Fitch Rates Palm Beach County, FL's 2016 Airport Rev Refunding Bonds at 'A+'; Outlook Stable
Fitch has upgraded approximately $72.08 million in outstanding airport revenue bonds to 'A+' from 'A' with the series 2006A's at $69.08 million being refunded with the 2016 bonds.
The Rating Outlook on all bonds is Stable.
KEY RATING DRIVERS
The upgrade to 'A+' from 'A' reflects the continued strengthening of PBIA's financial profile, evidenced by substantially improved debt service coverage ratios (DSCR) of above 3x from the historical average of 1.5x, robust cash balances, declining leverage and very low cost-per-enplanement (CPE) levels. Financial strength is expected to be maintained, given the anticipated reduction in debt service obligations through the refunding transaction, coupled with the absence of planned capital-related debt issuances in the near term.
The rating reflects the airport's modest enplanement base of just over 3 million with 95% O&D traffic and minimal carrier concentration. Favorable cost recovery from airlines and non-aeronautical revenue streams, coupled with a modest capital plan and conservative debt structure are viewed as credit strengths. Airport peers include Kenton County Airport ('A+'/Outlook Stable), Lee County Airport ('A'/Outlook Stable) and Broward County ('A'/Outlook Positive), with PBIA's and Kenton County's higher ratings reflecting more favorable leverage and coverage profiles.
Revenue Risk - Volume: Midrange
Medium Hub with Moderate Historical Volatility: The airport serves a medium regional O&D base of approximately 3.1 million enplanements whose service offerings are deemed adequate for the area's wealthy, niche market. The airport faces some competition from larger Southern Florida airports, but Fitch expects PBIA's traffic base to face modest volatility over time. Moreover, service reduction risk is partially mitigated by PBIA's well-diversified carrier mix, with no single airline exceeding 27% of enplanements.
Revenue Risk - Price: Stronger (revised from Midrange)
Competitive Costs, Robust Non-Airline Revenues: The airport utilizes a hybrid use and lease agreement (AUL) which provides for sufficient cost recovery of operating and debt service expenses. PBIA's cost-per-enplanement levels (CPE) have become exceptionally competitive for the Southern Florida area, and are expected to remain in the $4 range over the near term. Additionally, the airport has several healthy non-airline revenue streams at its disposal, which not only support the airport's bottom line but also subsidize airline costs via revenue sharing.
Infrastructure Development and Renewal: Stronger
Modest, Cash-Funded Capital Plan: PBIA's five-year capital improvement plan (CIP) is considered conservative at approximately $156 million and focuses primarily on maintenance and marginal improvements to the airport. Favorably, the capital plan is completely cash-flow funded in the form of grants, PFCs, and operating cash flow, helping to lessen the airport's debt burden.
Debt Structure: Stronger
Conservative Debt Structure: The airport benefits from a low-risk debt structure characterized by senior, fully amortizing, fixed-rate debt. The sculpted nature of PBIA's amortization profile provided for a substantial drop in debt service between FY2014 and FY2015 from $17.6 million to $6.8 million, respectively. Debt service is expected to further reduce in coincidence with the current refunding to the $6.3 million level. The debt service reserve funds are met solely through surety policies.
Robust Coverage, Low Leverage: PBIA's coverage levels are healthy, averaging 3.42x in Fitch's base case and 2.75x in Fitch's rating case in comparison to 3.18x in FY2015. PBIA's leverage position, at 0.50x in FY2015, compares favourably to Southern Florida peers which report leverage in the 9-11x range. PBIA's robust unrestricted cash balances of approximately $75 million in FY2015 are projected to be maintained in the future, with cash completely offsetting outstanding debt balances over Fitch's forecast period.
Peers: Relevant peers include Lee County Airport,('A'/ Outlook Stable), Broward County Airport ('A'/Outlook Positive), and Kenton County Airport ('A+'/ Outlook Stable). Broward is PBIA's main competitor while Lee County and Kenton County have similar traffic profiles. PBIA and Kenton County compare favourably to peers, with higher coverage levels and lower leverage.
