OREANDA-NEWS. Fitch Ratings has assigned an 'A+' rating to The City of San Antonio Airport's (SAT) $39.3 million Series 2015 senior airport system revenue improvement bonds (GARBS). Fitch has also affirmed SAT's $182.9 million outstanding parity GARBs at 'A+' and $143.2 million outstanding airport passenger facility charge (PFC) subordinate lien airport revenue bonds at 'A'. The Rating Outlook on all bonds is Stable.

KEY RATING DRIVERS

The ratings reflect an established carrier base serving resilient traffic, the airport's airline use and lease agreement (AUL), which has stabilized and improved financial performance, and the airport's moderate leverage. Following five years of consecutive growth, enplanements have overrun pre-recessionary levels with no carrier representing more than 42% market share. Further, revenues have outpaced expenses leading to stabilization of both DSCR (1.5x range on a consolidated basis including transfers) and CPE ($7.50 range). The airport's leverage is moderate at around 5.4x and is expected to evolve down to the 3.5x range by 2023, even taking into account the current issuance.

GROWING ECONOMY, CARRIER DIVERSITY: REVENUE RISK: VOLUME - MIDRANGE

SAT serves a strong predominantly origination and destination (O&D) passenger base (92.3%), though the proximity of Austin-Bergstrom International Airport hampers SAT's ability to grow regional market share. The airport is served by a diverse carrier mix and continues to grow international service to Mexico, further stabilizing the overall enplanement base.

LEASE AGREEMENT PROVIDES STABILITY: REVENUE RISK: PRICE - MIDRANGE

The compensatory AUL provides SAT with pricing flexibility and helps maintain a competitive cost profile via revenue sharing mechanisms. However, the agreement could exacerbate revenue and operating margin volatility as reductions in non-airline revenue would not be covered through additional airline charges. The agreement has been extended through FYE2017 with an additional option to extend through FYE2020.

LIMITED CAPITAL PROGRAM: INFRASTRUCTURE DEVELOPMENT AND RENEWAL - STRONGER

The airport's capital improvement plan (CIP) is modest and limits future borrowing to 10% - 15% of anticipated funding requirements. Current projects include Phase 2 Terminal A renovations as well as a new CONRAC facility. The CONRAC facility is partially funded with customer facility charges (CFCs), but also requires additional series 2015 CFC and senior GARB backed debt.

CONSERVATIVE DEBT STRUCTURE: DEBT STRUCTURE - STRONGER

The proposed debt and all outstanding debt is 100% fixed rate with a relatively conservative debt service profile that steps down in FY2019 and again in FY2028 and FY2033. Debt service reserves are funded with a combination of cash and surety bonds.

STABLE & IMPROVING FINANCIAL PERFORMANCE

Leverage is moderate at 5.43x net debt to cash flow available for debt service (CFADS). Fitch-calculated senior DSCR was 1.88x (1.62x without transfers) in FY2014, and Fitch expects DSCRs to remain at or above these levels under Fitch's base case conditions. All-in coverage was 1.53x (1.37x without transfers) and similarly is expected to remain at or above in Fitch's Base case. Liquidity has improved to 260 days cash on hand (DCOH), yet remains low relative to peers. The modest CIP partially mitigate low liquidity.

PEER ANALYSIS

In comparison to Fitch-rated 'A' category airports, SAT has more enplanements, similar CPE, more debt outstanding, fewer DCOH, higher leverage, lower coverage, and a larger capital plan. Notable exceptions are the Port of Oakland ('A+'; Stable Outlook) with slightly larger enplanements and capital plan and Raleigh Durham ('AA-'; Stable Outlook) with higher liquidity to support more debt outstanding.

RATING SENSITIVITIES

Positive-Traffic Growth with Cost Control: Further traffic growth along with continued cost management and a material reduction in leverage.

Negative - Enplanement decline: A significant reduction in the level of O&D traffic due to a weaker local economy.

