Fitch Affirms Austin, TX's Special Facility Bonds at 'BBB+'; Outlook Stable
RATIONALE:
The rating reflects a growing visiting origin and destination (O&D) base at Austin-Bergstrom International Airport which is driven by a sizable and increasing metropolitan region. Structural enhancements built into the rental car concession agreement provide credit protection by allowing the city to adjust rental rates and levy contingent rent should revenues fall short of projections. These features are somewhat offset by the project's relatively elevated leverage as compared to peer facilities, combined with the narrow customer facility charges (CFC) revenue stream pledged to the bonds, which is inherently volatile due to its direct correlation with visiting O&D passenger volumes.
KEY RATING DRIVERS
Stable Long-Term Demand Profile: The consolidated rental car facility project serves a sizeable and growing metropolitan region, with approximately 2 million visiting O&D deplanements annually. Austin had 601,207 rental car transactions and over 2 million transaction days in 2014, growing compounded annual growth rate (CAGR) of 3% and 3.7% respectively over the 10-year period since 2004. However, downside volatility in rental car transactions and transaction days is possible, as evidenced by a combined drop of nearly 20% in the 2008-2010 period. All major rental car brands operate at Austin, with the largest operator being Hertz at 28% of 2014 rental revenues.
Adequate Rate-Making Flexibility: The airport's current CFC rate of $5.95 is higher than that charged at other Texas airports, though rate increases in 2010 and 2011 do not appear to have negatively affected rental demand. The airport may increase rates at its discretion in the future if necessary, and the plan of finance assumes 5% increases in CFC rates every three years to meet project obligations, including operating expenses and reimbursements to the project lessee. A scheduled increase for fiscal 2015 was not implemented due to strong growth trends at the airport; the next increase is expected in 2018. The concession agreement with the rental car companies allows management to levy contingent rent on the rental car companies to the extent revenues are short of projections, which provides protection in a downside scenario.
Elevated Leverage Initially, With Adequate Financial Metrics: The project's leverage at 9.22 times (x) net debt-to-cash available for debt service (CFADS) based on 2014 CFC revenues is relatively high, but is expected to drop to the 5x-6x range by 2022. Debt service coverage ratios are estimated at around 1.8x excluding rolling coverage. Maintaining these leverage and coverage levels will require on-going revenue growth in CFCs over the life of the bonds through CFC rate adjustments or higher annual level of transaction days, as annual gross debt service increases approximately 1.9% annually in the 2014-2042 period.
Strong Security Package: The structure is underpinned by a first lien on CFC monies and, if needed, contingent rent, a closed loop of funds, and cash-funded project reserves. In the event project leases are terminated, CFC receipts remain property of the trust and will continue to be remitted without set-off or abatement. Operating expenses, major maintenance and other items are subordinate to debt service.
Modern Infrastructure: Construction risk is largely mitigated by CFC revenues that are already in place, coupled with a guaranteed lump sum contract, 6% contingencies, 100% payment and performance bonds, and adequate cash reserves. Construction of the project was 99% complete as of June 2015. Substantial completion is expected in September 2015 with the facility opening in October 2015. When completed, the new single-site rental location will have modern facilities and no additional plans for parity debt. The close proximity of the new rental car facility to the existing terminal building will eliminate the need for bussing operations.
Peer Analysis: Austin has similar levels of rental car transaction days as Charlotte (rated 'A'; Outlook Stable) and SAT (rated 'BBB+'; Outlook Stable). Leverage is comparable to SAT but higher than Charlotte, partially explaining Austin's 'BBB+' rating.
RATING SENSITIVITIES
Positive:
With upcoming completion of the facility eliminating construction risk, demonstration of a strong operating profile in the new facility may result in a higher rating.
Continued demonstration of strong rental transaction throughput and relative CFC revenue generating ability that continues to elevate projected coverage may merit upward movement of the rating.
Negative:
Changes in rental car demand, or volatility in the underlying O&D traffic base, that lead to performance that is materially above or below indicated projections may change the rating.
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 cashflow requirements under the bond documents and rental car concession agreements may change the rating.
SUMMARY OF CREDIT
Austin-Bergstrom Airport is the main commercial facility serving the growing five-county Austin MSA, which has a total population of approximately 1.8 million residents. Opened in 1999 on a site that was previously an Air Force base, the airport is located about eight miles southeast of downtown Austin. The airfield consists of a pair of parallel commercial runways sufficiently spaced to handle simultaneous operations and capable of accommodating all commercial aircraft currently in service, and the 600,000 square foot terminal provides access to 25 aircraft gates.
Airlines serving the airport offer 146 daily departures and provide nonstop service to 37 markets. The airport is served by five traditional hub-and-spoke carriers, four low-cost carriers, and nine regional carriers, as well as four all-cargo airlines. Southwest Airlines (Southwest) is the largest carrier at the airport in terms of passenger activity, accounting for 38% of passenger volume year-to-date (YTD) 2015, followed by American Airlines with 18%. There is some competition for passengers in the air trade area, with San Antonio and Fort Hood under 100 miles away and Houston area airports about 170 miles away.
