Fitch Affirms Philadelphia Parking Auth (PA) Airport Parking Rev Bonds at 'A-'; Outlook Stable
The rating affirmation reflects the authority's solid operating profile for exclusive, on-airport parking at Philadelphia International Airport (the airport or PHL). PPA has a demonstrated history of increasing parking rates to help counteract the effects of softening parking demand. Further, leverage is relatively low and coverage ratios are robust. Concerns include an ample supply of competitively priced off-site parking options, potential for additional borrowings, and low liquidity levels stemming from annual surplus transfers to the city of Philadelphia's airport department.
KEY RATING DRIVERS
Flat Parking Demand: Annual parking demand of about 2 million annual transactions is supported by the airport's origin and destination (O&D) enplanement base, which comprised more than half of 15.3 million total enplanements in fiscal 2015. Growth in parking transactions has been pressured over the years due to historically anemic growth in originating enplanements with a decline of the O&D share since 2005.
Narrow Revenue Stream: The authority's narrow parking revenue stream is partially mitigated by its moderate flexibility to raise parking rates. Competition from outside facilities may constrain the authority's capacity to implement future adjustments, although rates in competing facilities have reportedly recently been increased. The authority anticipates its next rate increase to occur in January 2016, which it expects will generate a modest additional \\$1.23 million in revenues.
Manageable Capital Plan with Borrowings: The authority is planning to embark on a five-year, \\$60 million capital improvement plan (CIP) in the near future. Improvements will mainly consist of modernization and structural repair of parking garages, as well as repaving and structural repair of the economy lot. The CIP will be fully funded with \\$60 million in parity debt, which is planned to be issued within a year's time.
Low-Risk Debt Structure: The authority's debt profile is conservative and consists of all fixed-rate debt. Currently, the authority's debt service profile has final maturity in FYE 2030. With the additional \\$60 million parity borrowing for capital improvements, maturity will likely extend into 2050.
Moderate Financial Metrics: The authority's historical leverage on a net debt-to-cash flow available for debt service (CFADS) basis has remained moderate, at 2.63x in fiscal 2015, down from 2.9x in fiscal 2014. Coverage of debt service has consistently been strong at above 2.4x, with fiscal 2015 coverage at approximately 2.5x, up from 2.44x in fiscal 2014. Some coverage dilution is likely, to the 1.8x-2x range under Fitch's rating case, should PPA move ahead with new debt. The authority transfers annual surplus cash to the city on a subordinate basis, thus internal liquidity levels are low (6 days cash on hand in 2015).
Peers: Rated peers include Baltimore Washington Airport Parking (rated 'A-'by Fitch) and Miami Parking ('A'). Philadelphia and Baltimore Washington are similar airport parking enterprises with leverage under 3x and coverage ratios over 2x. Miami's parking system has leverage ratios over 4x, but the system has more diversified revenue streams from garages and on-street spaces, which better hedges the entity from demand volatility.
Negative - A sustained decline in parking transactions or a substantial shift in the competitive environment in favor of off-site parking without commensurate rate increases which pressures revenues.
Negative - Higher debt under the capital program that is materially dilutive to coverage levels on an ongoing basis.
Positive - Due to the narrowness of the credit's revenue stream and the expectation for more debt, upward migration is unlikely.
SUMMARY OF CREDIT
Parking demand at PHL has historically been more volatile than airport enplanements, though parking revenue transactions are beginning to show marginal improvement in more recent years. While total enplanements have remained relatively flat since 2012, revenue transactions have grown at a 1.4% compounded annual growth rate (CAGR). Fiscal 2015 revenue has grown 2.3% over the year to nearly \\$65 million, although performance has not yet returned to pre-recession levels. For fiscal 2015, parking revenue transactions rose 6.7% to 1.93 million, while total enplanements were essentially flat at 15.3 million over 2014.
PPA has demonstrated an ability to raise rates in past years, providing downside protection as transaction levels fluctuate. However, long-term pricing flexibility remains a risk and Fitch believes overall financial health could weaken if demand continues to soften or parking patrons become more elastic to rate increases. To address competition for its economy lot parking, the authority embarked on an aggressive advertising campaign in February 2015, which has resulted in a more positive utilization, rising from 50% capacity to approximately 70%.
Additionally, as a result of the recent parking tax increase, only four of the 11 private companies competing with PPA currently offer rates that are substantially lower than PPA's economy rate of \\$11 per day. To the extent that the authority's rate increase moves forward in January 2016, economy rates will remain the same, while short-term daily and long-term rates will rise by \\$2 each.
The authority is planning to issue long-term debt for its capital program and this action will also likely require an extension of its operating lease with the city, as the current lease expires in 2037. Fitch notes that there has been some delay in gaining approval from the city to extend the lease term of the authority and therefore, the timing of the \\$60 million bond issuance for capital improvements remains uncertain. Fitch does not view this delay as a material concern, as it neither impairs revenue generation nor results in poor facility conditions. Bond proceeds are intended to be used to fund PPA's CIP, consisting mainly of modernization and structural repair of parking garages, as well as repaving and structural repair of the economy lot. Assuming flat debt service payments and a 35-year maturity, the authority's pro forma debt service schedule would be higher in early years, and then gradually decrease following fiscal 2021.
Fitch's base and rating case assume the full \\$60 million parity issuance occurs in fiscal 2017, with debt service payments beginning in fiscal 2018. In the base case, revenues experience growth of approximately 4% over fiscal 2016 to 2017, and then are flat thereafter. In the rating case, revenues decline 1.5% over fiscal 2016-2017 as result of a 7% shock to parking transactions, then experience modest recovery thereafter. Base case coverage drops to a low of 1.97x in fiscal 2020 as a result of higher operating expenses, while leverage decreases to 2.58x in fiscal 2020 from 3.36x in fiscal 2017.
Rating case coverage drops to a low of 1.85x, with maximum leverage at 3.62x in fiscal 2017. Fitch notes that in the event parking demand continues to decline without sustained revenue growth, these metrics could weaken and become inconsistent with the current 'A-' rating.
The airport parking bonds are secured by airport parking revenue at PHL, after deduction of operating expense and city parking tax. PPA has the exclusive right to operate parking facilities on airport property through a lease agreement with the city of Philadelphia that ends seven years after the final maturity of the outstanding bonds. Revenues from the authority's separate parking facilities within the city do not secure the airport revenue parking bonds.