Negative - Operational or Financial Performance: Material shifts in the airport's traffic base or financial profile due to economic conditions or additional leverage that affects coverage or liquidity may pressure the rating.
Positive - Volume Risk Constrains Rating: Given the airport's competition exposure and modest underlying traffic base, upward migration into the 'AA' category is deemed unlikely at this time.
SUMMARY OF CREDIT
PBIA expects to issue approximately $58.9 million in series 2016 senior revenue refunding bonds to advance refund the airport's series 2006A bonds. Proceeds will also cover the costs of issuance. The bonds will be on parity with existing senior bonds and are expected to be all fixed-rate. The refunding is estimated to provide $12.4 million in net present value savings (or 17.9% of refunded principal) and will amortize through 2037, without extending the maturity of the refunded bonds. With the refunding, the debt service profile declines to $6.3 million from approximately $6.8 million. The debt service reserve fund is expected to be funded at maximum annual debt service (MADS) with a surety from the National Public Finance Guarantee Corporation.
Fitch recognizes PBIA's growing enplanement base, which has increased 5.8% FY 2016 YTD for six months through March, 6.1% in FY2015, and 3% in FY2014. Traffic growth is mostly attributed to improving economic conditions, as well as the airport's ability to add service and seat capacity. As a medium hub, PBIA undoubtedly faced more traffic volatility during the airline consolidation phase following the Great Recession than large hubs did; however, Fitch expects volatility to taper in upcoming years as the airport re-establishes a new traffic baseline with which to serve its niche market of wealthy, older passengers. In Fitch's view, the airport could also benefit in future years from its older passenger base, as family-related travel lends to greater stability than leisure-oriented travel, positioning the airport favourably in comparison to other Southern Florida peers.
Fitch also views the consistency of non-airline revenues outpacing enplanement growth favourably, as it showcases the above-average spending trend of PBIA passengers as well as efforts by the airport to continue improving the attractiveness of concession offerings. Notably, non-airline revenues comprise roughly 80% of PBIA's operating profile, and grew by 7.1% in FY2015, building on growth of 7.9% in FY2014. Management expects non-airline revenue to continue its upward trajectory, as the airport continues to reap the benefits of monopolizing parking facilities, opening a new travel plaza, and expanding its fixed base operator operations.
A combination of the airport's AUL and robust non-airline revenue streams provide for substantial cost recovery of operating expenses and debt service costs. Moreover, the structure of the AUL produces extremely low CPE levels, expected to remain at the $4 level in the near term ($2-3 range once revenue sharing is considered). Fitch regards these features as key credit strengths, as they not only allow the airport to retain service from carriers but also provide substantial cushion during periods of lower demand.
Fitch's base case models 3% enplanement growth for FY2016, with 1% growth thereafter. Airline revenues are grown at a 3.5% compounded annual growth rate (CAGR), with a 6% increase in FY2017 reflecting the majority of expense for the airport's baggage handling system being passed-through to airlines. Non-airline revenues are assumed to increase by 5% in FY2016, reflecting the opening of the airport's travel plaza and continued growth in parking, with revenues growing at a slightly higher rate than enplanements thereafter in accordance with historical trends. Operating expenses are expected to grow at a 4.5% CAGR, with a 7% increase in FY2017 for the baggage handling system.
Fitch's rating case models a 10% decrease in enplanements in FY2017, followed by a modest recovery. Airline revenues grow slower than the base case at a 2.8% CAGR, reflecting lower operating expenses during periods of lower traffic volume. Nonairline revenues trend at a slightly higher rate than enplanements, similar to the base case. DSCRs average 3.42x and 2.75x in Fitch's base and rating case, respectively. CPE grows to the mid-$4 range in both cases without revenue sharing, and the $2-3 range with revenue sharing. Leverage in both scenarios is completely offset by cash balances by FY2016.