News Column

Fitch Affirms Austin, TX's Special Facility Bonds at 'BBB+'; Outlook Stable

July 7, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed its long-term 'BBB+' rating of Austin, TX's approximately $143.8 million rental car special facility revenue bonds, series 2013. Bond proceeds are being used to finance the construction of a consolidated car rental facility (ConRac) at Austin-Bergstrom International Airport. The Rating Outlook on the bonds is Stable.

RATIONAL:

The rating reflects a growing visiting origin and destination (O&D) base at Austin-Bergstrom International Airport which is driven by a sizable and increasing metropolitan region. Structural enhancements built into the rental car concession agreement provide credit protection by allowing the City to adjust rental rates and levy contingent rent should revenues fall short of projections. These features are somewhat offset by the project's relatively elevated leverage as compared to peer facilities, combined with the narrow customer facility charges (CFC) revenue stream pledged to the bonds, which is inherently volatile due to its direct correlation with visiting O&D passenger volumes.

KEY RATING DRIVERS:

Stable Long-Term Demand Profile: The consolidated rental car facility project serves a sizeable and growing metropolitan region, with approximately 2 million visiting origination and destination (O&D) deplanements annually. Austin had 559,577 rental car transactions and 2 million transaction days in 2013, growing compounded annual growth rate (CAGR) of 2.7% and 4% respectively over the 10-year period since 2003. However, downside volatility in rental car transactions and transaction days is possible, as evidenced by a combined drop of nearly 20% in the 2008-2010 period. All major rental car brands operate at Austin, with the largest operator being Hertz at 28% of 2013 rental revenues.

Adequate Rate-Making Flexibility: The airport's current customer facility charge (CFC) rate of $5.95 is higher than that charged at other Texas airports, though rate increases in 2010 and 2011 do not appear to have negatively affected rental demand. The airport may increase rates at its discretion in the future if necessary, and the plan of finance assumes 5% increases in CFC rates every three years to meet project obligations, including operating expenses and reimbursements to the project lessee. However, management indicates that if current growth trends continue at the airport, the increase scheduled for fiscal 2015 may not be necessary. The concession agreement with the rental car companies allows management to levy contingent rent on the rental car companies to the extent revenues are short of projections, which provides protection in a downside scenario.

Elevated Leverage Initially, With Adequate Financial Metrics: The project's leverage at 10.6 times(x) net debt-to-cash available for debt service (CFADS) based on 2013 CFC revenues is relatively high, but is expected to drop to the 6x-7x range by 2022. Debt service coverage ratios are estimated at around 1.7x excluding rolling coverage. Maintaining these leverage and coverage levels will require ongoing revenue growth in CFCs over the life of the bonds through CFC rate adjustments or higher annual level of transaction days, as annual gross debt service increases approximately 1.9% annually in the 2014-2042 period.

Strong Security Package: The structure is underpinned by a first lien on CFC monies and, if needed, contingent rent, a closed loop of funds, and cash-funded project reserves. In the event project leases are terminated, CFC receipts remain property of the trust and will continue to be remitted without set-off or abatement. Operating expenses, major maintenance and other items are subordinate to debt service.

Modern Infrastructure: Construction risk is largely mitigated by CFC revenues that are already in place, coupled with a guaranteed lump sum contract, 6% contingencies, 100% payment and performance bonds, and adequate cash reserves. Construction of the project is currently 36% with an expected completion date in October 2015. When completed, the new single-site rental location will have modern facilities and no additional plans for parity debt. The close proximity of the new rental car facility to the existing terminal building will eliminate the need for bussing operations.

RATING SENSITIVITIES:

--Changes in rental car demand, or volatility in the underlying O&D traffic base, that lead to performance that is materially above or below indicated projections may change the rating.

--Additional leverage to support project construction, including the use of completion bonds, may cause negative rating pressure.

--Use of fund balances beyond those anticipated in the sponsor's forecast or imposition of contingent rents to rental car companies in order to fully support project cashflow requirements under the bond documents and rental car concession agreements may negatively impact the rating.

SECURITY:

The series 2013 bonds are secured by a pledge of the Trust Estate, which includes revenues defined as new and prior CFCs paid by concessionaires to the Trustee under the new and prior concession agreements; contingent fees, if any, payable by the concessionaires; any amounts drawn under LOCs representing CFCs, contingent fees, or prior facility rentals; investment earnings for amounts held by the Trustee; and prior facility rentals paid by the concessionaires to the Trustee under prior concession agreements.

CREDIT SUMMARY:

Austin-Bergstrom Airport is the main commercial facility serving the growing five-county Austin MSA, which has a total population of approximately 1.8 million residents. Opened in 1999 on a site that was previously an Air Force base, the airport is located about eight miles southeast of downtown Austin. The airfield consists of a pair of parallel commercial runways sufficiently spaced to handle simultaneous operations and capable of accommodating all commercial aircraft currently in service, and the 600,000 square foot terminal provides access to 25 aircraft gates.

