Fitch Ratings has withdrawn its implied 'A-' long-term rating on Long Beach Airport, California (LGB or the airport). The rating withdrawal is in conjunction with the assignment of an 'A-' rating to the following bonds:
--Long Beach Airport Bureau (CA) senior airport revenue bonds, series 2009A;
--Long Beach Airport Bureau (CA) senior airport revenue refunding bonds, series 2009B.
The bonds are being issued under a new master senior trust indenture and are secured by net revenues generated at the airport, including transfers which are not to exceed 25% of annual debt service on the outstanding bonds. Bond proceeds will be used to fund the construction of a parking garage, refund a portion of the department's outstanding subordinate commercial paper notes, refund all of the airport's 1993 certificates of participation (COPs), and fund reserve accounts. The Rating Outlook is Stable.
The 'A-' rating reflects the airport's location and the underlying demand within the greater Los Angeles air trade service area, favorable enplanement trends even in the current economic downturn, strong financial performance supported by diverse business lines, and low cost facilities for passenger airlines. The airport's passenger base is 98% origination and destination (O&D), exhibits solid and growing demand for air passenger service to a considerable mix of both business and leisure destinations, and the airport has an adequate balance sheet characterized by a low debt burden and solid liquidity levels. Credit concerns include the higher than average carrier concentration level (79% by JetBlue Airways), near term additional leveraging in order to support JetBlue's airline operations, a competitive region served by multiple airports, increased dependence on passenger facility charge (PFC) revenues to cover future debt service, and the overall current state of the airline industry and regional economy.
The Stable Outlook reflects LGB's positive enplanement performance contrasted by other airports within the region that are reporting double digit declines, a manageable capital plan projecting healthy debt service coverage ratios including the issuance of additional bonds, and the continued presence and commitment of JetBlue to maintain a stable schedule of service at the airport. The Outlook also captures LGB's ability to maintain a low cost per enplanement over the next three to five year period, ensuring its low cost position in the Los Angeles air basin. Significant downward pressure on the rating could materialize if JetBlue were to shift operations to Los Angeles International Airport (LAX) or cease service. LAX is currently undergoing a large capital plan to improve operating efficiency, possibly becoming a more attractive location for the carrier. In addition, the airport's current rates and charges methodology allows carriers to quickly change the level of capacity offered given the absence of signatory carrier status, Majority-In-Interest terms, and other standard provisions contractually obligating carriers to pay debt service costs. Should other airline carriers not backfill service, the airport would face a meaningful higher cost structure and smaller enplanement base. Fitch notes that historical responses to changes in capacity have been positive. In 2006, the demand for service at the airport demonstrated its resilience as American Airlines retrenched and ultimately ceased service. Slot vacancies were reallocated to interested carriers and enplanements quickly returned to near historic levels.
The airport recently approved its five year capital improvement plan (CIP), which focuses on both the construction of a parking garage and permanent terminal improvements, as well as the rehabilitation of the airport's runways, taxiways, and other infrastructure from 2009 through 2013. The total cost of the CIP is currently estimated at $220 million, of which approximately 38% will be funded from bond proceeds over the next two year horizon. The series 2009A bond proceeds will fund construction of Phase I of the parking structure, which will provide an additional 1,990 parking spaces and is expected to be completed in August 2011.
Terminal improvements are also expected to be debt financed in the near term (fiscal year [FY] 2010). The $44.2 million improvement project, including design costs, will construct permanent facilities for passenger holdrooms, restrooms, concession opportunities, and consolidate passenger screening into one central location. Approximately 80% of PFC revenues would be eligible to service the related debt for the terminal, and management intends to support the 2010 terminal bond issue by a pledge of PFC revenues equal to 125% of PFC funded debt service, allowing the airport to maintain competitive airline rates and charges throughout the forecast period. Other CIP projects will be contingent on the availability of grants, and will be funded through a mix of PFC, AIP, and internal airport funds.
The airport projects marginal enplanement growth of 1.1% from FY 2009 through FY 2015, reflecting limitations on air carrier activity as a result of the noise ordinance. This is also consistent with the airport's historical enplanement growth of 1% on average annually. Including the proposed 2010 bonds, the debt service coverage ratio (DSCR) is expected to dip from a high of 3.95 times (x) in FY 2010 to a low of 1.75x between FY 2013 and FY 2015, including the use of rolling coverage and PFC revenues to support PFC eligible debt service. Without the use of rolling coverage, DSCR is projected to be approximately 1.5x. Cost per enplanement (CPE) levels are forecasted to remain competitive through FY 2015, reaching a high of $6.56 from $5.49 in FY 2009, which largely reflects management's intention to raise rates and charges only on an inflationary basis. Fitch believes the diminution in debt service coverage is a risk; however, the airport's low cost structure and healthy liquidity levels partially mitigate this trend to some degree. In FY 2009, the airport reported 225 days cash on hand (DCOH) and retains an internal target goal to strengthen cash reserves to 300 DCOH over the next five years.
The airport is located between major business and tourist destinations between Los Angeles and Orange Counties, with convenient access to the major freeway links in Southern California. Long Beach Airport is owned by the City of Long Beach. The mayor and the city council of Long Beach serve as the board of directors and set policy for the airport. The airport director and airport staff oversee day-to-day operations.
The application of the following criteria was used to derive the rating of the above referenced bonds:
--'Rating Criteria for Infrastructure and Project Finance', dated Sept. 29, 2009;
--'Airports Rating Criteria Handbook for General Airport Revenue, PFC and Letter of Intent Bonds' dated March 12, 2007.
Both are available on the Fitch Ratings web site at 'www.fitchratings.com'.
Additional information is available at www.fitchratings.com.
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