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Fitch Rates Houston Airport, TX Rfdg Bonds 'A+'; Affirms Outstanding Sub Lien Revs; Outlook Negative

Dépèche transmise le 29 février 2012 par Business Wire

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'A+' rating to the city of Houston, TX's $620 million airport system subordinate lien revenue refunding bonds, series 2012A, 2012B, and 2012C, issued on behalf of Houston Airport. Fitch also affirms its 'A+' rating on $1.9 billion of outstanding airport system subordinate lien revenue bonds. The Rating Outlook on all subordinate lien bonds is revised to Negative from Stable.

The airport also has approximately $450 million of series 2009A senior lien revenue bonds outstanding; Fitch does not rate the airport's senior lien revenue bonds.

The Negative Outlook reflects concerns that coverage ratio trends may continue to weaken as a result of a combination of increasing operating costs, stagnating revenues in a slowing enplanement environment, and expected reductions in debt service offsets from federal grants. Absent successful budgetary actions or traffic induced revenue improvements, Fitch believes that the airport system could face erosion in its operating margins and debt service coverage ratios (DSCRs) that are below historic averages. Should these trends persist, downward rating action may be necessary.

Key Rating Drivers:

Strong service area: Houston's broad economic base supports over 24 million annual enplanements, with strong demand for air carrier service at both Houston Intercontinental (IAH) and William P. Hobby (Hobby) airports. O&D traffic accounts for 53% of system enplanements, partially mitigating the dominant positions held by United/Continental at IAH and Southwest at Hobby.

Hybrid use agreement with moderate airline costs: The airport system's hybrid agreement has allowed Houston to maintain relatively competitive costs at both airports. However, airline revenues declined in 2011, in part reflecting the limited revenue protection provided by the compensatory nature of the system's largest cost center when traffic growth is flat or negative. Use and lease agreements cover approximately 70% of total costs.

Adequate coverage, but lower than historic norms: Historically the airport system had debt service coverage in excess of 1.75 times (x). However, 2011 saw lower coverage at 1.58x, and management's budget for 2012 indicates a further reduction to 1.36x (forecast is slightly higher at 1.43x). Fitch expects declines in margins and coverage levels in the near term projection period, in part due to increasing debt service requirements, and also due to increasing expenses paired with flat revenue growth.

Elevated leverage, but limited future debt requirements: The airport system has relatively elevated debt levels compared to its peers, with 11.8x net debt/CFADS and debt per enplanement of $99 in 2011. However, the airport system has a strong liquidity position (749 days cash on hand) and the ability to increase its PFC collections from $3 to $4.50. As a result, limited additional leverage is expected in the context of the upcoming capital program.

What Could Trigger a Rating Action:

--Maintenance of healthy margins and coverage levels as senior lien debt service comes online will be integral in maintaining the current rating.

--Fitch recognizes that recent changeovers in management bring considerable experience and knowledge to the Houston Airport System, and expect that the airport will continue to manage its cost profile while executing on its current capital plan.

--The ability to maintain service and traffic levels despite recent mergers by the system's two biggest carriers will also affect the rating going forward.

Security:

The bonds are secured by a subordinate lien on the net revenues generated from the operations of the airport system that includes the two primary commercial aviation facilities, IAH and Hobby airports.

Transaction Summary:

The current transaction consists of the issuance of an estimated $620 million in airport revenue refunding bonds, including $326 million in 2012A bonds (AMT), $273 million in 2012B bonds (Non-AMT), and $22 million in 2012C bonds (Taxable). Proceeds will be used to currently refund all or a portion of the airport system's outstanding series 1998B and C, 2000A, 2001A, and 2002A bonds and to pay related costs of issuance. The refunding is expected to result in net PV savings of $58.3 million through 2032. DSRF requirements will be met with existing surety policies.

