Fitch Upgrades Austin, TX's Special Facility Bonds to 'A-'; Outlook Stable
KEY RATING DRIVERS
The upgrade reflects the completion of the CONRAC project coupled with continued strengthening of its financial profile. The stronger financial profile is evidenced by substantially higher debt service coverage ratios (DSCR) of almost 2x versus originally projected ratios of 1.43x, and significantly lower projected leverage levels. The Austin-Bergstrom International Airport's (the airport) growing visiting origin and destination (O&D) base, driven by robust development within Austin's vibrant metropolitan region, has contributed to outperformance in transaction days and customer facility charge (CFC) collections at the CONRAC.
The rating reflects the CONRAC's strong demand profile of over 2 million transaction days, which is susceptible to a moderate level of volatility given the discretionary nature of rental car service. The rating also reflects the CONRAC's adequate rate-making flexibility evidenced by low historical price elasticity, which partially mitigates the narrowness of the CFC revenue stream. Bondholders are further insulated by a strong debt structure, which contains protective features such as subordination of operating and maintenance (O&M) expenses, contingent rent provisions, healthy cash-funded reserves, and continued remittal of CFCs to the trustee in the event of project lease termination.
Robust Demand Profile, Some Volatility: The consolidated rental car facility project has benefitted from robust transaction-day annual growth of nearly 7.5% over the past five years, bolstered by the airport's sizable and expanding visiting O&D deplanement base of over 2 million. However, volatility through the Great Recession was moderate with a peak-to-trough decline of nearly 20%, reflecting the discretionary nature of rental car service. Some carrier concentration at approximately 34% (when considering historical merger and acquisition activity among carriers) is partially mitigated by the attractiveness of the Austin service area, which would likely provide for rapid backfilling in the event of carrier service reduction.
Moderate Rate-Making Flexibility: The CONRAC's current CFC rate of $5.95 is slightly higher than CFC rates charged at other Texas airports, though comparatively higher rates have not appeared to meaningfully hamper rental demand. Additionally, a moderate level of rate-making flexibility has been demonstrated by low elasticity to historical CFC rate increases, which partially mitigates risk associated with the narrow revenue stream available to bondholders.
Modern Infrastructure: The project was completed on time and on budget as of October 2015, thereby eliminating construction risk. The new single-site rental location has modern facilities with no additional capital expenditure or debt issuances expected over the near term.
Strong Debt Structure: Austin's debt structure is relatively conservative, featuring all senior, fixed-rate debt. Fitch considers the CONRAC's escalating debt service profile mostly mitigated by rapid growth expected within the Austin area. The structure benefits from strong features such as subordination of O&M expenses, contingent rent provisions, cash-funded project reserves, and continued remittal of CFCs to the trustee in the event of project lease termination.
Healthy Coverage, Moderate Leverage: The project's coverage levels are considered healthy, expected to remain in the 1.8x-1.9x (without rolling coverage account) range over the near term. While leverage on a net-debt-to-CFADS basis is considered moderate at 8x in fiscal 2015 (ended Sept 30.), robust growth within the service area is expected to enable the project's leverage profile to rapidly evolve down in upcoming years.
Peer Analysis: Austin has similar levels of rental car transaction days as Charlotte (rated 'A'/Stable Outlook) and SAT (rated 'BBB+'/Stable Outlook). Austin's rating is partially explained by financial metrics which fall in between those of SAT and Charlotte, having higher coverage and lower leverage levels than SAT but lower coverage and higher leverage than Charlotte.
Negative: Deterioration in rental car transactions without commensurate rate increases which pressures coverage materially below Fitch's projections on a sustained basis may warrant a downgrade.
Negative: 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 cash flow requirements may pressure the rating.
Positive: Continued growth of rental car transactions and CFC revenues which meaningfully increases DSCR and reduces leverage may merit upward movement of the rating.
SUMMARY OF CREDIT
Over the past five years, favorable economic activity within Austin's vibrant metropolitan statistical area (MSA) has driven expansion of Austin-Bergstrom International Airport's traffic base, which in turn has contributed to outperformance in rental car transactions. Specifically, the MSA's population growth has outpaced that of several other large Texan cities, at roughly 3% annually, while unemployment rates have remained remarkably low, reflecting the healthy job market within the MSA.
The airport, which operates as the main commercial facility in Austin, serving a sizable, primarily O&D deplanement base of nearly 5.8 million, has seen growth of roughly 6.4% annually as a result of positive economic activity. Rental car transaction days, measured by the number of rental car transactions multiplied by the length of the rental in days, have consequently experienced similar growth of 7.5% annually, well surpassing Fitch's estimates of approximately 2% when the project was originally rated. Healthy growth at the airport and CONRAC is expected to be maintained, as the airport's expansionary capital plan seeks to accommodate additional passenger growth, including the addition of nine gates, another parking garage, expanded and improved concession space, and a new hotel.
Transaction-day outperformance has resulted in a much stronger financial profile in comparison to original expectations, yielding DSCRs (without coverage account) in the 1.7x-1.9x range in comparison to prior projections of 1.43x. Additionally, favorable revenue growth has enabled the project to de-lever more rapidly, evidenced by fiscal 2015 leverage nearly 2x lower than original estimates. As a result of revenue outperformance, original plans to raise rates by 2018 have been dismissed, though management intends to raise rates as necessary. Additionally, the CONRAC's completion as of October 2015 marked the end of near-term debt-related capital and maintenance expenditures, which should continue to support a strong fiscal position. Fitch views the aforementioned developments positively, as they reconfirm the strength of the underlying service area, and provide comfort rental car service will be retained and financial strength will be preserved going forward.
For fiscal 2016, Fitch has modelled a 7% increase in transaction days, which is slightly higher than if flat growth were assumed for the remainder of FY2016 given year-to-date performance through May. Fitch's base case assumes growth of 2.5% through fiscal 2023, considered conservative in comparison to the CONRAC's historical five-year compounded annual growth rate (CAGR) of 7.5%. Fitch's rating case assumes a near-term shock of 10% in fiscal 2018, followed by a year of flat growth and recovery, slightly less severe than performance through the Great Recession. Respective DSCRs (without coverage account) and leverage averages 1.91x and 6.12x in the base case, and 1.78x and 7.03x in the rating case.
In comparison to Fitch's airport criteria, Austin CONRAC's coverage levels are slightly stronger than metric guidance for an indicative 'A' category large-hub airport, reflecting the additional financial cushion necessary to offset a narrower and generally more volatile revenue profile generated by discretionary rental car transactions. Consequently, Austin's 'A-' rating is considered appropriate in line with criteria and relevant peers.
The bonds are secured by a pledge of CFCs paid by concessionaires, contingent fees paid by concessionaires, if any, the series 2013 supplemental security account, and interest earnings derived from funds on deposit in the revenue fund.