OREANDA-NEWS. November 11, 2015. Fitch Ratings has affirmed the City of Colorado Springs, CO's outstanding \\$7.6 million airport revenue bonds at 'BBB+'. The Rating Outlook remains Negative. Fitch does not rate the airport's approximately \\$10.4 million in senior revenue refunding bonds issued in 2014.

RATING RATIONALE

The Negative Rating Outlook reflects a continuation of downward traffic trends in 2015, declines in each year since 2008 and constrained financial margins. Colorado Springs Municipal Airport (the airport) expects to execute a new airline use and lease agreement (AUL) later this month, partially mitigating Fitch's concerns related to the agreement in 2014. Resolution of the Negative Outlook will be based on enplanement and financial stability in the near term.

The 'BBB+' rating reflects the airport's strong liquidity position, low leverage, and moderately-low cost per enplanement (CPE) for Fitch's airport sector.

KEY RATING DRIVERS

Small Hub Constricted by Highly Competitive Market [Revenue Risk- Volume: Weaker]: The airport services a small origination and destination (O&D) enplanement base of 623,000. However, the airport faces strong competition from neighbouring Denver International Airport (DIA) which is served by similar carriers and offers service to more destinations. Following a 21% decrease in traffic due to Frontier discontinuing service in 2013, traffic has declined by an additional 4.2% in 2014 and year-to-date 2015 is down another 5.3%.

New Five-year AUL [Revenue Risk- Price: Midrange]: The new five-year agreement, expected to be executed later this month, maintains a hybrid rate-setting structure, which provides for strong cost recovery terms. The AUL also offers a more defined capital outlay policy through a formalized Majority in Interest (MII) provision. The airport's 2014 cost per enplanement (CPE) has reduced to \\$7.37 from \\$8.96 in 2013, but it remains elevated for a small-hub airport. CPE for 2015 is expected to remain at this level. Economic flexibility to raise rates in an environment of further traffic declines may be difficult.

Modest Capital Program [Infrastructure Development and Renewal: Stronger]: The Airport's 10-year capital improvement program totals \\$140.9 million, funded largely by grants and passenger facility charge (PFC) revenues. The majority of the program is focused on repair and rehabilitation. Management has created a new plan of finance through PFCs, which completes necessary PFC projects and better matches PFC collections to PFC expenditures. There are no plans for new general airport revenue bond (GARB) issuances anticipated.

Fixed Rate Debt Structure [Debt Structure: Stronger]: Debt outstanding is all fixed rate, fully amortizing and maturing by 2023. Annual debt service requirements are mostly flat at \\$2.3 million to approximately \\$2.6 million range through 2023. The airport has indicated that it intends to fully repay the 2007 series bonds in December of 2016, when the bonds become callable.

Cash Positive Leverage, Strong Liquidity: Leverage, with net debt to cash flow available for debt service (CFADS), is -1.12x and the airport has maintained a strong liquidity position with \\$19.3 million of unrestricted cash, equivalent to 554 days cash on hand. However, following a 42% reduction in cost to airlines, debt service coverage ratio (DSCR) fell to 1.35x in 2014, which is in line with 2013 restated coverage. Excluding the pre-paid revenue account, natural coverage is just 1.09x. Under conservative assumptions of additional traffic losses, Fitch projects all-in coverages to decline to 1.25x to 1.35x range while CPEs remains at a relatively competitive level below \\$9.30.

Peer Group: Comparable peers with a small O&D base, on-going traffic concerns, and elevated CPEs are Jackson Municipal Airport (MS) ('BBB+'/Outlook Stable) and Burlington, VT ('BBB-'/Outlook Stable), with Colorado Springs maintaining more favorable leverage metrics but relatively weaker coverage levels.

RATING SENSITIVITIES
Negative: Further traffic declines exceeding rating case expectations and approaching 500 thousand enplanements and/or inability to maintain competitive airline rates.

Negative: Significant erosion in the airport's strong liquidity balances without commensurate decrease in debt levels and coverage levels (excluding prepaid revenue account) approaching 1.0x.

Positive: Sustained stabilization in enplanements would likely lead to a return to Stable Outlook. Given the airport's overall lowered enplanement base, positive rating migration to the 'A' category is limited.

CREDIT UPDATE

The airport continues to experience traffic declines as a result of rising airfares and high competition with Denver International Airport. Following a decrease in traffic by 20.9% in 2013 due to Frontier's ending of service, traffic has declined by an additional 4.2% in 2014 and is down another 5.3% year-to-date, with enplanements hovering at approximately 600 thousand. The airport's traffic profile has a history of weak performance evidenced by multiple years of declines totalling 43% since 2007. United Airlines' concentration remains elevated at 49% market share.

In light of the current challenging environment, the airport plans to continue to reduce debt service and operating costs to stabilize rates and charges to air carriers. As such, the airport intends to fully repay the 2007 series A&B bonds when they become callable in late 2016. Management has already defeased \\$16.5 million of series 2002A bonds using cash reserves and refinanced the remaining \\$11.2 million of such bonds with 2014 series refunding bonds, reducing annual debt service payments by approximately 55%.

Separately, as part of the airport's new PFC plan of finance, the airport has drawn on a \\$2.336 million loan with the State Infrastructure Bank (SIB), which is backed by PFCs. The SIB loan allows for funding on current and future PFC eligible projects.

The airport managed to reduce airline charges by 42% in 2014 through a combination of debt restructuring and a 4.5% reduction in expenses, attributed to salary savings from a reduction in full-time employees and vacancies. As a result, operating revenue was down by 18.85% in 2014, which further strained net operating margins. Fiscal 2015 operating revenues are expected to remain in line with fiscal 2014 and the airport expects expenses to rise marginally by 3.8%.

Adjusting for an accounting error and a reclassification of revenue, coverages for 2013 were lower than stated in Fitch's 2014 review. Debt service coverage, including pre-paid revenue fund, was in the 1.35x range in 2013 and 2014. Natural coverages resided in the 1.10x range over the same period. Coverage is expected to remain thin in 2015 and 2016. The slim margins are offset by the airport's extraordinary coverage provision (to maintain the 1.25x rate covenant), but the ability to pass through costs to airlines is restrained in a competitive environment.

Airline CPE decreased in 2014 to \\$7.37 from \\$8.96 in 2013, but remains elevated for a small hub airport. The airport's intentions to further reduce CPE may prove difficult if operating conditions do not improve. Fitch views the new five-year AUL, expected to be executed later this month, as a credit positive indicating strong carrier commitment to the airport.

Fitch's base case scenario assumes traffic declines 6% in 2015 followed by a period of flat growth. Operating revenues fall in line with the drop in enplanements over the same period and expenses are forecasted to track inflation. Maintaining debt service coverage near the rate covenant, CPE could climb to the \\$9.00 range.

In Fitch's rating case, traffic is stressed an additional 4% in 2016 and is then forecasted to stabilize. Financial margins further contract as operating revenue decreases in proportion to falling enplanements and operating expenditures grow at 3% per annum. With coverages held at 1.30x, CPE could climb upwards of \\$10.00.

The airport maintains positive leverage and a strong liquidity profile in all scenarios. Due to the expected increase in airline capacity, the airport is anticipating negative traffic trends to begin to reverse in 2016.

SECURITY

The bonds are secured by net revenues of the airport.