OREANDA-NEWS. Fitch Ratings has assigned an 'A+' rating to the Airport Commission's, City and County of San Francisco, San Francisco International Airport (SFO) approximately $244 million series 2016A second series revenue refunding bonds. Fitch has also affirmed the 'A+' rating on approximately $4.5 billion of parity SFO second series revenue bonds. The Rating Outlook for all of the bonds is Stable.

The rating reflects SFO's strong operational and financial performance within the healthy, yet competitive air trade market in the San Francisco Bay Area. The airport's fully residual airline agreement and proven management team provide a solid framework for stable and competitive results; however, its elevated leverage profile and additional borrowing needs create some pressures on the rating.

KEY RATING DRIVERS

Revenue Risk-Volume: Stronger
STRONG OPERATING PROFILE AND POSITIVE TRAFFIC TRENDS: SFO serves as a major international gateway airport with a strong market share of passenger traffic within the San Francisco bay region (70% in fiscal year [FY] 2015). The airport has a well-balanced traffic profile, with 79% origination & destination (O&D) traffic in 2015, the remainder being a mix of domestic and international connecting traffic. United Airlines Inc. (United; 'BB-'/Outlook Positive) maintains a sizable presence at SFO, with a 45% share of the passenger market. United's share has fallen in recent years despite its increased seat capacity as growth at SFO has been largely driven by the increasing presence of low-cost carriers (24% in FY2015) and service expansion by foreign-flag airlines.

Revenue Risk-Price: Stronger
FAVORABLE RATE-SETTING FRAMEWORK: The current airline use agreement (AUL), in place through 2021, is fully residual and provides for strong cost recovery with respect to all operating and debt service requirements. Airline charges were $16.24 per enplanement in FY2015 and have been relatively stable in recent years, although they are expected to rise in the medium term due to additional projected costs associated with the airport's capital improvement program (CIP).

Infrastructure Development/Renewal: Midrange
LARGE, DEBT-FUNDED CAPITAL PLAN: Airport capital needs are well managed, but substantial infrastructure improvement is planned for the medium term. Recently completed terminal improvements together with planned development projects are considered necessary to allow the airport to adequately serve its growing user base. The new CIP totals $4.5 billion and is expected to be predominantly funded through revenue bonds. Approximately $3.1 billion in new money issuance, funding $2.6 billion in projects, was factored into the forecast period through fiscal 2021.

Debt Structure: Stronger
STABLE DEBT PROFILE: SFO has reduced its variable-rate exposure from nearly 20% of outstanding debt in 2008 to approximately 11% in 2015 (all synthetically fixed) and has eliminated its mandatory tender exposure. Further, SFO's percentage of variable-rate debt will continue to decline as new, fixed-rate bonds are issued to fund its CIP. Covenant and reserves are sufficient, with the debt service reserves now nearly 100% cash-funded and funded in excess of the maximum annual debt service (MADS) requirement.

STRONG FINANCIALS, ELEVATED LEVERAGE METRICS: SFO's debt level is high at $4.5 billion ($187 per enplanement in FY2015) and contributes to the airport's high fixed-cost structure. The airport's current net debt-to-cashflow available for debt service (CFADS) ratio is similar to that of peer large-hub airports at 8.4x. Additional borrowings to support capital spending will likely cause debt metrics to remain at around the same level going forward. Nevertheless, the airport has a good liquidity position (344 days cash on hand for FY2015) and stable coverage levels, demonstrating it can adequately meet its debt service obligations. Fitch forecasts the debt service coverage ratio (DSCR) to remain in the 1.35x - 1.45x range through FY2021 including permitted transfers (1.10x - 1.16x without).

PEERS: SFO's Fitch-rated peers include Los Angeles International Airport ('AA/AA-'), Miami International Airport ('A'), and Atlanta International Airport ('A+/A+') given their similar prominence as large-hub, international gateway airports. All also have elevated leverage related to large capital needs in support of their on-going operations. SFO benefits from the most positive enplanement trends over the last five years while LAX benefits from the highest DSCR given its hybrid AUL. Cost per enplanement (CPE) is expected in the $20 range for all but Atlanta, although SFO's CPE is projected to rise above $20 after FY2019.

RATING SENSITIVITIES
Negative: A larger capital program size or additional borrowings above current forecast parameters may lead to rating pressure.
Negative: Changes in the airport's traffic profile given the sizable presence of United and the presence of competing airports in San Jose and Oakland.

Positive: Upward rating migration is unlikely at this time given SFO's elevated leverage and large additional borrowing needs over the next 10 years.

