OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB' rating on the City of Fresno, CA's approximately $51.1 million of outstanding airport revenue bonds related to Fresno Yosemite International Airport (FYI). The Rating Outlook is revised to Positive from Stable.

The revised Rating Outlook is due to relatively high enplanement growth rates supported by improvements in the local economy as well as the airport's financial metrics including debt service coverage ratio (DSCR) and leverage. Continued enplanements growth and sustainable solid financial metrics could result in upward rating migration.

The 'BBB' rating is reflective of the airport's small market within central California's San Joaquin Valley and overall weak revenue volume framework driven by an O&D base that is susceptible to airline service cuts. This weakness is, however, partly mitigated by relatively high growth rates supported by local economic improvements and conservative budgeting methods, contributing to the airport's higher debt service coverage ratio (DSCR), satisfactory and growing liquidity levels and improving leverage. Fiscal year 2015 produced DSCR of 2.92x per the indenture (2.20x with Passenger Facility Charges treated as revenues) and leverage of 3.85x. Compared to peers in its rating category, the airport has above average coverage and leverage levels, appropriate for its current rating level.

KEY RATING DRIVERS

Small, Economically Vulnerable O&D Base (Revenue Risk - Volume: Weaker): FYI serves a small yet captive 100% O&D passenger market in the Fresno region of California's Central Valley, which is economically disadvantaged and dominated by agriculture. Management reported a 5.1% increase in enplanements in fiscal 2016 given the increase in service routes, which contrasts with fiscal 2015's flat growth as certain routes were discontinued. However, the region's cyclical recovery had pushed fiscal 2014 enplanement levels to a record-setting 717,024. This fluctuation in enplanements highlights volume risks inherent in such a small and geographically remote airport.

Volume-Dependent Revenues (Revenue Risk - Price: Midrange): The airport is highly reliant on passenger volume-dependent revenues, such as rental car and parking fees, with just a quarter of total revenues derived from airline fees. Nonetheless, FYI's Fitch-calculated CPE of $8.06 remains competitive, with passenger facility charges (PFCs) offsetting landing fees.

Manageable CIP, No Debt Plans (Infrastructure Renewal and Development: Stronger): The airport's capital improvement plan (CIP) is modestly sized at $59 million and predominantly financed with federal grants with no debt issuances planned. Given the airport's ample surplus capacity, most of the CIP reflects maintenance of existing assets with no major construction projects planned.

Conservative Debt Structure (Debt Structure: Stronger): FYI's debt is entirely fixed rate and fully amortizing, though it escalates modestly. Debt service payments on the 2007 bonds are supported by CFC revenues and the 2013 bonds are paid with up to $1.6 million of PFCs annually.

Improved Financial Metrics: Rising net revenues boosted liquidity to a satisfactory level of 387 days cash on hand (DCOH) and increased FYI's indenture-based DSCR to a solid 2.92x in fiscal 2015 from 2.49x the year prior. Net debt-to-cash-flow also improved, falling to 3.85x from 5.02x over the same period. Financial operations in fiscal 2016 are forecasted by management to further improve these metrics, though conservative projections suggest some DSCR weakening beginning in fiscal 2017.

Peer Group: FYI's peer group includes airports with similar enplanement base levels such as Jackson, MS ('BBB+'/Stable Outlook) and Dayton, OH ('BBB+'/Stable Outlook). The one-notch distinction between FYI and its peers reflects FYI's slightly lower liquidity and DSCRs and higher leverage levels.

RATING SENSITIVITIES

Positive: Sustainable and material improvement of the airport's key financial and debt metrics, such as liquidity, DSCRs persistently above 2x, and leverage evolving down to below 1.50x could result in positive rating action.

Negative: Material deterioration of the airport's financial performance where leverage increases above 5x and DSCR persistently falls below 1.20x could lead to a negative rating action.

SUMMARY OF CREDIT

The airport's enplanement base has benefitted from solid expansion over the past several years with a five-year CAGR of 3.2% from FY2010 to FY2015, though FY2015 enplanements declined by 1.8%, in line with management's expectations. Recent years' growth reflects the region's continued economic recovery, population growth, affordable housing, and increases in airline seat capacity as well as greater international enplanements mainly driven by Mexico. Management provided preliminary enplanement growth estimates of 5% in fiscal 2016, as the elimination of certain routes in FY2015 was also offset by new service routes added in FY2016, mitigating the impact of prior slight enplanement losses.

