CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings of Clark County, Nevada, Airport System (McCarran, the airport) as follows:
--$11.4 million senior lien revenue bonds at 'A+';
--$778.3 million subordinate airport revenue bonds at 'A';
--$279.3 million passenger facility charge (PFC) airport revenue bonds at 'A'.
The Rating Outlook on all of the airport's bonds is Stable. Fitch notes that the airport has approximately $4.3 billion in total long-term and short-term debt obligations outstanding - Fitch maintains ratings only for the long-term debt issued through 2008.
The ratings reflect the large, predominantly origin and destination (O&D) base of 22 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, slightly elevated leverage, and moderate risk inherent in the debt structure. Enplanement and financial performance was in line with Fitch's expectations over the past year.
KEY RATING DRIVERS
Revenue Risk - Volume: Midrange
Sizeable, Leisure-based Traffic: In fiscal year (FY) 2015, McCarran served nearly 22 million enplanements of which approximately 90% 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.
Revenue Risk - Price: Stronger
Favorable Contractual Framework: 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. As expected, airline cost per enplanement (CPE) has grown to and levelled out in the $12 range due to the costs associated with the recently completed 14-gate Terminal 3 (T3) project.
Infrastructure Development & Renewal: Stronger
Modest Capital Needs: The airport completed a major terminal-based capital program and is now operating with a manageable $507 million spending plan through 2019. Future debt borrowings are not anticipated to support currently planned capital projects.
Debt Structure: Stronger (Sr); Midrange (Sub and PFC/Sub)
Above Above-Average Risk Exposure: 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.
While leverage rose substantially in recent years to support a primarily debt -financed $3.1 billion capital program, it is still at a reasonable level as revenues have risen 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.
Fitch-rated peers include Orlando ('AA-'/Outlook Stable) and Tampa ('A+'/'A' sr/sub Outlook Positive) 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. LAS has the highest leverage, partially accounting for the rating differential.
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.
Negative: Increased level of capital spending resulting in future borrowings and weaker financial and airline cost metrics beyond current expectations.
Negative: 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 exhibit 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 2014, and as the economy and employment recover, enplanements grew 3.1% for FY2015 (year-ending June 30). This builds upon 1.7% growth for FY2014, and enplanements are up another 8.4% for the first two months of FY2016 with growth coming from both domestic as well as international traffic. Current enplanements remain 7.4% below pre-recession levels, but the previous peak also included traffic from a small connecting hub US Airways maintained at the airport prior to 2009.
CPE moderated to $11.74 in FY2014 (in line with Fitch's base case) following the FY2013 increase to above $12. This new level is markedly higher than the $8.50 range seen in FY2011 and FY2012, but expected with the debt and operating costs of the T3 project coming fully online. However, the opening of the T3 project is also helping to offset some of the increased costs by helping to generatinge positive non-airline revenue growth. In addition, airport management has taken firm action to reduce operating costs following the recession. This has similarly also 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 2019 appear manageable at $507 million and are not expected to require additional borrowing. Behind the overall existing debt and capital structure, the airport retains outstanding swap transactions with notional amounts of approximately $1.5 billion, down from $2.4 billion at FY2013. In November 2013, the airport terminated nearly $850 million in swaps by combining in-the-money and out-of-money transactions at no cost to the airport. This termination reduced counterparty exposure with Citigroup Financial Products, Inc. (IDR of 'A', Outlook Stable Outlook by Fitch) -- still 65.8% of total derivative exposure but down from 75% previously -- and resulted in a more closely aligned overall capital and derivative structure.
Overall airport debt levels are among the highest for a large-hub U.S. airport at about $206 per enplanement. Fitch's calculation of net debt to cash flow available for debt service (CFADS) is beginning to evolve down from the its historical 15x historically to the 10x range for FY2014 as the rates and charges to the carriers now reflect the debt service from the $3.9 billion capital plan coming online. This level is still slightly elevated relative to the indicative range for the 'A' category, but should approach the 8x range by 2020 in Fitch's base case by 2020. Some financial flexibility is noted given the airport's current liquidity position of approximately $380 million in unrestricted current assets as of March 31, 2015, translating to nearly 600 days cash on hand.
For FY2014, excluding rolling coverage accounts, the DSCR for senior lien bonds was 4.13x while the ratio for subordinated lien bonds was only 1.35x. These are up slightly from the year prior and above the minimum levels required through the residual rate methodology. Fitch's calculation of total airport cash flow coverage to of all of its debt obligations, excluding rolling coverage accounts, is a lower 1.26x. Debt service on the PFC bonds is just barely covered from annual PFC collections of nearly $80 million (1.05x), and a continuation of self-support would depend on a positive trend in traffic activity - 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 traffic, building off of the FY2015 actual, through 2020, to 23.2 million enplanements as well as a 3.9% average growth rate in expenses from 2014, which is essentially flat versus 2013. Senior lien DSCR ranges from 3.68x to 3.95x (excluding coverage funds) while coverage of subordinate obligations are in the 1.25x to 1.44x range. CPE peaks at $11.64 and net debt to CFADS evolves downward towards 7.9x, more moderate for a large hub airport. The rating case assumes a 10% traffic reduction phased in over two years followed by 2% to 2.5% annual recovery. DSCRs and leverage are similar to those in the base case; however, CPE rises to approximately the $13.20 level reflecting the airport's residual rate -setting approach.
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 on www.fitchratings.com
Rating Criteria for Airports (pub. 13 Dec 2013)
Rating Criteria for Infrastructure and Project Finance (pub. 28 Sep 2015)
Dodd-Frank Rating Information Disclosure Form