Dépêches

Fitch Affirms LAX Airport's (CA) Sr Revs at 'AA' & Sub Revs at 'AA-'; Outlook Negative

Dépèche transmise le 12 octobre 2011 par Business Wire

NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'AA' rating on the Department of Airports of the City of Los Angeles (the Dept.), Los Angeles International Airport's (LAX, or the airport) outstanding $2.75 billion senior revenue bonds and the 'AA-' rating on LAX's $795 million of outstanding subordinate revenue bonds. The Rating Outlook for all bonds is Negative.

KEY RATING DRIVERS:

-- Large gateway airport with resilient traffic base: The strength of the airport's passenger base, currently in excess of 30 million enplanements, ranks among the nation's largest markets. LAX is also positioned as one of the largest international gateway airports with broad foreign-flag carrier service and limits the exposure to any one airline.

-- Progression toward firmer facility control and cost recovery structure: Recent terminal acquisitions have resulted in substantive progress toward equalization of airline rates and charges using compensatory methodologies. These agreements with Los Angeles World Airports' (LAWA) terminal tenants will allow for needed capital investments and enhance the airport's control of terminal spaces. Fitch expects airline cost levels to rise but remain moderate for a large hub airport.

--Conservative debt structure: All of the existing senior and subordinated long-term airport debt is in fixed-rate mode, thus minimizing the risk for fluctuations in debt interest costs.

-- Well-positioned financial metrics with some elevated leverage: Current financial metrics such as debt service coverage and liquidity remain solid. Debt-to-total enplanements, at $120, has risen in recent years due to capital program borrowings but is still viewed as moderate relative to peer airports. Net debt to cashflow available for debt service (CFADS) is approximately 9.4 times (x). While this metric is viewed as high for the 'AA' category, this leverage ratio will likely drop over the next several years as airline charges are adjusted for debt costs associated with the capital plan.

--Continued progression of the airport capital program: The airport is in the midst of an ambitious $5.6 billion capital program (ending in 2016) with a focus on a rebuilt international terminal and previously deferred maintenance. Many key construction contracts have been awarded, thus reducing costs and timing risks associated with the capital program. Future borrowings are limited to under $600 million.

WHAT MAY TRIGGER A RATING ACTION:

--A material downward trend in airport traffic as a result of economic factors or general adverse conditions in the aviation sector;

--Upward adjustments to the capital program size that may result in weaker than expected financial metrics including aggregate debt service coverage, leverage, and liquidity;

--Airline lease terms that demonstrate strong cost recovery terms as airport fixed costs rise may allow for the Outlook to be revised to Stable.

SECURITY:

The senior revenue bonds are secured by the net revenues of the Los Angeles International Airport. The subordinate revenue bonds are secured by subordinate net revenues. The airport expects to utilize both lien levels to address future capital developments.

CREDIT SUMMARY:

Over the past year, LAX continued to demonstrate solid traffic and financial performance. As is reflective of an international passenger and cargo gateway airport, LAX is served by a diverse mix of domestic, foreign-flag and all-cargo carriers. The largest passenger carrier, American, accounted for less than 15% of the airport's total enplanements in fiscal 2011. This level of diversity is a particular strength of the credit.

Traffic levels, currently at 30.3 million enplanements, continued to climb well off the 9% reduction in fiscal 2009. For fiscal 2011 and 2010, passenger enplanements rebounded by 4.4% and 2.4%, respectively, led by growth in both domestic and international traffic. With only two months of fiscal 2012 data reported, the airport continues to see a continued positive direction in its traffic activity, although concerns of weakness remain given the weakening economic conditions.

LAX's financial operations have been largely stable over the past several years with coverage of total debt service nearly reaching 2.5x based on preliminary fiscal 2011 results. Based on prior enplanement forecasts and the financial structure of the airport, the airport consultant projects total coverage levels from net revenues to remain above 1.6x through 2016. LAX historically had a very low debt per enplanement metric but with recent bond issues, this debt metric increased to nearly the $120 level and will likely be modestly higher through the full capital program. Net debt-to-CFADS is 9.4x but is expected to evolve to below 7x in the 2014-2016 timeframe.

LAX's liquidity position is viewed as strong taking into consideration the substantial unrestricted cash reserves of $628 million that are also supplemented by a high passenger facility charge (PFC) balance of $631 million and a maintenance reserve of $138 million. Financial projections indicate that airline cost per enplanement (CPE) levels could rise from current levels of $11.23 to over $18 by 2016. In addition, debt service coverage levels on the combined senior and subordinate lien revenue debt are expected to be considerably lower but still healthy at above the 1.50x level. The ability of the airport to maintain these financial metrics as well as to preserve its very strong market position for Los Angeles regional passenger traffic will be key drivers for the rating maintenance.

Approximately $1.5 billion of the $5.6 billion long-term capital improvement plan (CIP) is dedicated to the Bradley international terminal building improvement program. Fitch notes the positive progress with this complex project as approximately 80% of the costs are established through existing contract awards. The remaining CIP comprises other terminal and airfield projects, including a new central utility plant that will be constructed over the next year. Capital expenditures for the entire program that runs through 2016 will be nearly half funded with debt (including the current senior and subordinate bonds as well as $535 million of future bonds) supplemented by LAX funds, grants, and PFC pay-go receipts. Overall, Fitch notes that the current update on CIP costs and funding are largely comparable to prior estimates. To the extent the program costs remain on budget, a Stable Rating Outlook may be restored.

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. Recent terminal acquisitions position LAX to transition to a more uniform airport-wide capital charge to the airlines over the next several years.

The city of Los Angeles owns LAX; the airport is operated and maintained by LAWA, which 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.

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. 29, 2010).

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=578745

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