Fitch Rates Tucson Airport Auth $35MM Sub Lien Revs ‘A’; Outlook Positive
Fitch assigns an ‘A’ rating to $34,985,000 Tucson Airport Authority Inc. Subordinate Lien Airport Revenue Bonds, Series 2006 (AMT). In addition, Fitch assigns an ‘A’ rating to $27,970,000 million in outstanding airport revenue bonds, refunding series 2003. Fitch affirms the ‘A’ rating on $12.7 million outstanding senior lien airport revenue bonds and the ‘A’ rating on $39.3 million in outstanding subordinate lien airport revenue bonds. The Rating Outlook on all bonds is revised to Positive from Stable. The Series 2006 bonds are scheduled to sell on a negotiated basis, led by Bear Stearns and Co. Inc., on or about Dec. 5, 2006.
The Positive Outlook reflects Tucson Airport’s (the airport) strong upward trend in financial operations, resulting in a very healthy balance sheet with 732 days of cash on hand as of Sept. 30, 2006 and an operating ratio of 33% that same year. Total debt service coverage is also very strong, especially for a residual airport, at 2.52 times (x) in fiscal 2006. The diversity of revenues and the ability of airport management to retain 48% of certain non-airline revenues (industrial and space rentals, etc.) for pay-go development projects continue to drive the credit’s healthy operations and liquidity. In fiscal 2002, management initiated an air service marketing development program that resulted in airlines up-gauging aircraft and/or adding frequencies on existing routes. The positive effects of the air service marketing program has led to the successful recapture of some additional passenger traffic that has historically leaked to Phoenix Sky Harbor International Airport and has supported the introduction of new passenger service including nonstop routes from Tucson to New York (John F. Kennedy Airport), New Jersey (Newark Airport), and Washington D.C. (Dulles International Airport).
The ‘A’ rating reflects the breadth and stability of the local economy that supports a high origination and destination (O&D) passenger base of approximately 99%. The strength of the service area and management’s business-minded and proactive decisions have produced healthy financial operations, where airline revenues accounted for only 26% of total operating revenues in fiscal 2006. The airport’s low debt levels are exhibited by the low $40.82 debt per enplanement in fiscal 2005. Providing further assurance that debt levels and airlines rates and charges will remain low and stable is the airport’s affordable capital program that is structured to maintain a low-cost facility, with an average cost per enplanement of $6.43 over the forecast period (fiscal years 2006 through 2011).
Counterbalancing the above mentioned strengths is the very competitive air service environment in Southern Arizona as the airport is located 118 road miles south of Phoenix Sky Harbor International Airport, a large hub airport. Placing pressure on financial margins is the growing personnel expenses that increased 7.1% in fiscal 2006, primarily attributable to the contribution rate increases in both the Arizona State Retirement System and the Arizona Public Safety Retirement System, both largely outside the purview of airport management. Two continuing economic challenges include the below-average income levels in the Tucson Metropolitan Statistical Area (MSA), though somewhat mitigated by a modest cost of living and a growing economy, and the concentration of tourism and leisure travel, though stabilized by the strong presence of the military and government and growing manufacturing and technology sectors.
Similar to other double-barreled (PFC and subordinate general airport revenue bond) structures, the weaker pledge of subordinate net airport revenues securing the airport’s subordinate lien airport revenue bonds is mitigated by a pledge of PFC revenues, with the combined streams consistently yielding strong debt service coverage. While the series 2006 bonds are parity subordinate lien obligations, bondholders benefit from only a portion of the additional PFC revenue pledge given that 79% of total project costs are eligible for funding from PFCs. Fitch believes this debt structure creates additional credit risk. However, under Fitch’s base case forecast, the difference in debt service coverage between this structure and a traditional double-barreled structure is minimal.
When forecast revenues are stressed, the 2006 bonds are more vulnerable than outstanding subordinate lien bonds. However, the relatively small size (21%) of the non-PFC eligible portion of the series 2006 bonds and the relative coverage differentials did not merit a rating distinction. Fitch will continue to evaluate the security on the 2006 bonds in the event enplanements and/or related revenues (PFC and/or general airport revenues) under perform expectations or if management employs this non-double-barreled structure with future subordinate bonds. To the extent there is material erosion in coverage, a rating differential could be made.
Proceeds of the series 2006 bonds will be used to finance terminal improvements, pay capitalized interest, provide for a debt service reserve fund and pay costs of issuance. Fitch expects the bonds to be insured by a financial insurer whose financial strength is rated ‘AAA’ by Fitch.
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