Fiscal 2014 destination O&D deplanements grew by 4.5%, reaching 2.1 million. This level, a new peak, represents the fifth year of growth following a decline of 8.8% in 2009. Transaction days at the facility stood at 2 million for fiscal 2014, up 6.5% over 2013 and up 29% from the low seen in 2010, following a decline of nearly 20% in 2009 and 2010. Similar to other ConRacs, transaction days have demonstrated a higher degree of volatility than visiting O&D deplanements through economic cycles. It is Fitch's view that the city has the ability to ensure that all obligations are met by charging a contingent rent to tenants and/or by increasing CFC rates in addition to all the reserve funds supporting the project.
The ConRac facility project consists of two five-level structures connected via vehicle circulation ramps. The facility will be walking distance to the airport's passenger terminal building, located behind the existing parking garage and accessible by a pedestrian walkway across the garage. The ConRac/parking facility, which began operating in June 2015, is 1.66 million square feet, including 758 public parking spaces on the ground floor, 1,840 ready/return rental car spaces on three levels of the garage, and 1,152 rental car storage stalls on the roof. The second floor will also include the rental car customer service area. There will be a multi-level quick turnaround facility for fueling and cleaning, including 48 fueling stations and 12 car wash bays. The facility is designed to accommodate 11 rental car companies upon opening; there are currently nine rental car companies operating at the airport. As a result of this ConRac facility, there will be no need for rental car bussing operations. The third level of the existing parking garage, which is currently occupied by rental car companies, will also convert to public parking.
Construction commenced in March 2013 and the date of beneficial occupancy (DBO) is currently in October 2015 after being pushed back a month from the original date of September 2015. Despite the slight delay, the project is on budget and 99% complete as of June 30, 2015. Fitch notes that the bonds are secured by CFC revenues that are already being levied. Rental car companies currently operate under existing concession agreements, but have executed new concession agreements that will automatically supersede the existing agreements on the DBO of the ConRac, mitigating completion risk. The term of the new concession agreement is 11 years from the DBO, with the city maintaining the option to renew the agreement for two additional five-year periods. If the city chooses to terminate the lease, it must negotiate agreements with all of the rental car companies serving the airport, ensuring that CFC collections are uninterrupted.
The estimated project costs for the facility are $155.5 million of which 79% are funded with series 2013 proceeds combined with 21% from previously collected CFCs. The CFC debt is secured by a narrow revenue stream that is dependent upon rental car activity. The current $5.95 per day CFC rate is relatively high when compared to other airports with CFC secured stand-alone bonds, and the plan of finance assumes 5% increases in CFC rates approximately every three years in order to keep pace with annual gross debt service that escalates at 1.9% through maturity.
Fitch considers the structural features of the transaction as adequate based on the protections available to mitigate project completion and delay risk. The construction contract was awarded under a guaranteed maximum stipulated sum price of $133.6 million and includes $7.5 million in project contingencies. Liquidated damages are uncapped, and are payable after 760 days from the start date sized at $1,750 per day ($1,000/day to the city, $500/day to the developer, $250/day to master lessee). Performance and payment bonds are in place in the amount of 100% of the contract price. The project also benefits from substantial structural liquidity. Liquidity available to the project includes CFC cash on hand from prior collections, the rolling coverage account (funded at 25% maximum annual debt service [MADS]), and the debt service reserve fund (funded at 10% of par).
Fitch's base case projects debt service coverage ratios (DSCR), excluding coverage and reserve funds, to average 1.87x though fiscal 2022. This coverage level assumes cash flow will be adequate to meet both bond debt service and all subordinate transfers and payments, including city payments and reimbursements for operations and maintenance, tenant improvements, and base rents. In order to achieve this, a 2.5% annual average growth rate for transaction days is assumed through the projected period. The CFC rate is expected to reach $6.89 by fiscal 2022 per managements original forecasts. If growth in transaction days or CFC rates slows, Fitch notes that subordinate payments may not be met. Project leverage is high at 9.22x net debt to CFADS, though this drops to the 5x-6x range over the forecasted period; principal repayment begins in 2017. Fitch's rating case assumes a 15.6% decline in transaction days in fiscal 2016 (comparable to the drop seen during the 2009 recession) followed by a 5% recovery each year through fiscal 2019 before assuming a normal growth rate of 2.5% through the remainder of the forecasted period. In this scenario, coverage (without coverage and reserve funds) averages 1.65x and reaches a minimum of 1.53x in fiscal 2016 while leverage peaks at 10.5x in 2016, falling to the 6x range by 2022. Several sensitivity scenarios were also projected including restricting transaction day growth to 1% per year and freezing CFC rates at the current rate of $5.95. Under all scenarios, cash flow remains sufficient to meet bond debt service, and to cover subordinate reimbursements. While the structure is dependent on growth in the long run, Fitch views the required levels of growth to be achievable given the strength of the Austin market.
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