Negative - Weaker competitive position: Market share loss to nearby competing airports could impair the airport's revenue profile.

Negative - Persistent cost growth: Elevated levels of cost growth that cannot be passed along to air carriers could erode the airport's long-term cost structure.

TRANSACTION SUMMARY

The City of San Antonio is issuing $39.3 million series 2015 parity senior GARBs to construct two levels of public parking within a seven level new CONRAC at the airport. The City is also issuing $124.2 million series 2015 CFC revenue bonds to construct the CONRAC (see Fitch Rates San Antonio (TX) Airport CONRAC Facility Bonds 'BBB+'; Outlook Stable, July 9, 2015). The total project cost is estimated at $196 million and includes cash funding debt reserve accounts. 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. Though secured by net airport revenues, the series 2015 GARB debt service is expected to be paid from surplus CFC collections.

The airport expected and experienced no impact from the Wright Amendment expiration and controlled operating costs for FY2014. Enplanements have steadily increased at a five-year compound annual growth rate (CAGR) of 1.3% and most recently grew 2.2% over FY2014 to 4.2 million enplanements. Furthermore, enplanements are up 0.8% for the first seven months of FY2015 (FYE September 30). International passenger traffic continues to grow with added service to Mexico and comprised around 6% of total FY2014 enplanements. Domestic traffic should also continue to increase as Delta and American add new service to Los Angeles in FY2016/2017.

A new six-year CIP totals $261 million and is funded from a variety of sources including federal grants (9%), general airport funds (30%), PFCs (1%), CFC bonds (58%), and future airport debt (3%). In addition to the new CONRAC facility, projects include terminal security and customs upgrades to accommodate increased international travellers.

FY2014 ordinance-based senior coverage was 2.06x including transfers (1.75x without). Under the Fitch approach, which treats PFCs and CFCs as revenues instead of offsets to debt service, the senior DSCR was a lesser 1.88x (1.62x without transfers). Per the airport's AUL, DSCR has remained high above 1.5x since FY2010, and CPE has begun to drop recently. Senior DSCRs should remain strong and even under a scenario of reduced enplanements, PFCs in each year should be sufficient to fully cover subordinated debt service. Added international airline service to Mexico and upgraded passenger amenities should continue to attract passenger traffic.

The Fitch cases forecasted the airport's financial and operational performance under the current compensatory AUL. While the airport intends to pay series 2015 GARB debt service with CFC revenues, CFC revenues are not pledged to the security of the bonds. Therefore, Fitch forecast financial and operational metrics both with and without the benefit of CFC offsets to GARB debt service to analyse the impact. Fitch forecasts also exclude the airport's flexibility to raise rates or increase the airline credit under the compensatory lease agreement.

Fitch's base case assumes a 1.5% enplanement CAGR, a 2.2% CAGR for airline revenues, a 1.5% CAGR for non-airline revenues, and 3.5% expense CAGR in line with historical performance and management's expectations for cost growth. Under this scenario, even with increased debt obligations, leverage would remain moderate averaging 4.7x with a minimum all-in DSCR of 1.56x (1.39x without transfers). CPE averages $7.57 through FY2023.

Fitch's rating case assumes a 6% shock to enplanements in FY2016, followed by 1%-2% annual recovery thereafter for a 0.3% CAGR over the FY2015-FY2023 forecast period. Airline revenues still grow at a 2.2% CAGR but non-airline revenues grow at a 0.3% CAGR in line with enplanements. Expenses grow at a 4% CAGR, slightly higher than the base case and inflation. Under this scenario, which includes the increased 2015 debt obligations, leverage is slightly higher averaging 5.6x with minimum all-in DSCR of 1.31x (1.08x without transfers). CPE averages around $8.12 through FY2023.

SECURITY

The senior bonds are secured by a first lien on net airport revenues. The subordinate PFC bonds are secured by a first lien on net PFC revenues and a subordinate pledge of net airport revenues.