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Fitch Rates Denver International Airport, Colorado's $607MM Revs 'A+'; Outlook Stable

Posted on: Wednesday, 25 July 2007, 18:25 CDT

Fitch assigns an 'A+' rating to $607 million City and County of Denver, Colorado, (the city) series 2007, airport system revenue bonds for the Denver International Airport (the airport). The series 2007 bonds consist of the following:

--$195 million, airport system revenue bonds series 2007A (AMT)

--$25 million, airport system revenue bonds series 2007B (Non-AMT)

--$150 million, airport system revenue bonds series 2007C (Non-AMT) (Market dependent revenue bonds)

--$188 million, airport system revenue bonds series 2007D (AMT)

--$49 million, airport system revenue bonds series 2007E (Non-AMT)

The city intends to sell series 2007A and series 2007B bonds, with Goldman, Sachs & Co serving as the lead underwriter, and series 2007C bonds, with Citigroup Global Markets, Inc. serving as the lead underwriter, on or about Aug. 1, 2007. The city further intends to sell series 2007D and series 2007E bonds, with Lehman Brothers, Inc. serving as the lead underwriter, on or about Aug. 16, 2007. Fitch's rating also reflects the airport's expected near term issuance of $360 million in series 2007F bonds, which may be structured as auction rate or as variable-rate demand obligations. Fitch will assign a rating to the series 2007F bonds once a debt structure has been determined, closer to their expected sale date, to be scheduled sometime between late summer and before November 15th. Proceeds for series 2007 bonds will finance approximately 35% of the airports estimated $1.2 billion capital program (2007-2013) and will refund a portion of the outstanding bonds.

Fitch also affirms the 'A+' rating on the city's approximately $3.5 billion in outstanding airport system revenue bonds. All airport system revenue bonds are payable from the net revenues of the airport system. The Rating Outlook on all bonds is Stable.

The 'A+' rating reflects the expanding economy of the Denver Metropolitan Area, continued growth in origination and destination (O&D) and connecting passenger traffic, the airport's favorable geographic location, the growing presence of low-cost carriers, and the favorable airport economic structure that consistently produces sound financial performance. Credit concerns include the airport's increasing debt levels and cost structure, construction risk associated with the implementation of a large capital program, and United's market share concentration, though mitigated by a strong use and lease agreement.

The airport serves not only as the primary commercial airport for the Denver metropolitan area, but for the entire eastern Rocky Mountain area in general, providing natural regional connecting traffic to complement the national hubbing operation of United. The airport served a record 23.7 million enplaned passengers in 2006, to rank as the nation's fifth busiest airport. Originating passengers accounted for approximately 56% of total enplanements, representing a strong local component of overall traffic for a major connecting hub facility.

United remains the airport's largest carrier, although its share of enplaned passengers (including United, Ted, and United Express) declined to 56% for the three months in 2007 from 68.8% in 2000. While United's dominance continues to diminish, the airline still represents the majority of airline revenue, thus its scheduling decisions could significantly influence the overall financial operations of the airport.

The growth of Denver-based Frontier, which increased its share of passengers to 20.2% in for the first 3 months in 2007 from 7.9% in 2000, serves to offset the dominance of United and provide price competition, which benefits the local consumer base. Furthermore, Southwest, which entered the market in January 2006, has quickly captured 4.8% of total enplanements, according to 3 months actual 2007, a figure likely to increase with recently announced service from Denver to 5 additional markets- including Albuquerque, Amarillo, Austin, Oklahoma City, and Seattle.

Management continually works to proactively manage its finances and control costs, as reflected by a 1.8% average annual growth rate in operating and maintenances (O&M) expenses between fiscal 2002 and 2006. The airport's favorable economic model drove operating revenues to grow at a 3.1% average annual growth rate, over that same period, producing a strong operating ratio of 49% in fiscal 2006. The airport has consistently produced a strong liquidity position and has had an average of 415 days cash on hand, between 2002 and 2006, providing enough financial flexibility to cash fund projects.

Fitch Ratings expects the strong enplanement growth rate to ease as the competitive environment stabilizes and as fares align with demand and the growth in regional economy. The airport's feasibility consultant forecasts an average annual growth rate of 1.7% through 2013, growing more in step with the economy. The moderate enplanement growth will continue to produce a sound operating and financial profile through the forecast period. While the airport's high leverage ratios improved over the five-year historical period, as debt was defeased and costs controlled, its leverage ratios and cost structure are expected to increase as the airport begins to implement its substantial capital program. The airport's net revenues provided a strong 1.99 times (x) coverage of annual debt service expense (including PFC revenues as a debt service offset) in 2006. The airport's forecast shows coverage of annual debt service (including PFC revenues) declining to 1.65x in 2013, as debt service for the new airport projects is included in the airlines rates and charges.

The airport's sizeable capital program includes $1.2 billion in projects through 2013. The largest portion of the program includes terminal and concourse improvements at $657 million and airfield improvements at $260 million. The airport plans to finance the program through a variety of sources including federal grants, passenger facility charge receipts, and through future bond issuance that will fund an estimated $722 million in projects. This sizable capital program results in the airport's cost per enplaned (CPE) passenger increasing to an estimated $15.01 in 2013, from $11.16 in 2007. While the airport's CPE remains above the industry average level, the difference will become more comparable as other airports continue to undertake major capital initiatives to address their respective capacity needs.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Source: Business Wire

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