NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed at 'A' the rating on Burbank-Glendale-Pasadena Airport Authority's (BUR or the "airport") $108.6 million series 2012 and 2015 airport revenue bonds. The Rating Outlook on all bonds is Stable.
The 'A' rating reflects the airport's relatively small, predominantly origination/destination (O&D) traffic base within a competitive Los Angeles basin service area. Although enplanements were up in fiscal 2015, historical performance shows continual declines in enplanements since the 2008. The rating also takes into account the airport's ability to maintain stable financial performance despite decreasing enplanement volumes, which is due in part to growth in non-aviation revenue. Moderate debt levels coupled with a substantial liquidity position provide ample cushion to sustain weakness in operational performance. The rating further reflects the airport's solid financial metrics in the context of uncertainty surrounding future terminal redevelopment plans, which could result in higher leverage and/or possible depletion of cash balances.
KEY RATING DRIVERS
Volume Risk: Weaker
Volatile Traffic Base; Highly Competitive Market: Significant air service competition exists in the Los Angeles basin, most notably from LAX. As a result, BUR has experienced annual decreases in enplanements since the recession, though decreases have slowed in recent years and growth has occurred in fiscal 2015 and year-to-date 2016. Significant airline concentration risk exists with Southwest Airlines Co. ('BBB+'/Stable Outlook) representing approximately 75% 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, which was recently extended until 2019, provides strong cost recovery by fully passing through residual airport costs to airlines. However, BUR currently has minimal dependence on airline charges as evidenced by its low cost structure with fiscal 2015 airline CPE of approximately $2.29.
Infrastructure Renewal and Development: Midrange
Manageable Capital Plan: The fiscal 2016 capital plan totals $14.5 million, the majority of which is funded with passenger facility charges (PFCs) and grants. Current capital plans focus on maintenance and improvements, with several projects currently underway, including taxiway rehabilitation and land acquisition. Future plans are progressing, yet remain uncertain, with the airport authority and the City of Burbank drafting an initial agreement for the replacement of the aging terminal facility.
Debt Structure: Stronger
Conservative Debt Structure: All of BUR's debt is fully amortizing and fixed-rate. Gross debt service remains flat at the low $10 million range prior to decreasing to approximately $5.8 million in fiscal 2025 and remaining at this level through maturity in 2042. Since the Regional Intermodal Transportation Project was completed, CFC revenues and rental car company rents have been used as an offset to annual debt service.
Moderate Leverage; Exceptionally High Cash Balances: The airport has a very healthy liquidity position, primarily reflecting the $101 million Facility Development Reserve (the reserve), which is not legally encumbered, resulting in 1343 days cash on hand (DCOH) and negative leverage for fiscal 2015. Excluding the reserve, DCOH remains solid at 376 days and leverage increases to a moderate to 5.2x. Debt service coverage was strong at 2.77x in fiscal 2015, and has remained above 2x in the last three fiscal years.
Peer Analysis: Burbank's closest peers are other regional airports within the Los Angeles region, including both Long Beach ('A-'/Negative Outlook) and Ontario ('A-'/Negative Outlook) airports. Burbank demonstrates similar volatility in its traffic base but is protected by higher debt service coverage and lower CPE as compared to both peer airports. Burbank possesses more debt than Long Beach and Ontario, however, its exceptionally strong cash balances offset the associated risk.
Negative - A depletion of the airport's cash balances leading to a sharp increase in leverage;
Negative - Continued traffic declines, 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 - Continued stabilization of traffic in conjunction with more certainty surrounding additional leverage needs for the upcoming terminal redevelopment could result in positive rating action.
Increased demand for air travel bolstered fiscal 2015 enplanements to approximately two million, up 2.3% from fiscal 2014, the first year of growth since fiscal 2008. Air traffic continued to increase through April 2016, up 1.5% compared to the prior year. Increased frequency by airlines should help to stabilize previous declines in the traffic base. However, traffic may remain volatile given the strong competition from nearby airports and the susceptibility to service decisions by Southwest Airlines.
Despite the historical decreasing volume trend, cash flows have been relatively stable due to the airport's robust non-airline revenue and prudent management of expense growth. Total non-aviation revenue accounted for 62% of fiscal 2015 revenue, with parking revenue accounting for 38% of total revenue. Parking revenue has remained generally flat since 2011, with traffic declines offset by a rate increase in 2014. Total revenue increased approximately 7.4% in fiscal 2015 to $51 million. Expense growth of 5%, driven primarily by growth in contracted airport services and repair and maintenance costs, is generally a function of increased traffic. The airport's CAGR of 2.6% from 2010 - 2015 indicates prudent expense management, with strong cash balances offsetting some uncertainty surrounding future expense growth.
In June 2016, the airport signed a conceptual term sheet with the City of Burbank regarding the proposed terminal replacement project. In early July, the City of Burbank Planning Board voted in favor of the proposed replacement terminal project. The next step is consideration of the proposed project by the Burbank City Council in late July. In its preliminary phase, the timeline for the construction remains uncertain; however, management is targeting a start date of 2019, with completion in 2022. Borrowing needs will become more certain as airport management finalizes its plans. The approximately $212 million in the reserve in fiscal 2016, which includes proceeds from the sale of airport property, will help offset future borrowing needs.
Coverage (including transfers) in fiscal 2015 remained strong at 2.77x, as a result of increased tenant rent and parking revenue. Coverage without transfers also remained strong at 2.3x. CPE levels were well below Fitch's comparable peers in fiscal 2015 at $2.29, and are expected to remain in the mid-$2 level through Fitch's five-year forecast.
Fitch's base case (2016 - 2020) assumes flat average traffic growth following 2016 coupled with operating revenue increases averaging slightly less than 1%. Coverage levels (including transfers) are expected to decline slightly from a lack of traffic growth, yet remain robust in the mid-to-low 2x range. Average CPE is expected to hold at about the $2.40 level. The rating case assumes a generally flat traffic growth profile, which includes a 5% decline in 2018 followed by recovery in subsequent years. Given the offset from CFC revenue, CPE increases slightly in the rating case, averaging in the mid-$2 range. Coverage ratios including transfers average a strong 2.62x, and 2.04x in the rating case excluding transfers.
The bonds are secured by the net revenues generated at the airport.
Additional information is available on www.fitchratings.com
Rating Criteria for Airports (pub. 25 Feb 2016)
Rating Criteria for Infrastructure and Project Finance (pub. 28 Sep 2015)
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