OREANDA-NEWS. Fitch Ratings has assigned a 'BBB+' rating to The City of San Antonio Airport's (SAT) $124.2 million Series 2015 Customer Facility Charge (CFC) Revenue Bonds for a new Consolidated Rental Car (CONRAC) Special Facilities Project. The Rating Outlook is Stable.

KEY RATING DRIVERS
The rating reflects the rental car market's monopoly to provide San Antonio visitors with transportation services and increased efficiency from a new on-airport connected CONRAC facility, as well as strong concession and lease terms protecting the City, the airport, and rental car operators. Around 50% of deplaned passengers have historically rented cars at the airport which may incrementally increase with the convenience the new CONRAC brings users which is needed alongside projected deplanement growth to support near-term rising debt service. CFCs collections have been growing since FY2012 inception to support the CONRAC and will continue to be charged through maturity. Current rates are competitive at $5.00, but increases may be necessary in the early years as debt service ramps up to its maximum. Fitch notes that the airport retains a provision to charge rental car companies contingent rent should rate increases be insufficient.

DIVERSE AND NECESSARY RENTAL CAR MARKET:
SAT benefits from a sizable and predominantly O&D market (92.3% of total enplanements), but with limited transportation alternatives for visitors which supports the airport's rental car business as a necessary link. The new CONRAC will further increase rental car attractiveness by making it easier for deplaned passengers to rent cars from a single on-airport facility. However, Fitch notes car rental demand is vulnerable to the leisure market and the general economy as the ratio of transaction days to deplaned passengers has been declining over the past few years.

MODERATE RATE-SETTING FLEXIBILITY:
The airport has a moderate $5.00 CFC rate which management forecasts to increase to $5.50 Sept. 1, 2018 given management's ability to change the CFC rate at any time without outside approval. The new CONRAC benefits from car rental facility agreements executed by all rental car operators serving at the airport.

ESCALATING DEBT STRUCTURE:
Debt is fixed rate, and annual debt service escalates through 2027 before levelling at approximately $9.8 million through final maturity in 2045. The bonds will benefit from a fully cash-funded debt service reserve fund (sized to maximum annual debt service; MADS), a 25% coverage account, and a $7.5 million renewal and replacement account providing some initial liquidity to partially mitigate the rising debt service obligations. Additional CFC-backed borrowing is currently not anticipated.

ELEVATED LEVERAGE AND ADEQUATE COVERAGE:
Through fiscal 2023, net debt-to-cash flow available for debt service (CFADS) is initially high around 10x but is expected to evolve down to around 7x in Fitch's base case. CFC bond coverage is strong above 1.5x in Fitch's base case, however total coverage including the new general airport revenue bonds (GARB) debt service is thinner at just above 1.13x through the 2023 forecast period. Management forecasts initial liquidity of approximately $2.5 million in the surplus fund.

NEW FACILITY CONSOLIDATES OPERATIONS:
CONRAC construction is expected to start August 2015 and be completed in March 2018. The project is expected to be fully funded with proceeds from the SAT series 2015 CFC revenue bonds, series 2015 general airport revenue bonds, and internal CFC liquidity.

PEER ANALYSIS: SAT has similar levels of rental car transaction days as Charlotte (rated 'A'; Stable Outlook) and Austin (rated 'BBB+'; Stable Outlook). When considering the additional GARB debt being issued to construct the facility, SAT's CONRAC is expected to cost more than both Charlotte and Austin. However, leverage is expected to be comparable to Austin but higher than Charlotte, partially explaining SAT's 'BBB+' rating.

RATING SENSITIVITIES
Negative - A considerable drop in rental car transactions or volatility in underlying O&D traffic base could adversely affect pledged revenue and coverage levels absent an increase in the CFC rate.

Negative - Use of fund balances beyond those anticipated in the sponsor's forecast or imposition of contingent rents to rental car companies in order to fully support project cash flow requirements under the bond documents and rental car concession agreements may change lead to a downgrade.

Positive - Rental car transaction day growth above Fitch's base case and a material reduction in leverage.

TRANSACTION SUMMARY
The City of San Antonio is issuing $124.2 million series 2015 CFC revenue bonds to construct five levels for CONRAC operations within a new seven-level CONRAC facility at the airport. The city is also issuing $39.3 million series 2015 senior airport revenue bonds to construct two levels of public parking within the new CONRAC facility. These bonds are secured by net airport revenues (see 'Fitch Rates San Antonio (TX) Airport Revs 'A+', Outlook Stable', July 9, 2015). However, the city intends to pay series 2015 GARB debt service with surplus CFC revenues.

Strong population growth and low unemployment provide a firm 92.3% O&D enplanement base, with the level of deplaned passengers directly correlated to rental car transaction days. Deplanements increased 1.34% for FY2014 to 4.1 million (5-year CAGR of 1.09%). The airport's main competition comes from Austin-Bergstrom International Airport, a 77 mile (1.5 hour drive) northeast. However, SAT currently serves 35 non-stop destinations, which include five destinations in Mexico, and Austin does not offer as much international service. The city maintains that significant traffic diversion between the two airports does not occur due to comparable fare and service levels at each airport.

