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Fitch Rates Denver, Colorado's Airport Bank Bonds 'A+'; Outlook Stable

Posted on: Monday, 13 October 2008, 18:00 CDT

Fitch assigns a long-term underlying rating of 'A+' to bank bonds corresponding to variable rate demand obligations (VRDOs) issued by the City and County of Denver, Colorado, (the city), for and on behalf of its Department of Aviation (Denver International Airport (DIA) or the airport) series 2007G1-G2 airport system revenue bonds. Fitch also affirms the 'A+' rating on the city's approximately $3.8 billion in outstanding airport system revenue bonds. The Rating Outlook on all bonds is Stable.

Although approximately 20% of the airport's $3.8 billion outstanding debt consists of VRDOs, and about $148.5 million is currently held as bank bonds, the airport's interest rate and term-out risk on this series is relatively low given the airport's sufficient available resources ($269 million in unrestricted cash in fiscal year 2007) to accommodate any increased principal and interest requirements in the near term. Under an alternative Fitch scenario that contemplates the potential for the maximum amount of bank bonds, the airport exhibits an ability to withstand this exposure, even during a five-year period of an accelerated prepayment of principal. Should this alternative scenario take place, the airport would have to make major adjustments in both capital and operating expenditures while efforts to maximize revenues are executed to meet the rate covenant. The cure period for all reimbursement agreements is 90 days. Bank bond rates are set for the first 30 days at the bank bond rate, defined as the higher of the prime rate or the fed funds rate plus 0.5%. Between the 31st day and the 91st day, the bank rates are set at the bank bond rate plus 0.5% and include the 90th day. On the 91st day, interest rates are set at the bank bond rate plus 1.0% and principal repayment begins in equal payments over the next 60 months. All bank bond rates are capped at 15%.

The 'A+' rating reflects the large and diverse economy of the Denver metropolitan area, continued growth in origination and destination (O&D) and connecting passenger traffic through fiscal 2008, the airport's favorable geographic location, growing presence of low-cost carriers, and favorable airport use and lease agreement that consistently produces sound financial results. Credit concerns include continued softening in the overall U.S. economy and near-term health of the airline industry. In addition, the airport will need to manage operating cost escalation in an environment where airlines continue to make service adjustments. Moderate operating and revenue concentration risk is present as a result of the airport's largest carrier, United Airlines (United), though this risk is partially mitigated by the growing diversity of carriers.

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 25 million enplaned passengers in 2007 with January to June 2008 year-to-date results up 4.4% over the year prior. Originating passengers accounted for approximately 57% of total enplanements, representing an adequate 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 53% 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.

Denver-based Frontier (including Lynx and Jet Express), has served to offset the dominance of United and provide price competition, which benefits the local consumer base. At present, Frontier operates under bankruptcy protection but has recently assumed their lease at the airport and is current on all payments due to the airport. Southwest Airlines has grown its market share at the airport to about 5.3% of total enplanements in 2007, one year after beginning operations. Southwest plans to continue to expand at DIA to 70 daily departures, up from its current 54 daily departures, by the end of 2008.

For fiscal 2007 results, operating revenues and operating expenses were up 4% and 10%, respectively. Record passenger growth bolstered non-airline revenues including concessions and parking. Operating revenues grew at a 4.3% average annual growth rate, between 2003 and 2007, producing a strong operating ratio of 45% in fiscal 2007. Management has historically worked to manage its finances and control costs; however, costs associated with snow removal, overtime pay, guard services, janitorial services and repair and maintenance costs have resulted in a high annual growth rate in operating and maintenances (O&M) expenses between fiscal 2003 and 2007 at 9.5%. The airport has consistently maintained a strong liquidity position and has had an average of 390 days cash on hand between 2003 and 2007, providing enough financial flexibility to cash-fund projects.

While airlines at DIA have announced capacity reductions across the board, net augmentations and reductions to schedules are expected to result in flat to slightly positive results in the latter half of 2008. Fitch expects the enplanement growth rate to ease as the competitive environment stabilizes and as fares align with demand and the growth in the 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 leverage ratio has recently improved given the defeasance of debt, leverage ratios and cost structure are expected to increase if the airport begins to implement its substantial capital program. The airport's net revenues provided a strong 1.68 times (x) coverage of annual debt service expense (including PFC revenues as a debt service offset) in 2007. The airport's forecast shows the full implementation of the capital program and coverage results of annual debt service (including PFC revenues) declining slightly to about 1.65x in 2013, as debt service for the new airport projects are included in the airlines rates and charges.

The airport's sizeable capital program, which includes $987 million in projects through 2013, is largely on hold as pressure on terminal capacity issues have eased given capacity reductions. The largest portion of the program would include terminal and concourse improvements at $465 million and airfield improvements at $177 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. The full implementation of the capital program would result in the airport's cost per enplaned (CPE) passenger increasing to an estimated $15.01 in 2013, from $11.09 in 2007. While the airport's CPE remains above the industry average level, it 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 site.

Source: Business Wire

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