Dépêches

Fitch Rates LAX Airport (CA) Sr. Revs 'AA'; Sub Revs 'AA-'; Outlook to Negative

Dépèche transmise le 26 octobre 2009 par Business Wire

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned the following ratings to the Department of Airports of the City of Los Angeles (the Dept.), Los Angeles International Airport's (LAX, or the airport):

--$285 million senior revenue bonds series 2009A 'AA';

--Up to $609.3 million senior refunding revenue bonds series 2009B (to be sized and sold subject to tender) 'AA';

--$241.9 million subordinate revenue bonds series 2009C (federally taxable - Issuer Subsidy - Build America Bonds) 'AA-';

--$107.4 million subordinate revenue bonds series 2009D 'AA-';

--$40.6 million subordinate refunding revenue bonds series 2009E 'AA-'.

Fitch also affirms the Dept.'s outstanding $713 million senior revenue bonds at 'AA' and outstanding $240.2 million subordinate revenue bonds at 'AA-'.

Fitch has revised the Rating Outlook for all bonds to Negative from Stable.

The series 2009A-E bonds are scheduled for negotiated sale during the week of Nov. 16, 2009. Proceeds of the series 2009A, 2009C, and 2009D bonds will be used to pay certain capital program costs and refund certain subordinate commercial paper notes. The series 2009E bonds will refund the subordinate series 2002C-1 bonds, while the series 2009B senior bonds will possibly refund the series 2008A and B bonds, subject to tender.

The Negative Rating Outlook reflects the increased potential for stress to the airport's cost and financial profile in conjunction with the $5.6 billion 2009-2016 capital improvement program (CIP). Under the current financial plan, more than half of this sizable CIP will be debt financed, creating materially higher fixed costs for LAX's operating budget in the near- to medium-term. Further, the size and scope of the CIP, which is already more than 35% higher from plans developed in 2008, could be at risk for further upward adjustments during stages of project bids and construction. In addition, airport management is in the process of acquiring facilities previously owned by the airlines which could generate additional costs for LAX due to the potential deferred maintenance needs of those facilities.

LAX enters this capital program with a high passenger facility charge (PFC) balance of $500 million and, at current traffic levels the airport is in position to collect an additional $90 million-$100 million annually. The PFC receipts are expected to represent a key source of funds to offset future debt service obligations and somewhat mitigates the impact of future leverage. Still, financial projections indicate that airline cost levels are expected to be much higher at $11 to $19 compared to LAX's historical range of $5 to $7. In addition, debt service coverage levels on combined senior and subordinate lien revenue debt are expected to be considerably lower but still healthy at 1.6 times (x) to 2.2x. The ability of the airport to maintain these financial metrics as well as to maintain its very strong market position for regional passenger traffic will be key drivers for rating maintenance. Fitch also notes that the airport is seeking amendments to existing bondholder legal covenants relating to parity debt tests. Specifically, the proposed amendments, upon consent of majority bondholders that may occur by 2012, will revise the additional bonds tests for both the senior and subordinate lien levels to forecast-based calculations based on aggregate annual debt service rather than maximum annual debt service, affording the airport more flexibility to issue additional debt in the future.

The 'AA' rating on the senior revenue bonds and the 'AA-' rating on the subordinate revenue bonds reflect the strength of the airport's passenger base that ranks among the nation's largest for both origination and destination (O&D) traffic and international service. The airlines serving LAX's 83 domestic non-stop and 50 international non-stop markets are more diverse than any other U.S. international gateway airport. In fiscal 2009 (ended June 30), American Airlines (American) had the largest share of enplanements at LAX of 15% compared to other U.S. gateway airports with 50% or more airline concentration of American or another legacy carrier. Credit concerns include the challenges facing the airport in addressing significant deferred maintenance needs through a multi-billion dollar CIP and the current economic challenges facing the greater air trade area which could negatively affect traffic performance.

LAX's 2009-2016 CIP totals approximately $5.6 billion. Approximately $1 billion is allocated to the 2009 Projects which include capital projects to be funded, in part, with the proceeds of the series 2009 bonds. Capital expenditures are expected to be 58% debt financed (25% from future senior bonds and 33% from future subordinate bonds) and include the completion of the interior improvements to the Tom Bradley International Terminal that began in February 2007 and were partly funded by the series 2008 bonds as well as construction of a 3,400-foot-long connection between the north and south airfields. The remaining $4.6 billion CIP comprises Other Incorporated Projects (OIP); 42% is expected to be funded by future senior bonds, 9% from future subordinate bonds, 17% from LAX's balance sheet, and 19% from PFCs. Bradley West is the largest project in the OIP at $1.6 billion; nine new gates will be added and secure walkways will be constructed between Terminals three and four so connecting passengers do not need to re-enter security.

As is reflective of an international passenger and cargo gateway, the airport is served by a diverse mix of airlines, including 22 scheduled domestic carriers, 43 scheduled foreign flag airlines, and 17 all-cargo carriers. The largest carrier, American, accounted for only 15% of the airport's total enplanements in fiscal 2009, relatively unchanged from 2001. Even with airline alliances, no one alliance comprises more than 30% market share. This level of diversity is unique to LAX and is considered a strength of the credit. While LAX serves as the largest airport in the greater Los Angeles area, comprising roughly 70% of all passenger traffic, the airport's enplanements fell 9% in fiscal 2009 to 28.3 million. LAX's fiscal year extended from July 1, 2008 to June 30, 2009, primarily driving the reduction in traffic, since the worst declines for all U.S. airports occurred in the second half of 2008.

Airport management utilizes a commercial compensatory rate-setting methodology in the terminal areas and a residual cost recovery methodology for the airfield, representing a combined airport economic model that generates excess cash for reserves. Historically, the airlines paid for capital costs associated with terminal improvements, meaning airport management had little control over a large portion of LAX's facilities. LAX is pursuing the implementation of a uniform airport-wide capital charge to the airlines and to effectuate this change, LAX is actively engaged in acquiring those facilities previously funded by the airlines and expects to repurchase 30%-40% of its gates and acquire 2 million square feet from a total of 4.4 million.

LAX's financial operations have been largely stable over the past several years with coverage of total debt service exceeding 2.8x since fiscal 2002. Fiscal 2009 coverage on total debt was particularly strong at 5.5x. Based on the enplanement forecast and the financial structure of the airport, the airport consultant projects total coverage levels from net revenues to remain above 1.7x through 2016. LAX historically had a very low $6-$10 debt per enplanement and after the series 2008 bond issue, it increased to a moderate $34. After the series 2009 bond issue, debt per enplanement will still be a moderate $58, but will potentially reach $127 through the full capital program.

The City of Los Angeles owns LAX, the airport is operated and maintained by Los Angeles World Airports (LAWA) who also manages Ontario International Airport (ONT) and Van Nuys Municipal Airport (VNY). In addition, LAWA maintains Palmdale Regional Airport (PMD), although it is not currently certified by the Federal Aviation Administration. The LAX airport revenue bonds are solely secured by revenues derived from LAX's operations.

The application of the following criteria was used to derive the rating of the above referenced bonds:

--'Rating Criteria for Infrastructure and Project Finance', dated Sept. 29, 2009;

--'Airports Rating Criteria Handbook for General Airport Revenue, PFC and Letter of Intent Bonds' dated March 12, 2007.

All are available on the Fitch web site at 'www.fitchratings.com' under the headers Global Infrastructure & Project Finance >> Rating Criteria and U.S. Public Finance >> Rating Criteria.

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

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