Airlines serving the airport offer 146 daily departures and provide nonstop service to 37 markets. The airport is served by five traditional hub-and-spoke carriers, four low-cost carriers, and nine regional carriers, as well as four all-cargo airlines. Southwest Airlines (Southwest) is the largest carrier at the airport in terms of passenger activity, accounting for 39% of deplaned passengers in fiscal 2013, followed by American Airlines with 19%. There is some competition for passengers in the air trade area, with San Antonio and Fort Hood under 100 miles away and Houston area airports about 170 miles away.

Fiscal 2013 destination O&D deplanements grew by 5.1%, reaching 2 million. This level, a new peak, represents the fourth year of growth following a decline of 8.8% in 2009. Transaction days at the facility stood at 1.83 million for 2012, up 13% since falling nearly 20% cumulatively in 2009 and 2010. Similar to other ConRacs, transaction days have demonstrated a higher degree of volatility than visiting O&D deplanements through economic cycles. It is Fitch's view that the City has the ability to ensure that all obligations are met by charging a contingent rent to tenants and/or by increasing CFC rates in addition to all the reserve funds supporting the project.

The ConRac facility project consists of two five-level structures connected via vehicle circulation ramps. The facility will be walking distance to the airport's passenger terminal building, located behind the existing parking garage and accessible by a pedestrian walkway across the garage. The ConRac/parking facility will be 1.66 million square feet, including 790 public parking spaces on the ground floor, 1,840 ready/return rental car spaces on three levels of the garage, and 1,152 rental car storage stalls on the roof. The second floor will also include the rental car customer service area. There will be a multi-level quick turnaround facility for fueling and cleaning, including 48 fueling stations and 12 car wash bays. The facility is designed to accommodate 11 rental car companies upon opening; there are currently nine rental car companies operating at the airport. As a result of this ConRac facility, there will be no need for rental car bussing operations. The third level of the existing parking garage, which is currently occupied by rental car companies, will also convert to public parking.

Construction commenced in March 2013 and the date of beneficial occupancy (DBO) is currently in October 2015 after being pushed back a month from the original date of September 2015. Fitch notes that the DBO push back is not a material development as the bonds are secured by CFC revenues that are already being levied. Management has indicated that the DBO pushback is not material and that the construction is on course to be completed within the timeframe and budget established at the time of issuance. Rental car companies currently operate under existing concession agreements, but have executed new concession agreements that will automatically supersede the existing agreements on the DBO of the ConRac, mitigating completion risk. The term of the new concession agreement is 11 years from the DBO, with the city maintaining the option to renew the agreement for two additional five-year periods. If the city chooses to terminate the lease, it must negotiate agreements with all of the rental car companies serving the airport, ensuring that CFC collections are uninterrupted.

The estimated project costs for the facility are $155.5 million of which 79% will be funded with series 2013 proceeds combined with 21% from previously collected CFCs. The CFC debt is secured by a narrow revenue stream that is dependent upon rental car activity. The current $5.95 per day CFC rate is relatively high when compared to other airports with CFC secured stand-alone bonds, and the plan of finance assumes 5% increases in CFC rates every three years in order to keep pace with annual gross debt service that escalates at 1.6% through maturity.

Fitch considers the structural features of the transaction as adequate based on the protections available to mitigate project completion and delay risk. The construction contract was awarded under a guaranteed maximum stipulated sum price of $133.6 million and includes $7.5 million in project contingencies. Liquidated damages are uncapped, and are payable after 760 days from the start date sized at $1,750 per day ($1,000/day to the city, $500/day to the developer, $250/day to master lessee). Performance and payment bonds are in place in the amount of 100% of the contract price. The project also benefits from substantial structural liquidity. Liquidity available to the project includes CFC cash on hand from prior collections, the rolling coverage account (funded at 25% maximum annual debt service [MADS]), and the debt service reserve fund (funded at 10% of par).

Management's plan of finance projects debt service coverage ratios (DSCR), excluding coverage and reserve funds, to average 1.66x over the life of the project. This coverage level assumes cash flow will be adequate to meet both bond debt service and all subordinate transfers and payments, including city payments and reimbursements for operations and maintenance, tenant improvements, and base rents. In order to achieve this, the plan of finance assumes 1.8% annual average growth for transaction days through 2042 and 5% increases in CFC rates every three years through 2027. If growth in transaction days or CFC rates slows, Fitch notes that subordinate payments may not be met. Project leverage is also high initially at 10.6x net debt to CFADS, though this drops to the 6x-7x range over 10 years once principal repayment begins in 2017. Fitch ran several sensitivities to the plan of finance, including restricting transaction day growth to 1% per year, freezing CFC rates at the current rate of $5.95, and assuming a 10% increase to leverage to reflect the issuance of completion bonds. Under all scenarios, cash flow remains sufficient to meet bond debt service, and to cover subordinate reimbursements. While the structure is dependent on growth in the long run, Fitch views the required levels of growth to be achievable given the strength of the Austin market.

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=838384

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

Emma W. Griffith

Director

+1-212-908-9124

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Seth Lehman

Senior Director

+1-312-368-0755

or

Committee Chairperson

Scott Zuchorski

Senior Director

+1-212-908-0659

or

Tertiary Analyst

Samuel Marsico

Analyst

+1212-612-7810

or

Media Relations

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

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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