Dépêches

Fitch Downgrades City of San Jose, CA's $1B Outstanding Airport Revs to 'A-'; Outlook Negative

Dépèche transmise le 14 septembre 2009 par Business Wire

NEW YORK--(BUSINESS WIRE)--Fitch Ratings downgrades to 'A-' from 'A+' the City of San Jose, California's approximately $1.04 billion of outstanding airport revenue bonds. The Rating Outlook on the bonds remains Negative. The downgrade reflects the combined effect of three years of continued enplanement losses that were beyond Fitch's prior expectation, and a doubling of the airport's debt for the terminal area improvement plan (TAIP), which together has elevated the airport's annual fixed obligations with a much smaller passenger base dramatically changing its financial profile. The bonds are secured by net revenue of the airport, including operating grants and customer facility charge (CFC) collections on rental car transactions.

The Negative Outlook reflects the potential for further erosion of air service and weakness in concession revenue that could further pressure the airport's cost profile going forward. While the TAIP is on schedule and on budget, the airport's enplanements have dropped by 17% since 2007 and assuming no further reductions in 2010 would be 20% below the airport's 2007 financial plan assumption of 5.5 million. The 4.4 million enplanements seen in fiscal 2009 puts the airport back to levels last seen in fiscal 1995 and are a combination of the current economic environment and San Jose's highly competitive air service area, with San Francisco and Oakland airports approximately 30 miles away.

Coupled with the lower traffic base is an approximately 100% increase in annual debt service obligations in 2011. Annual debt service jumps from approximately $30 million to over $60 million and remains at this level until 2014 when obligations increase again by another 12%, and then remain relatively flat through 2028. While annual obligations begin to drop after 2028, they then jump to nearly $120 million in 2035-2037, leaving the airport exposed to refinance risk. Additionally, the airport currently has $341 million in outstanding subordinate lien commercial paper that will also need to be refinanced into fixed-rate debt over the next two years as letters of credit expire. Debt per enplaned passenger at the airport for 2009, including commercial paper, is over $300 and in a Fitch scenario the cost per enplaned passenger (CPE) could approach $16 in 2011 as debt service comes on line; the 2007 financial plan assumed an $11.82 CPE in 2011. With San Francisco and Oakland airports being so close and competitive on a cost basis, the airport will be hard pressed to increase the CPE further to maintain debt service coverage at levels consistent with their prior 'A+' level, and are estimated to be more consistent with an 'A-' rating level. It is Fitch's view that this pressure will likely remain for the medium term given the airport's heavily backloaded debt structure.

The 'A-' rating reflects a nearly 100% origination and destination traffic base but more limited schedule offerings than nearby competitors, the size and strength of the airport's service area which is the 13th largest in the U.S., and a new terminal complex, rental car facility and other airfield improvements meaning very limited capital needs going forward. The rating also reflects the highly competitive nature of the air service area with the nearby San Francisco and Oakland airports that has led to a volatile enplanement history, high debt levels at the airport with over $300 in debt per enplaned passenger, which is more than double most peers, and debt to net income of 30 times (x). In addition, the airport will likely have a very high CPE for a medium hub airport that will remain pressured for the next several years given the backloaded debt structure.

As of August 2009, the airport had scheduled service from 13 carriers with 149 daily non-stop flights and service to 26 cities. For fiscal 2008, the airport had 4.6 million enplanements with net revenue growth of 54%, a CPE of $7.49 and generated a debt service coverage ratio (DSCR) of nearly 1.6x, excluding surplus revenue from the prior year. Preliminary information for fiscal 2009 show enplanements at 4.4 million, a net revenue decline of 3.6%, a CPE of $9.87 and a DSCR of 1.8x. The airport's 2010 budget assumes net revenue declines of about 1.4%, assuming the use of $5.9 million in the rate stabilization fund, a CPE of $10.67 and a DSCR of 1.5x. In 2011, debt service jumps by 100% and while the airport's 2007 financial plan assumes a CPE of $11.82. It is Fitch's expectation that the approximately $30 million increase in terminal related debt service could cause the CPE to increase to as much as $16 depending upon 2010 enplanements. The DSCR is likely to drop much closer to the 1.25x rate covenant and remain at that level for some time.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 'www.fitchratings.com'. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.