News Column

Fitch Affirms San Diego County Regional Airport Auth, CA's Rev Bonds

February 17, 2014

Fitch Ratings has affirmed the ratings on San Diego County Regional Airport Authority's (the authority) bonds as follows:

--Approximately $379.6 million senior revenue bonds at 'A+';

--$570.9 million subordinate revenue bonds at 'A'.

The Rating Outlook on all bonds is Stable.

The authority also has $50.1 million in outstanding subordinate commercial paper (CP). The CP is gradually repaid over a period through 2030, rolled periodically at prevailing interest rates, and is on parity with the airport's long-term subordinate revenue bonds.

KEY RATING DRIVERS:

Primary Airport in Strong Service Area: San Diego International Airport is the primary air service provider for the San Diego area with an enplanement base of 8.74 million in 2013. The airport's enplanement base is 94 percent origin & destination (O&D), and is serviced by a diverse group of airlines (including Southwest with 37 percent of total enplanements, United 14 percent, and Delta 11 percent). Traffic in fiscal year (FY) 2013 built off FY 2012 gains, increasing a further 1.6 percent. Fitch expects a continued improvement in traffic given the economic recovery being experienced in the San Diego region.

Revenue Risk-Volume: Stronger

Hybrid Airline Agreement: The airport has a hybrid use and lease agreement, which is residual on the airfield and compensatory in the terminal. The previous agreement expired in June 2013 and was renewed through FY 2018. The airport's cost per enplanement (CPE) was $10.16 in 2013, expected to rise to around $11 by 2015. Management seeks to keep CPE below $12.

Revenue Risk-Price: Midrange

Sizable Capital Plan Nearing Completion: The airport has completed the majority of its Green Build project which included a dual-level roadway at Terminal 2, expanded security, additional terminal apron parking, 10 new gates and a ticket lobby, and is in the midst of a concessions redevelopment program to expand shopping and dining, due for completion in spring 2014. The next major project will be a consolidated car rental facility for which the authority raised approximately $305.3 million of special facility bonds secured by CFC collections.

Infrastructure Development: Stronger

Sizable Fixed Rate Debt Profile: The airport currently has $379.6 million of senior and $570.8 million of subordinate bonds outstanding. All bonds are fixed rate. The authority also has $50.1 million of CP outstanding that ranks on par with rated subordinate lien bonds.

Debt Structure: Stronger

Considerable Leverage, Strong Financial Profile: The airport's net debt-to-cash flow available for debt service (CFADS) of 12.97 times (x) is elevated relative to peers. Senior and aggregate coverage for FY2013 was strong at 30.83x and 3.77x respectively (the senior ratio reflects only a partial interest payment given that senior bonds were issued in 2013). However, both are expected to evolve down to lower levels as the recent debt is incorporated into airport costs. The airport maintains a healthy level of $147.8 million in unrestricted cash as well as restricted O&M and R&R reserves, equivalent to 575 days cash on hand.

RATING SENSITIVITIES

--Lower enplanement growth leading to reduced PFC collections and lower concession spending may pressure revenues;

--Costs increasing above estimates related to the new facilities could tighten financial flexibility;

--Material changes in the financial profile in terms of leverage, coverage, or liquidity.

SECURITY:

The bonds are special obligations of the authority, secured by and payable from a senior and a subordinate lien on the net revenues of the airport system and, under certain circumstances, investment earnings and certain other funds and accounts.

CREDIT UPDATE

Enplanements increased by 1.9 percent to 8.7 million in FY 2013 and have shown continued improvement through the first five months of 2014, growing by an additional 1.7 percent. The airport's traffic base is 94 percent O&D and has benefited in the past year from continued economic recovery in the San Diego metropolitan statistical area (MSA). Air carrier service at the airport remains stable, with Southwest accounting for 37 percent of enplanements in 2013. The airport has international service to various cities in Canada and Mexico in addition to London-Heathrow and Tokyo-Narita.

The airport operates under a hybrid use and lease agreement that is residual on the airfield and compensatory in the terminal. Airlines also pay other fees and charges to cover costs relating to security, terminal apron parking and overnight charges. The current use and lease agreement will expire in June 2018.

FY 2013 operating revenues were $177.5 million. This was 15.6 percent higher than FY 2012, reflecting higher property rental income, concession and parking revenues, and safety and security charge income. FY 2014 revenues are budgeted to grow by a further 7.0 percent. In FY 2013, non-airline revenues accounted for 50 percent of operating revenues, with concession income being the single largest source. Non-airline revenues are dependent upon traffic levels and, as such, revenues may be pressured if enplanement growth falters.

Coverage levels have remained strong in recent years as management has worked to contain operating expense growth. Operating expenses in FY 2013 were $126.8 million, reflecting a 6.5 percent increase over FY 2012 due to the new terminal coming online. Prior to this, management was able to contain annual operating expense growth through the economic downturn, which remained below 2 percent since 2009.

The airport is currently wrapping up its sizable Green Build capital investment program. Borrowing for the $820 million program has increased the airport's debt burden, raising CPE to over $10, and expected to grow to around $11-$12 in coming years. Senior coverage is expected to stabilize at around 5.0-5.5x, while aggregate coverage is expected to stabilize at around 1.9-2.0x. The airport has a relatively high degree of leverage compared to peers, with a net debt / CFADS ratio at 13.0x, but it is projected to decrease as PFCs applied to debt service come online and project costs make their way into the carrier rate base post-completion. Fitch expects a net debt to CFADS of closer to 10x by 2016.

The authority expects to construct a consolidated rental car facility at the airport. This $305.3 million project is expected to be funded with special facility bonds backed by customer facility charges (CFCs), collected by rental car companies from their customers and subsequently transferred to the authority. The board has adopted a CFC collection rate of $6 per transaction day, increasing to $9 per day by 2017 (limited to five transaction days per transaction). CFC revenues are expected to be used to design, finance and construct the rental car facility, and fund certain enabling projects.

Additional information is available at 'fitchratings.com'.

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (July 12, 2012).

--'Rating Criteria for Airports' (Dec. 13, 2013).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=682867

Rating Criteria for Airports

http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=725296

Additional Disclosure

Solicitation Status

http://fitchratings.com/gws/en/disclosure/ solicitation?pr_id=820413

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