Fitch Affirms Broward County's (FL) Airport Revs at 'A'; Outlook Revised to Positive
The county recently priced approximately \\$480 million of airport system revenue bonds series 2015ABC that Fitch does not rate.
The Positive Outlook reflects the significant progression of FLL's \\$2.4 billion capital program in terms of budget management and project delivery, which will position the airport for long-term growth. A higher rating can be supported in the next one to two years by the continuation of growing traffic levels and non-airline revenue, which together will allow FLL to manage its higher debt burden with stable coverage levels and low-to-moderate airline costs.
The 'A' rating reflects a strong base of traffic demand that is supported by expanding domestic and international services although FLL faces moderate competition from airports in nearby Miami and Palm Beach. The airport's cost structure under its residual agreement, which was extended for an additional 10 years, remains favorable both regionally and nationally. Airport leverage has increased in recent years to support a large capital program but should moderate from the 13x-14x range over the next several years.
KEY RATING DRIVERS
Revenue Risk - Volume: Stronger (Revised from Midrange)
Growing Traffic Base, Carrier Diversification: FLL is the leading domestic O&D airport for south Florida with over 13 million enplanements in fiscal 2015. Carrier service exposure is exceptionally well-diversified across many low-cost carriers. Some vulnerability to traffic volatility is evident given the leisure-oriented market FLL serves; however, passenger trends are largely positive particularly with international destinations going through a major expansion phase. Competition exists from both Miami and Palm Beach airports.
Revenue Risk - Price: Stronger
Sound Rate-Setting Structure: The airport currently utilizes a residual use agreement that was recently extended through 2026. This extension is credit supportive as it demonstrates the commitment from carriers, as fixed costs for the airport are rising in conjunction with the capital program borrowings. Current airline costs are very low at \\$4.52 per enplanement, and while they may rise to over \\$8.00 under Fitch's base case, Fitch believes that the airport has sufficient economic flexibility to pass costs to carriers despite the large presence of low-cost carriers.
Infrastructure Development & Renewal: Midrange
Significant Capital Spending Underway: The extension of the airport's second runway as well as terminal expansion and redevelopment will come at a cost of \\$2.4 billion. Taking into account the series 2015 bonds, much of these costs will have already been funded. While passenger facility charges (PFCs), grants and additional commercial revenues are expected to fund much of these added debt-related costs, traffic underperformance could translate to higher than planned airline charges.
Debt Structure: Stronger
Conservative Debt Structure: The airport's debt is fixed rate with a flat-to-declining amortization profile, secured by a first lien on general airport revenue.
Adequate Metrics: Because of the residual agreement, the airport maintains narrow debt service coverage levels below 1.10x based on current net operating revenues (1.44x with transfers). Historical liquidity levels have been adequate at close to one year of operating costs, while airport leverage is expected to rise in the near term from 10.2x to over 14x in conjunction with the capital program. With growth in passenger traffic and operating revenues, leverage should evolve below 10x within the next five years.
PEERS: Among its 'A' category Florida peers, are Miami (MIA; 'A'/Outlook Stable) and Tampa (TPA; 'A+' senior, 'A' subordinate, Outlook Positive). FLL is projected to maintain more favorable cost per enplanement (CPE), leverage, and debt coverage levels relative to Miami. On the other hand, Tampa is expected to have similar CPE levels but stronger coverage ratios (over 1.7x) lower leverage (5x-6x) over time.
--Successful completion of the airport's current capital program, coupled with commensurate enplanement growth and revenue generation, which leads to still competitive CPE levels and stabilizing debt service coverage.
-- Leverage: Significant additional borrowing beyond the airport's current plan leading to CPE higher than anticipated under the airport's current forecasts;
--Traffic Base: Material declines in enplanement levels, due to competition or service changes, that pressure non-airline revenue generation and CPE levels;
-- Financial Performance: Material declines in liquidity or debt service coverage levels that adversely affect the airport's financial or operating profile.
SUMMARY OF CREDIT
Enplanements and carrier service at the airport have shown solid positive performance over the last five years through fiscal 2014, growing at an annually compounded rate of 2.8%. Looking ahead, the traffic growth is expected to be even stronger with a nearly 10% increase estimated for fiscal 2015 followed by over 5% growth for next year. A combination of notably strong new service levels on international routes, particularly in Central and South America, as well as jetBlue's ongoing expansions at FLL are primary catalysts for these demand trends. Carrier diversification at FLL still remains a positive attribute with the leading carrier, jetBlue, representing about 22% of enplanements. Overall, low-cost carriers still account for a majority of total enplanements.
The county recently began the extension of its airline agreement for 10 years through 2026. Carriers that represent a majority of enplanements have already signed on to the extension while more carriers are similarly expected to do so in the coming months. Fitch views this extension as a credit positive development, since it demonstrates a strong commitment to the airport as higher debt costs will be embedded in airline rates and charges. CPE levels are very low and even with increases expected over the next five-year period, FLL will still compare quite favorably to nearby Miami where airline costs average above \\$20.
The airport's revenue generation capabilities remain strong and diverse in Fitch's opinion. Operating revenue was \\$194.4 million in FY2014, a healthy increase of 5.1% over the prior year, while FY2015 operating revenue is expected to grow at similar levels based on healthy non-airline revenue and an anticipated increase in airline revenue. Non-airline revenue, which represents approximately 72% of total operating revenue, increased 3.0% in FY2014. The main categories of non-airline revenue - rental car, parking and concessions - have been steadily increasing over the last couple of years and these increases have allowed the airport to maintain a relatively low CPE.
The county is well underway to completing its \\$2.4 billion capital improvement plan (CIP) and includes a new South Runway which was completed on time and under budget in September 2014. Major elements include re-building Terminal Four's concourse which will bring 14 gates for domestic and international use, the construction of a new five-gate Concourse A in Terminal One, and interior renovations at all four terminals. The South Runway was a technically challenging project but with its completion, airfield operational capacity is expected to increase by 44% to serve long-term growth. Terminal redevelopment and renovations will be a catalyst for both carrier expansion and additional concession revenue generation.
Although portions of the CIP will include both federal and state grants and PFC pay-go utilization, approximately \\$1.9 billion of overall funding will be provided through prior and future bond issues through FY2017. PFC receipts are nearly \\$50 million based on current traffic levels and this revenue stream is intended to cover a substantial portion of the future financing costs as a means to reduce airline contribution payments through rates and charges. This approach will effectively leverage most of the future PFC receipts and put some reliance on enplanement activity in cashflow forecasts.
Fitch's base case incorporates moderate enplanement growth averaging 2.2% through 2020, rising operating revenues and expenses averaging 8.7% and 5.8%, respectively, and additional debt issuances to support the capital program. Debt service coverage, per the bond resolution, falls to 1.34x while net debt-to-adjusted cash flow available for debt service (CFADS) peaks at just over 14x in 2016 and then rapidly moves to under 10x to a still competitive \\$8.30 level.
In Fitch's rating case, which models for near-term enplanement stress of 5% loss in FY2016 while operating revenues and expenses are not affected under the residual agreement, debt service coverage and leverage are both in the same range as the base case while CPE levels grow to just above \\$10 within five years. These financial metrics are in line with previous analysis.
The bonds are payable from the net revenue of the airport's operations. PFCs are not pledged by the bond resolution as a source of security of or payment for the bonds, but have been irrevocably committed as available revenue to the payment of debt service on various issues.