News Column

Fitch Rates San Jose, CA's Airport Sub Bank Notes 'BBB'; Outlook Stable

February 19, 2014

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has assigned a 'BBB' rating to the city of San Jose, California's Airport (the airport) bank note associated with subordinated commercial paper notes series A-1 (non-AMT), A-2 (non-AMT/Private Activity), B (AMT) and C (Taxable). The Rating Outlook is Stable.

The airport has approximately $1.4 billion in outstanding senior airport revenue bonds rated 'BBB+' by Fitch with a Stable Outlook.

KEY RATING DRIVERS:

COMPETITIVE AIR SERVICE AREA: The airport's traffic base is over 90% origination and destination but is exposed to competition from nearby San Francisco and Oakland. As a result, enplanements have historically been volatile and are currently at 1995 levels. The airport also has a moderately concentrated carrier base with Southwest (rated 'BBB' by Fitch) accounting for over 50% of traffic. Revenue Risk - Volume: Midrange.

LOW TO MODERATE PRICING POWER: The airport's hybrid use and lease agreement allows for adequate cost recovery. However, the airport is reliant on the solid performance of volume sensitive parking, PFC, and CFC revenue to keep airline costs reasonable. The airport is utilizing unspent bond proceeds to pay a portion of debt service to keep the cost per enplanement (CPE) at $12. However, airline costs are exposed to this financial plan, which could lead to CPE jumping to $15 in five years if traffic levels and thus volume sensitive revenues decline further. Revenue Risk - Price: Midrange.

MODERATE DEBT STRUCTURE: The airport has very limited financial market exposure, with $45 million in subordinate commercial paper outstanding and all senior debt fixed rate. However, it does have a highly back-loaded debt structure with a significant jump in annual debt service 20 years out, which is unique in the airport sector. The bonds do have a 2017 call date and the airport intends to restructure the debt to eliminate the increase. Debt Structure: Midrange.

LIMITED NEAR-TERM INFRASTRUCTURE RENEWAL: San Jose has a recently completed terminal complex, rental car facility, and other airfield and roadway improvements allowing for very limited capital needs in the near term. This is important as there will be limited funding generated from revenue over the next five years given the full allocation of PFC, CFC and concession revenue to offset airline rates and charges. Infrastructure Development and Renewal: Stronger.

DECLINING COVERAGE, ELEVATED LEVERAGE, LIMITED OPERATING FLEXIBILITY: San Jose has leverage of approximately 10x as a result of the recently completed $1 billion terminal area improvement plan (TAIP). While the airport's fiscal 2012 liquidity is high with 463 days cash on hand the airport will likely use these resources over the next five years to mitigate airline rate increases. Under modest growth assumptions, Fitch expects total debt service coverage of 1.8x to decline to 1.3x over the next several years as fund transfers diminish. Management has been very aggressive in reducing costs but will be hard pressed to achieve further savings if volume sensitive revenues stagnate or decline.

RATING SENSITIVITIES

--Significant Traffic Declines: Severe air traffic declines of 10% or more could lead to a downgrade;

--Additional Leverage: Although not currently anticipated, any additional leverage without commensurate air traffic growth could lead to a downgrade;

--Bank Note: Any change in the senior underlying rating of the airport would affect the subordinated bank note rating.

SECURITY:

To the extent term loan bank notes were to be issued, such notes would be secured by surplus revenues held in the subordinated debt account of the surplus revenue funds, established in the master trust agreement. The senior airport bonds are secured by a first lien of net revenue of the airport, including operating grants, facility rents, and CFC collections on rental car transactions. The commercial paper notes are secured by a lien and pledge of advances pursuant to the letter of credit facility, proceeds of the sale of notes, and surplus revenues subordinate in lien to the senior bonds.

TRANSACTION SUMMARY:

The commercial paper notes series A-1, A-2, B, and C have an authorized maximum $60 million aggregate principal amount at any given time with an irrevocable direct-pay letter of credit (LOC) provided by Barclays Bank PLC (rated 'A/F1', Stable Outlook). The LOC provides coverage for the principal amount of the notes and interest on the maturity date. Any principal portion of an unreimbursed LOC draw becomes a term loan and must be repaid by the 3rd anniversary of the LOC draw date. The bank note rating supporting the commercial paper reflects the subordinated nature of the obligation.

Fiscal 2013 enplanements at the airport increased 2.7% to 4.2 million. Through the first 7 months of fiscal 2014, enplanements have improved a further 6.9%.

For more information, please see Fitch's press release 'Fitch Affirms San Jose, CA's Airport Revenue Bonds at 'BBB+'; Outlook Stable'; dated June 28, 2013 and available at 'www.fitchratings.com'.

Additional information is available at 'www.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://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Rating Criteria for Airports

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=821035

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Daniel Adelman

Analyst

+1-312-368-2082

Fitch Ratings, Inc.

70 W. Madison St.

Chicago, IL 60602

or

Secondary Analyst

Zane Latham

Associate Director

+1-415-732-5612

or

Committee Chairperson

Seth Lehman

Senior Director

+1-212-908-0755

or

Media Relations:

Elizabeth Fogerty, New York, +1 212-908-0526

Email: elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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