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Fitch Downgrades Colorado Springs Muni Airport, CO's Revs to 'BBB+'; Outlook Revised to Stable

Dépèche transmise le 19 avril 2012 par Business Wire

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded the City of Colorado Springs' outstanding $43 million in airport revenue bonds to 'BBB+' from 'A-'. The Rating Outlook is revised to Stable from Negative.

KEY RATING DRIVERS

The downgrade reflects the airport's elevated risk profile resulting from multi-year traffic declines (down an aggregate 20% between 2006 and 2011) and concerns that traffic volatility can potentially constrain the airport's future operating and financial flexibility. Fitch views the current rating level to be more consistent with a small market airport that may be subject to persistent future volatility, in part due to the presence of a nearby competing Denver International Airport (DIA). The airport's very low debt levels and strong liquidity position partially mitigate the weakness in operational performance. The Stable Outlook reflects Fitch's expectations that the airport is nearing a base level of traffic that is sustainable and will maintain stable financial margins.

Small O&D Hub Within a Highly Competitive Market: The Colorado Springs Municipal Airport's (COS) small, origination and destination (O&D) traveler base has experienced considerable volatility in the most recent recession and faces strong competition from the neighboring large-hub DIA (rated 'A+', with a Stable Outlook by Fitch). The airport reported 814,336 enplanements in 2011 down 5.7% from the prior year, which represented a fourth consecutive annual traffic decline. United Continental's (Fitch Issuer Default Rating (IDR) of 'B', Stable Outlook) concentration at the airport is above average, with 47% market share in 2011.

Short Term Airline Leases with Strong Cost Recovery Terms: The airline use and lease agreement expiring in December 2012 is expected to be extended, maintaining the existing hybrid rate-setting structure that provides for strong cost recovery terms. The airport's cost per enplaned passenger (CPE) is elevated for a small-hub airport (at $8.85 in 2011).

Strong Debt Structure: All COS' debt is in fixed-rate mode with level to declining amortization profile.

Extremely Low Leverage but Weaker Coverage Levels: The airport has a relatively low debt burden of $53 per enplaned passenger. Strong liquidity (820 days cash on hand) supports a very low, below 1 times (x) net debt/cash flows available for debt service. In fiscal 2011, coverage declined to 1.45x, including prepaid revenue account balances, as compared to 1.59x the prior year. When excluding the prepaid revenue account, 2011 coverage was at 1.19x versus 1.21x in 2010.

Modestly Scaled Capital Program: The airport's $57 million capital improvement program (CIP) over the next six years is expected to be funded from grants and passenger facility charge revenues (98% of total), with no expected new borrowings.

WHAT COULD TRIGGER A RATING ACTION

--Significant further enplanement declines either over a period of years or in a sudden loss of service;

--Inability to manage operating expenses which could lead to a less competitive CPE and deterioration of financial flexibility;

--Inability to renew the use and lease agreement with similarly strong cost recovery terms;

--Additional leverage that would increase the debt metrics and dilute coverage levels.

SECURITY

The bonds are secured by a first lien on the net revenues of the airport.

CREDIT UPDATE

Enplanement volatility at COS is tied to the airport's proximity to DIA, which has much broader service offerings, as well as the effects of the economic downturn. Historically, approximately 50% of passengers generated in the airport's catchment area have leaked to DIA. Fitch views there to be elevated risks on maintaining current carrier service level since United Continental and Frontier have more flight services out of DIA. Also, American Airlines represents 22% of passenger traffic and its current bankruptcy situation could result in reduced operations as has been the case in several other small market airports. While the first two months of 2012 continue to show declines of 4%, the airport anticipates it will experience a 6% growth in 2012, attributed to new Frontier Airlines service to Los Angeles and Phoenix beginning in May 2012, as well as additional frequencies to Seattle and Portland during the summer months. While Fitch will monitor the airport's traffic trend, the current rating level recognizes that traffic may continue to moderately fluctuate.

The airport's hybrid airline agreement employs a cost-center residual approach for landing fees and a compensatory approach for the terminal facility. The agreement expired in December 2011 and was extended through the end of 2012. While management expects the cost recovery terms of the existing agreement to be extended at the end of the year, some uncertainty on the terms does exist. The hybrid nature of the agreement has allowed the airport to build sizable unrestricted cash balances, ending 2011 with $32 million in unrestricted cash reserves. Managing the future airline agreement to provide for continued financial flexibility will be key driver to rating maintenance.

In 2011, operating revenues increased by 6% from 2010 to $20.4 million, despite the 5.7% decline in traffic. This was largely due to higher airline revenues to support increased debt service requirements. Airline charges growth was somewhat tempered by cost control measures implemented in 2011; operating expenses decreased by 6.4% from 2010 to $14.4 million. Non-airline revenues represent 61% of total operating revenues. Parking revenues (40% of total non-airline revenues) have decreased at a five-year CAGR of 4.3%, driven by traffic declines. Continued management of the airport's cost profile is critical as there is sensitivity to traffic operations.

Debt service coverage in 2012 equaled 1.45x using the rolling coverage account (1.19x excluding the coverage account), which is the lowest ratio since 2000. For 2012, management projects a 4.5% increase in operating revenues, driven by aforementioned projected traffic growth, while operating expenses are forecasted to increase by less than 3% resulting in projected 1.55x/1.29x coverage. CPE under this scenario decreases to $8.30, below the current level of $8.85. This CPE is lower than DIA's approximately $12 CPE.

Under a stressed scenario that assumes a 15% reduction in enplanements, Fitch's analysis indicates the possibility for additional use of airport funds to maintain coverage at historical levels. Otherwise COS may be required to take other prudent actions such as increasing operating revenues through higher airline charges or further containment of operating costs. Given that Fitch believes that current CPE levels are already elevated when compared to similar facilities, a scenario in a similar range of traffic reduction would impact the airport's competitiveness.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance', Aug. 16, 2011;

--'Rating Criteria for Airports', Nov. 28, 2011.

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648832

Rating Criteria for Airports

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=656970

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