authority anticipates more sizeable capital needs which nonetheless are expected to be mostly funded with grants, passenger facility charges (PFCs), or debt that would be fully paid with PFCs.

Conservative Debt Structure: Debt Structure - Midrange
The airport's senior bonds matured in fiscal 2013; however, additional senior-lien borrowings are still permitted under the bond documents. The outstanding subordinate debt is all fixed-rate, fully amortizes, and matures in fiscal 2031. Annual debt service is flat through fiscal 2027, steps down significantly in fiscal 2028, and remains flat through maturity. The debt service reserve fund (DSRF) for the series 2006 debt is fully cash funded, while the series 2001 DSRF is met with a surety.

Strong Financial, Leverage Metrics: The airport's financial position is very strong, with 1,662 days cash on hand (DCOH) in fiscal 2015 and debt service coverage in excess of 4.0x, excluding airline transfers. Leverage is negative, indicating that available cash levels exceed outstanding debt.

Peers: Among its small airport peers at the 'A' rating level, such as Reno (NV) and El Paso, TUS exhibits stronger liquidity and debt service coverage, and lower single-carrier concentration. These strengths are somewhat offset by TUS's higher CPE.

RATING SENSITIVITIES

Negative:
--A substantial increase in CPE and corresponding decline in regional competiveness, resulting in the loss of carrier service.
--Severe financial deterioration, whether caused by a significant loss of enplanements, excessive leveraging, or other events.
--A further substantial decline in enplanement levels or carrier diversification.

Positive:
--The airport's small enplanement base and strong regional competition will likely prevent the rating from migrating upwards.

SUMMARY OF CREDIT

Management estimates fiscal 2016 enplanements increased 1.6% in fiscal 2016 to 1.62 million, in line with management's prior expectations. The modest enplanement gain caps five consecutive years of losses caused by airline supply reductions, the impact of the recession on the Tucson economy, strategic moves by airlines to consolidate operations at larger airports, and competition from PHX. Management believes these factors have largely run their course, and is cautiously optimistic that announced service additions and an improving local economy will result in modest enplanement increases over the short term.

Audited total operating revenues rose in fiscal 2015 (ended September 30) by 1.5%, reflecting increased terminal rental and security fees. The airport's net revenues were also boosted by an 11% drop in expenditures due to higher than budgeted staff vacancies, resulting in a DSCR increase in fiscal 2015 to 4.32x (3.57x excluding payments from an airline fund reflecting prior year operating surpluses) from 2.84x (2.81x) the year prior. DSCR is estimated by management to drop to a still strong 3.2x in fiscal 2017, with a related CPE decline to $7.96 from $8.64 the year prior.

Audited fiscal year end 2015 cash levels increased to a very high $129 million (1,662 DCOH) from $119 million (1,570 DCOH) the year prior. Management targets cash levels of at least 365 DCOH, which Fitch views as prudent.

Fitch's base case scenario, which uses audited fiscal 2015 data and ongoing 1% enplanement growth, results in debt service coverage of 3.58x (the average of the past two audited years) in all years and CPE that drops to $7.57 in fiscal 2016 and escalates gradually thereafter to $8.36 in fiscal 2020. Fitch's rating case assumes that a typical recessionary environment results in 7.5% enplanement losses in both fiscal years 2016 and 2017, followed by a recovery with 3% growth through the end of the forecast in fiscal 2020. The scenario also assumes management reduces costs, as it had in the prior recession, by 5% in fiscal years 2016 and 2017, followed by growth of 3.5% annually through fiscal 2020. Due to the residual nature of the airport's AUL, the DSCR is held steady at 3.58x while CPE rises to a peak of $9.57 in fiscal 2017 from $8.64 in fiscal 2015, declining thereafter.

SECURITY

The bonds are secured by a pledge of PFCs and a subordinate pledge of general airport net revenues. The bonds are additionally secured by debt service reserve funds.

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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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013021
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https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings
Primary Analyst
Scott Monroe
Director
+1-415-732-5618
Fitch Ratings, Inc.
650 California Street
San Francisco, CA 94108
or
Secondary Analyst
Jeffrey Lack
Director
+1-312-368-3171
or
Committee Chairperson
Seth Lehman
Senior Director
+1-212-908-0755
or
Media Relations
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sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Scott Monroe
Director
+1-415-732-5618
Fitch Ratings, Inc.
650 California Street
San Francisco, CA 94108
or
Secondary Analyst
Jeffrey Lack
Director
+1-312-368-3171
or
Committee Chairperson
Seth Lehman
Senior Director
+1-212-908-0755
or
Media Relations
Sandro Scenga, New York, +1 212-908-0278
sandro.scenga@fitchratings.com