As a system, the Houston airports combined have shown reasonable resilience through the economic downturn. After exhibiting average growth rates of 3.2% through the decade leading up to the downturn, in fiscal 2009, both IAH and Hobby lost passengers (declines of 8.2% and 8.8% respectively). For fiscal 2010, the system overall saw 2.1% growth in enplanements, with IAH increasing by 1.3% and Hobby enjoying a more robust recovery of 5.7%. Fiscal 2011 brought 1.7% growth overall; IAH has seen moderation in its enplanements (0.4% growth), while Hobby continued to enjoy strong growth (7.8%). At IAH, the recovery of international enplanements has been more robust than that of domestic enplanements (7.2% growth for international vs 1.4% decline for domestic in fiscal 2011). For the first seven months of fiscal 2012 (July 2011 - January 2012), Hobby enplanements are up 8.3% over the same period a year prior; IAH enplanements are down 1.7% over the same period a year prior. Systemwide, enplanements are essentially flat. Given Southwest's announcement of slowing expansion plans and the ongoing route rationalization process for United/Continental post-merger, Fitch expects enplanement growth to moderate at both airports in the near to medium term.

Fiscal 2011 operating revenues grew 0.9% over the prior year, and were derived from airline charges (60%), commercial/ concession revenues (34%), and other operating revenues (6%).

2011 Airline Fees dropped 2% year over year, with landing fees down 4.2%, and terminal revenues down 0.9% due to less terminal space leased to airlines and lower capital recovery charges at IAH. Concession revenues performed more strongly, increasing 6.5% in 2011 over the prior year, compensating somewhat for tepid growth in airline revenues. Management indicates they expect airline revenues to be $1 million below budget for 2012, while retail and auto rental concessions are expected to be $1.4 million above budget. About 2/3 of airport costs are covered under the airport system's rate base.

Operating expenses increased 7.1% in fiscal 2011. Management indicates that a large portion of the 2011 increase was driven by unusual one-off expenses, including $9.2 million for halted capital projects, $8.8 million for Hurricane Ike related expenses, and $13.8 million for planning and construction costs which did not meet capitalization criteria. As a result, operating margins fell to 38%; this compares to margins of 50% in 2008 and prior.

For the first six months of fiscal year 2012, total operating revenues have increased 4.9% over the same period a year prior. The increase is largely due to higher terminal space rentals, retail concessions, parking, and car rental revenues. On the cost side, operating expenses are up 2.7% for the first six months of 2012 over the same period in 2011. This is in-line with management's budgeted levels, which reflect expense growth of 2.6% for 2012. Based on budget figures, margins are expected to remain at the 38% level in 2012 and beyond.

Airport unrestricted cash reserves have remained strong with $523 million of unrestricted fund balances in December 2011, equivalent to 749 days cash on hand and covering 22% of total long-term debt. Some use the airport's internal liquidity will be drawn down for capital spending in upcoming years. The airport system also maintains some flexibility in the form of its passenger facility charge (PFC) rate; both Hobby and IAH currently charge a $3 PFC, below the allowable limit of $4.50. The airport system plans to use between $43 million and $57 million in PFCs annually to offset debt service obligations through 2015.

In the past the airport system has also used federal grants as an offset to debt service, with offsets of $39 million in 2010 and $18 million in 2011. Going forward, management indicates grant offsets may be reduced, with the 2012 budget indicating grant offsets of $6 million. While this frees up grant dollars for capital expenditure or retirement of debt, it also results in a reduction of annual debt service coverage ratios to 1.43x or lower on an all-in basis, well below the 1.7x average seen in recent years. Should coverage continue at these levels or drop further, this may be viewed as inconsistent with the current rating level.

The five-year capital improvement program (CIP) for 2012 through 2016 totals approximately $874 million, unchanged from June 2011. However, management notes that the Airport System is mid-process on its Master Plan and CIP review, and that the plan may change going forward. The plan may include additional bond funding, though the size and timing of potential future issuance is not known at this time. Management indicates that the airport system has adequate cash and PFCs to handle near term funding needs.

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, 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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