A diverse group of airlines including five network carriers, approximately 10 of their regional affiliates, and four Mexican carriers serve the airport with no airline holding more than a 42% share of passengers (Southwest; 'BBB' Positive Outlook). The airport expected and experienced no impact from the Wright Amendment expiration and controlled operating costs in FY2014.

The CONRAC facility will replace the short-term parking garage next to the airport terminals and will directly connect to the terminal building via a sky bridge. For a total of seven stories tall, the facility will include 2,040 ready/return spaces, 1,060 storage spaces, a customer service center, a Quick Turn-Around facility that allows car rental companies to provide vehicle service support and maintenance, other essential supplemental functions, as well as 1,349 short-term public parking spaces on the first two floors. Current airport rental car operations are scattered, inefficient, and disorganized. Present public parking facilities adequately serve demand but are not sized to fit demand expectations.

Construction will begin August 2015, and March 2018 is expected to be the date of beneficial occupancy (DBO). Rental car companies currently operate under existing concession agreements which have been extended to the DBO and will begin new agreements after the DBO which mitigates completion risk. The new concession agreement is for 10 years which the city may extend for an additional 10 years. The 20-year CONRAC lease agreement is short of the FY2045 debt maturity which the airport views as providing additional flexibility, since the Lease Agreement can be revised/modified after expiring FY2038.

The airport has collected CFCs since FY2012 in preparation for the new CONRAC facility and will use approximately $27 million of collected CFC revenues to partially fund construction. The total project cost is estimated at $196 million, and monies will be used for construction, tenant improvements, issuance costs, and reserve funds which include a renewal and replacement fund, a debt service reserve fund, and a debt service coverage fund. The airport must collect CFCs from all rental car companies as long as CFC bonds remain outstanding regardless of when the CONRAC opens.

The CFC debt is secured by a narrow revenue stream that is dependent upon rental car activity. The current $5.00 per day CFC rate is moderate when compared to other airports with CFC secured stand-alone bonds. Management forecasts a $0.50 increase in the CFC rate Sept. 1, 2018. Unscheduled rate increases are permitted as needed to meet annual gross debt service and contingent rent may be levied to the extent a needed rate increase is not economically feasible.

Fitch considers the structural features of the transaction adequate based on protections available to mitigate project completion and delay risk. Under the terms of the guaranteed maximum price construction contract, the CONRAC contractor is responsible for any cost overruns but the DBO can be delayed. Under a delay in opening, CFCs continue to be collected. Reserves include a $6 million Tenant Improvement Fund, $9.8 million DSRF, DS Coverage Fund at 25% of MADS, $7.5 million CFC Renewal and Replacement Fund, and $8.5 million Airport Parking Operating Funds Account of CFC Surplus Fund.

SAT's management case expects rental car transaction days to equal 48% of deplaned passengers through FY2023, which is in line with the historical average since FY2013. Rental car transaction days are the basis for CFC revenues and are projected to grow at the same rate as deplaned passengers representing a 2.3% CAGR from 2 million in FY2015 to 2.5 million for FY2023. CFC collections are projected at $9.4M in FY2015 to $13.5 million for FY2023, and FY2016 (first full year collecting at a $5.00 rate) through FY2023 growing at a 4.7% CAGR. CONRAC routine maintenance is estimated by operators at $4 million/year total for both CFC eligible and non-CFC eligible expenses combined. Operators will levy a facility maintenance fee to customers to cover non-CFC eligible routine maintenance costs of approximately $2.5 million annually.

Management's forecast projects minimum debt service coverage ratios (DSCR) including series 2015 GARB debt service obligations to be 1.22x which is reached in FY2017. Project leverage is initially around 10x net debt-to-CFADS and would evolve to around 7.5x by 2023.

Fitch's base case assumes a 1.5% deplanement CAGR along with a 48% rental car transaction day/deplanement ratio. In Fitch's base case, management's forecasted CFC rates were observed except for FY2023 where management would have to raise the CFC rate from a forecasted $5.50 to $6.23 in order to meet all debt obligations and forecasted operating expenses without dipping below a $2 million balance in the surplus reserve fund.

Fitch's rating case assumes a 0.3% deplanement CAGR along with a 48% rental car transaction day/deplanement ratio. In Fitch's rating case, management's forecasted CFC rates were observed except for FY2022 and FY2023 where management would have to raise the CFC rate from the forecasted $5.50 to $7.57 and $6.95 in order to meet debt obligations and forecasted operating expenses without depleting the surplus fund balance.

Fitch cases assumed the same deplanement traffic levels as enplanement traffic levels assumed in Fitch's 2015 review of the San Antonio Airport senior GARB and subordinate PFC bonds (see Fitch Rates The City of San Antonio (TX) Airport Revs at 'A+'; Outlook Stable, dated July 8, 2015).

Fitch also ran several sensitivity analyses including testing the impact of either the ratio of transaction days to deplaned passengers stabilizing at 44% or the CFC remaining at the current $5 rate. Fitch notes that reserves may need to be tapped and/or contingent rent levied if transaction days fall short of forecast or the planned CFC increase fails to materialize. While the structure depends on near-term growth, Fitch views the growth to be achievable given the strength of the San Antonio market and takes comfort in the system's reserves should CFC revenues initially underperform.

SECURITY
The series 2015 CFC revenue bonds are secured by a gross pledge of CFC revenues.