News Column

Fitch Downgrades El Paso, TX's Airport Revs to 'A'; Outlook Stable

May 16, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has downgraded the City of El Paso, Texas' approximately $20 million airport revenue bonds to 'A' from 'A+'.

The Rating Outlook is Stable.

DOWNGRADE RATIONALE

The downgrade reflects El Paso International Airport's (the airport) elevated risk profile as indicated by multi-year traffic declines and concerns that traffic volatility may potentially constrain the airport's future operating and financial flexibility. These concerns further stem from the expectation of supplementary declines following the forthcoming expiration of the Wright Amendment. Fitch views an 'A' rating to be more consistent with a small market airport that may be subject to persistent future volatility. The airport's very low debt level and strong liquidity position, however, should leave it well-placed to sustain continued weakness in operational performance.

The Stable Outlook reflects Fitch's expectation that the airport should approach a sustainable base level of traffic once adjustments following the expiration of the Wright Amendment have materialized, and should be able to maintain stable financial margins thereafter.

KEY RATING DRIVERS

Small Market Airport with Notable Airline Concentration: Despite facing limited competition and having a predominantly origination and destination (O&D) based traffic profile, El Paso International Airport continues to experience significant enplanement declines. Traffic in fiscal year (FY) 2013 was down 5.5% with a year-to-date (YTD) FY2014 decline of 5.2% indicating a continuing trend; in aggregate, traffic is now 19% below its 2007 peak. Elevated concentration risk exists with Southwest Airlines Co. (Southwest, rated 'BBB' with a Stable Outlook by Fitch) accounting for 52% of the airport's FY2013 enplanements. Additionally, its small operating profile, with significantly fewer than 2 million annual enplanements, further constrains the assessment. Revenue Risk-Volume: Weaker

Low Historical Cost Profile: The airport's cost per enplaned passenger (CPE) remained moderate relative to peer airports at $6.80 in FY2013. However, the five-year airline agreement in place through 2017 employs a hybrid rate-setting methodology that passes through merely a portion of the airport's fixed and variable costs. Only series 2003 debt service is recovered through the agreement, with minimal dependence on airline charges to support the airport's future debt service requirements. Furthermore, the airport has a relatively high reliance on non-airline revenues, although the diversity of non-aviation related revenue sources partially mitigates this concern. Revenue Risk-Price: Midrange

Manageable Near-Term Infrastructure Needs: The airport's five-year capital improvement plan (CIP), estimated at $139 million, anticipates no additional airport leverage. Funded through a combination of federal grants, passenger facility charges, customer facility charges and airport funds, the CIP will finance runway pavement reconstruction, ticketing and baggage expansion, parking improvements, 16 passenger loading bridges and a separately financed rental car facility expansion. The terminal was last renovated and expanded in 2011, and the airport does not anticipate capacity constraints that will require additional capital spending. Infrastructure Development and Renewal: Midrange

Conservative Debt Structure: All of the airport's debt is fixed-rate with a declining amortization profile. Maximum annual debt service (MADS) of $2.13 million is scheduled in FY2016, coinciding with the series 2003 maturity. Post-FY2016, debt service is reduced to an average level of $1.4 million through 2033. Debt Structure: Stronger

Low Leverage and Adequate Liquidity: The airport has a very low debt load with debt/O&D enplanements of $16 and a negative 0.43x net debt/cash flow available for debt service (CFADS). Balance sheet liquidity is strong, with 381 days cash on hand supported by $30.4 million in available reserves. Debt service coverage in FY2013 increased from the prior year to 4.05x, providing significant cushion against volatility. In Fitch's view, this level of cushion in coverage is necessary given the airport's very narrow operating margins and volatile operating profile.

RATING SENSITIVITIES

--While some traffic losses may continue in the near term, future material erosion in airline operations or further contraction of traffic volume in excess of 10% would likely signal additional credit weakness;

--An inability to support margins from operating revenues, should expenses rise, that impact the DSCR to a level more comparable to lower-rated airport credits; or

--Heightened revenue volatility or declining trends in non-core airport operations, such as the industrial park segment.

SECURITY

The bonds are supported solely by the net revenues of the airport, after the payment of operating and maintenance expenses.

CREDIT UPDATE

Enplanements declined 5.5% from the prior year to 1.4 million, representing a 19% loss from peak levels in FY2007. Additionally, traffic has continued to decline 5.2% over the first seven months of FY2014. The airport relies heavily on non-airline, fee-dependent revenue sources while its volume is sensitive to national economic cyclicality, employment at nearby Fort Bliss and unpredictable flight schedules post Wright Amendment expiration in October of this year. While the combination of a high O&D base and low leverage were key factors supporting the 'A+' rating, the significant decline in enplanements combined with unbalanced revenue sources indicate an exposure to volume risk that is more comparable with 'A' credits within Fitch's portfolio.

The current airline use and lease agreement, commencing Sept. 1, 2012 and extending five years through 2017, maintains the hybrid rate-setting structure with cost-center residual approach for landing fees and compensatory approach within the terminal. The airport's CPE was $6.80 in FY2013, an increase from $6.23 in FY2012, but is projected to remain stable due to management's plan to continually contain operating costs. The airport maintains an adequate liquidity position of 381 days cash on hand.

Operating revenues have grown at a 0.8% five-year compounded annual growth rate (CAGR), while operating costs have decreased at a CAGR of -0.6% over the same period. Based on FY2013 results, operating revenues increased 0.7% from the prior year to $36.3 million, largely due to higher airline revenues resulting from an increased terminal rental rate. FY2013 operating costs increased modestly 0.8% to $27.6 million. Only $9.4 million, or 26% of total operating revenues, were derived from airline revenues in FY2013. Management has continued to bolster non-aviation revenues from the airport's property, with industrial parks, hotels and other assets, and anticipates future growth as the economy recovers.

Fitch's Rating Case, which contemplates further revenue and enplanement declines, indicates that net revenue produced from future cost containment and/or higher CPE levels may be required to maintain the DSCR at expected levels. An estimated 30% of combined annual debt service costs and operating expenses are passed through to the airlines through 2016; thus, cost control is critical to continued financial flexibility.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (July 11, 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=830460

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

Casey Cathcart

Associate Director

+1 312-368-3214

Fitch Ratings, Inc.

70 West Madison Street

Chicago, IL 60602

or

Secondary Analyst

Tanya Langman

Director

+1 212-908-0716

or

Tertiary Analyst

Emma Chapman

Associate Director

+1 312-368-2063

or

Committee Chairperson

Saavan Gatfield

Senior Director

+1 212-908-0542

or

Media Relations, New York

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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