Fitch Rates Burbank's Airport Rev Bonds 'A'; Outlook Stable

CHICAGO--()--Fitch Ratings has assigned an 'A' rating to Burbank-Glendale-Pasadena Airport Authority's (BUR) $35.8 million series 2015A and 2015B airport refunding revenue bonds. Fitch has also affirmed BUR's $131.9 million outstanding airport revenue bonds at 'A'. The Rating Outlook on all bonds is Stable.

RATING RATIONALE

The rating reflects the airport's relatively small, predominantly origination/destination (O&D) traffic base within a competitive Los Angeles basin service area. The enplanement base has shown retrenchment even in recent years following the recession, while financial operations are significantly supported by non-aviation revenue. Moderate debt levels coupled with a sound liquidity position provide ample cushion to sustain some weakness in operational performance. Additionally, the airport's very low cost per enplanement (CPE) under the current residual airline use and lease agreement (AUL) also serves as an underlying strength.

KEY RATING DRIVERS

Volume Risk: Weaker

Volatile Traffic Base Tied to a Highly Competitive Market: BUR had 1.95 million enplanements in fiscal year (FY) 2014 (ending June 30), a decline of 32.8% compared to the peak in FY 2008. The airport's traffic declined another 5.5% in FY2014 while nearby LAX continues to see robust growth. Significant airline concentration risk exists, with Southwest Airlines Co. (rated 'BBB'; Positive Outlook by Fitch) representing 74.5% of enplanements. Southwest continues to invest and add service at LAX, exacerbating the carrier profile risk.

Price Risk: Stronger

Strong Cost Recovery Framework: The airport's residual use and lease agreement, under which residual airport costs are fully passed through to airlines, was recently extended until 2019. Despite the strong pass through of all costs, BUR currently has minimal dependence on airline charges, reflecting its low cost structure, resulting in an airline cost per enplanement (CPE) of approximately $2.37 in FY 2014.

Infrastructure Renewal and Development: Midrange

Manageable Capital Plan: The RITC structure, which includes the Consolidated Rental Car Facility (CRCF) was completed in 2014, demonstrating management's ability for project delivery. Now, several other ancillary projects are being worked on, including the replacement of airfield lighting, which can be funded without debt. While the airport terminal is aging and lacks modern upgrades, a replacement project is still not anticipated to begin for several years.

Debt Structure: Stronger

Conservative Debt Structure: All of BUR's debt is fully amortizing and fixed rate. After the refunding, gross debt service escalates to maximum annual debt service (MADS) of $10.6 million in FY 2016 and remains flat until FY 2026 when it drops to $5.8 million. Since RITC project was completed, CFC revenues and rental car company rents have been used as an offset to annual debt service.

Moderate Leverage and Exceptionally High Cash Balances: The airport has a very healthy liquidity position, primarily reflecting the $101 million Facility Development Reserve, which is not legally encumbered, resulting in 1374 days cash on hand and negative leverage. When excluding this reserve, days cash on hand would drop to a still healthy 388 level and leverage jumps to 8.1 times (x).

Peer Analysis: Burbank's closest peers are other secondary airports within the Los Angeles region, include both Long Beach and Ontario airports. Burbank demonstrates stress to its traffic base but protected by its higher debt service coverage ratio (DSCR) and lower CPE as compared to both peer airports. Burbank possesses more debt than Long Beach and Ontario but its strong cash balances offset associated risk.

RATING SENSITIVITIES

Negative - A depletion of the airport's cash balances leading to a sharp increase in leverage.

Negative - Continued traffic losses, with an emphasis on Southwest's service decisions.

Negative - Downward coverage trends due to either continued falls in general traffic, unsuccessful cost controls or inability to maintain stable operating revenues.

Positive - Given the recent enplanement declines, upward rating movement is unlikely at this time.

TRANSACTION SUMMARY

The series 2015 bonds will refund all outstanding series 2005A and 2005B bonds ($3.175 million and $41.725 million, respectively). The transaction will create annual debt service savings of $625,000 assuming the DSRF funded with 2015 bond proceeds. BUR is also considering a reserve fund surety (instead of the current cash funded reserve) which would reduce bond size by $4 million and increase annual savings to $835,000.

The airport saw declines in enplanements for the sixth straight year in FY 2014, with enplanements down 5.5% to 1.95 million. Some growth has returned as seen in the 2% increase in enplanements for the first seven months of FY 2015. Competition from other airports continues to impede any growth, although the airport continues to try and grow enplanements through its relationship with Southwest Airlines.

Despite heavy volatility in enplanements, cash flows have been relatively stable due to the airport's prudent management of expense growth at a compounded annual rate of 2.8% since FY 2009, and also as a result of robust non-airline revenues. FY 2014 DSCR without transfers increased to 2.06x from 1.97x in FY 2013 primarily due to increased parking revenues (40% of total revenue). Over the next several years, DSCR is expected to average above 1.5x. CPE is expected to remain in the middle $2 range, which is well below comparable peers.

The airport is located three miles northwest of downtown Burbank, serving the northern Los Angeles area, including Burbank, Glendale, and Pasadena. Since 1978, day-to-day airport management has been handled by TBI Airport Management, Inc, and the airport director has been at the airport since 1988.

SECURITY

The bonds are secured by the net revenues generated at the airport.

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

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (July 12, 2012);

--'Rating Criteria for Airports' (Dec. 13, 2013).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Rating Criteria for Airports

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725296

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=981320

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Contacts

Fitch Ratings
Primary Analyst:
Daniel Adelman, +1-212-368-2082
Associate Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Seth Lehman, +1-212-908-0755
Senior Director
or
Committee Chairperson:
Yvette Dennis, +1-212-908-0668
Senior Director
or
Media Relations:
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Daniel Adelman, +1-212-368-2082
Associate Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Seth Lehman, +1-212-908-0755
Senior Director
or
Committee Chairperson:
Yvette Dennis, +1-212-908-0668
Senior Director
or
Media Relations:
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com