TRANSACTION SUMMARY
SFO is expected to issue approximately $244 million of series 2016A (Non-AMT) second series revenue refunding bonds for debt service (DS) savings. The bonds will be long-term fixed rate bonds and will not extend the final maturity of the refunded bonds. The series 2016A bonds will refund certain maturities of Issue 32FG and 34D. DS savings are anticipated to be relatively uniform over FY16-FY32 and total over $63 million ($51 million NPV). Maximum annual DS (MADS) is anticipated to be reduced by around $4.5 million. The 2016A bonds are designated as an original reserve series and will be secured by the issue one reserve fund. The bonds are expected to price around Jan. 26, 2016.

SFO is implementing a sizeable multi-year CIP of around $4.5 billion through FY2024, with a main focus on modernizing terminals 1 and 3, increasing safety and security, and enhancing passenger experience. Fitch notes that the projects will be undertaken on a demand-driven basis, with $1.6 billion that is deferrable. The program will be nearly all bond-funded.

Despite the magnitude of the CIP, SFO's moderate net debt-to-CFADS for a large-hub airport of approximately 8.4x for FY2015 is not expected to change materially given the rapid amortization of existing debt expected over the next decade. However, the authority is still completing its airport development plan (ADP), which may be integrated as early as the FY2017 capital plan (subject to environmental approval and demand) and additive to the current CIP. To the extent additional borrowings for either the current CIP or forthcoming ADP materially weaken the airport's financial profile, the rating may be pressured at its current level.

SFO's traffic has continued to perform extremely well in recent years (4.7% CAGR between FY2010 - FY2015), with strong enplanement growth every year. Most recently, enplanements grew by 4.5% in FY2015 (compared to the 2% growth forecast by the airport consultant) to a record 24 million enplanements, and are up another 7.6% over the first five months of FY2016. SFO is benefiting from international passenger traffic growth in addition to strong domestic performance driven by low-cost carrier expansion and United's increased service. United remains the dominant carrier with 45% of enplanements, though the share of low-cost carriers increased to 24% in FY2015 from 13% in FY2007. Since the recent economic downturn, SFO's passenger traffic market share has increased relative to competing Oakland and San Jose airports, now comprising approximately 70% of the Bay Area.

Debt service coverage in FY2015 was 1.37x, taking into account permitted contingency fund transfers of approximately $94 million as well as the use of designated passenger facility charge (PFCs) as revenues. On a stand-alone basis, excluding contingency rollover funds, coverage was 1.13x. This coverage level is in line with performance in recent years and is not unusual given SFO's residual rate-setting methodology. Given the stronger than forecast enplanement growth in FYTD2016, performance is expected to be in line with FY2015 and slightly better than previously forecast.

The airport commission utilized $48 million of PFC revenue to cover debt service in FY2015, up slightly from FY2014, but still down notably from the $73 million and $87 million used in FY2012 and FY2011, respectively. Going forward, PFC revenues are expected to be used to offset new debt service attributable to the CIP and as a tool to manage costs passed on to airlines, resulting in DSCR remaining at the 1.3x - 1.4x level (including transfers) through the forecast period as new debt is issued.

SFO's airline CPE continues to grow, rising to $16.24 in FY2015, up from $16.01 in 2014, as debt service obligations ramp up, but remains in line with expectations and reasonable for an international gateway. Continued growth in enplaned passengers as well as large increases in non-airline revenue sources and usage of PFC receipts as offsets to debt service payments together contribute to the recent stabilization of airline costs.

Fitch's base case assumes 2.2% average enplanement growth through 2021, in-line with the airport's most recent forecast financial plan and notably lower than that observed in recent years. Total revenues are expected to grow at 6% driven by airline revenue growth of 8% while operating expenses are forecast to grow at an average of 4% annually through 2021, which is just below historical levels. Under this scenario, CPE is likely to reach $22-$23 by FY2021. Net debt-to-cashflow rises minimally to 9x but moves back to the 7.4x range by 2021. Under this base case, DSCR is expected to remain stable at around 1.34x-1.44x range (including permitted transfers) given the fully residual AUL.

Fitch's rating case assumes a weaker 0.1% average enplanement growth through 2021, taking into account an 8.3% loss in 2016 with recovery in future years. Total revenues are expected to grow at 6% driven by airline revenue growth of 9% while operating expenses are forecast to grow at the same 4% average annually as the base case through 2021 despite the lower enplanement volume. Under this scenario, CPE is likely to reach the $27 range; however, net debt-to-cashflow will still fall to approximately 7.4x by 2021 and debt service coverage levels are expected to remain comparable to the base case at around 1.34x-1.44x given the AUL framework.

Even with continued growth in the airport's enplanement base, Fitch expects the average CPE to increase over the next few years to service rising annual DS payments resulting from additional borrowings. Fitch believes that rising airline costs will affect SFO's overall financial flexibility, although it notes that such higher airline costs are supported by a relatively large component of high-yielding international and long-haul domestic travel. In addition, these costs facilitate necessary improvements to support the continued growth experienced at SFO and should remain in-line with and comparable to peer airports with similarly sized capital needs.