NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns a 'AA' rating to the Department of Airports of the City of Los Angeles' (the department) $338 million senior revenue bonds and an 'AA-' rating to the up to $175 million subordinate revenue bonds issued on behalf of the Los Angeles International Airport (LAX, or the airport). Fitch also affirms its 'AA' rating on $3.05 billion senior revenue bonds, and its 'AA-' rating on the $822.6 million subordinate revenue bonds, as well as its underlying 'AA-' rating on bank bonds corresponding to $500 million of authorized subordinate revenue commercial paper notes subseries A1-A4, B1-B4, C1-C4, and D1-D4. The Rating Outlook for all bonds is Stable.
The ratings reflect 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. The scale of the capital program is significant and additional borrowings will be required to provide a portion of the funding. Concerns regarding the program 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 Resilient Traffic Base: Extremely strong market economics are 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 as well as diversity of service and the geographic location of LAX allow the airport to capture over 70% of the domestic market and almost all of the international market.
REVENUE RISK - PRICE: STRONGER
Sound Rate Agreements: The airport began implementing new-carrier rate agreements in 2013, which is resulting in substantive progress towards greater equalization of its rates and charges using compensatory methodologies. These agreements with terminal tenants will also enhance the long-term control of most of the terminal spaces. Airline cost levels at $13.50 per enplanement for fiscal 2014 remain moderate for an international gateway airport while also providing financial flexibility.
INFRASTRUCTURE DEVELOPMENT/RENEWAL: MIDRANGE
Continued Progression of Airport Capital Program: The airport is undertaking an ambitious $8.5 billion capital program (ending in 2020) with a focus on a rebuilt international terminal as well as additional airfield and terminal projects. LAX has a history of successful project delivery; 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 (SENIOR), MIDRANGE (SUBORDINATE)
Conservative Debt Structure: All of the existing senior and subordinated long-term airport debt is in fixed rate mode, thus minimizing the risk for fluctuations in debt interest costs. Covenants for rates and additional borrowings are relatively standard for the sector.
Strong Financial Metrics: Current financial metrics such as debt service coverage (2.24x of senior and subordinate debt) and liquidity remain solid. Leverage metrics are moderate at 6x on a net debt-to-cashflow available for debt service basis while debt to enplanements is competitive at $113. As the full costs of the capital program, including an additional $2.6 billion in future debt borrowings, are phased-in over the next five years, coverage and leverage ratios are projected to remain close to historically strong levels but could be pressured in the event the airport underperforms on traffic and revenues.
Peers: Comparable highly rated airport sector peers include Massachusetts-Boston and San Francisco airports. Both are international gateway, large hub facilities, have strong revenue risk profiles supported by large enplanement levels and competitive airline costs coupled with strong financial metrics.
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's 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.
The airport intends to issue approximately $388 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 2045. Separately, the airport may issue approximately $175 million in subordinate revenue bonds for the purposes of advance refunding a portion of the outstanding subordinate revenue bonds series 2008C for debt service savings.
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, United Airlines, accounted for just 19.1% of the airport's total enplanements in fiscal 2014. This level of diversity is a particular strength of the credit. FY 2014 traffic levels, at 34.3 million enplanements, continued to climb 5.6% which is a rate well above most U.S. airports. Traffic growth is continuing at a very solid level of 6.4% through the first six months of fiscal 2015, led by growth in both domestic and international traffic.
A recently adopted 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 up to $125 million per year. To date, $25.4 million has been deposited and over time this account will enhance LAX's ability to support internal funding of future maintenance costs.
LAX's capital program is significant in size even for a large-hub airport, having a current estimate of $8.5 billion. Over $3 billion of the overall program has been completed and an additional $2.7 billion is under construction. The largest project includes approximately $2.1 billion for the Bradley international terminal facility. The remaining CIP comprises other terminal and airfield projects, including a new central utility plant and the first phase of a midfield satellite concourse that will be constructed over the next five years. Capital expenditures for the entire program, which runs through 2020, are expected to be funded approximately 60% with debt (including up to $2.6 billion of future senior and subordinate bonds) supplemented by LAX funds, grants, and passenger facility charge (PFC) pay-go receipts. Fitch notes that the 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. Fitch also notes that the airport's master plan has the potential for additional projects that include the relocation of its north runway as well as new transportation centers. While final approvals and timing for several of these master plan projects are not yet established, there could be a need for substantial future borrowings that could affect the financial profile.
LAX's recent financial performance has been largely stable with coverage of total debt service at 3.28x based on indenture-derived fiscal 2014 results. Fitch's calculation of coverage, treating PFC receipts as revenue rather than debt service offsets, generated a still healthy 2.24x. Both passenger growth and solid increases in non-aeronautical operating revenues have allowed for financial performance to remain at very high levels over the last several years even with the growing debt burden 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 2014 and should remain in that range over the next three to 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 $576.4 million that are also supplemented by a high PFC balance of $654.7 million and a maintenance reserve of approximately $163.7 million. Airline CPE levels are projected to rise from fiscal 2014 levels of $13.50 to over $20 by 2018. Assuming enplanement growth at about 2.1% compounded through 2020, total coverage levels from net revenues should remain at or above 1.7x when treating PFC receipts as revenue, in lieu of debt service offsets.
The senior revenue bonds are secured by the net revenues of the Los Angeles International Airport. The subordinate revenue bonds and underlying bank 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 Airports (Dec. 13, 2013).
Applicable Criteria and Related Research:
Rating Criteria for Airports