The airport's airlines' use and lease agreement (AUL) rates are set by ordinance and in effect through fiscal 2018, with residual rate-setting on the airfield and compensatory rate-setting on the terminal. The share of airline payments supplemented by non-airline revenue generation collectively provides an overall cost recovery framework. Management has indicated that agreements with domestic carriers, Allegiant, Delta, American Airline, Horizon and United will be executed in the near future. If this materializes, the airport will benefit from a longer term agreement which expires in fiscal 2020. Airline revenues are projected to increase by approximately 10% in fiscal 2016 due to a 4% increase in landing and terminal fees, agreed upon by the airlines, and a reduction in Federal Inspection Fees to $12 per international deplaning passenger from $14. The airport's large proportion of non-airline revenues has resulted in affordable costs per enplanement, which are Fitch-estimated at $8.06 in fiscal 2015. The airport is heavily reliant on passenger volume-driven non-aeronautical revenues, such as rental car (12% of fiscal 2015 total revenues) and parking fees (23%), as airline revenues generate just a quarter of total revenues.

Solid revenue growth and cost containment resulted in expansion of the airport's indenture-based DSCR to 2.92x in fiscal 2015 (2.20x if PFCs are treated as a revenue, instead of a debt service offset, and excluding other available funds from revenues) from 2.49x (2.02x) the year prior. Liquidity has also improved with rising net income and conservative cash management practices that increased unrestricted cash to a satisfactory $15.3 million at fiscal year-end 2015, or 387 DCOH. Assuming net revenues increase as expected, management targets 500 DCOH in FY016 and plans on contributing four to five million a year to the Surplus Fund. The airport projects DSCR to increase to 3.34x (2.46x) in fiscal 2016 due predominantly to higher net revenues driven by enplanements growth. DSCR is projected by management to decline significantly in fiscal 2017 to 2.59x (2.00x) as expenses are budgeted to normalize in line with enplanement growth. Coverage will then stabilize thereafter, though Fitch acknowledges that the projections include quite conservative assumptions and actual results are likely to outperform.

Under Fitch's base case scenario, which adopts management's initial expectation of a 4.2% increase in FY2016 enplanements, followed by Fitch's assumption of 1.5% growth thereafter, DSCR falls to 2.28x (1.82x) by the end of the forecast period in fiscal 2021. The base case also adopts the airport's conservative expense estimates in FY2016 and FY2017, but increases average annual expenditure growth to 3% from FY2018 to FY2021. DSCR averages 2.50x (1.95x) throughout the forecast period.

Under Fitch's rating case scenario, which assumes enplanements drop 10% in fiscal 2017 followed by 2% growth thereafter, DSCR falls to 2.28x (1.80x) and remains around the same level. The ratings case also assumes that the expenditure growth rate is lowered to 5% from management's projections in fiscal 2017, in recognition that the airport likely would reduce the pace of expenditure growth in a stressed enplanement environment as was consistent with management's response to the prior recession. Subsequent years' expenditure growth is assumed to return to Fitch's elevated base case rate. DSCR averages 2.38x (1.87x) throughout the forecast period. The airport demonstrates financial resilience in both the base and rating case given higher coverage ratios and lower leverage compared to peers in a similar rating category.

The airport's five-year CIP is manageably sized at $59 million and will be predominantly funded with federal AIP grants. The airport benefits from proceeds from a county-wide sales tax that averages $700,000 annually that is used to satisfy grant matching requirements. As an airport with ample surplus capacity, the CIP consists largely of refurbishment and replacement of existing assets rather than more costly expansion projects. FYI's projections indicate that airport revenues will fund an average of $1.9 million capital spending annually from fiscal 2017 to fiscal 2020. Total capital spending in fiscal 2016, however, will be much higher at $3.7 million, driven by an employee parking lot project. Management does not plan to issue debt in the foreseeable future.

SECURITY

The bonds are payable from net revenues generated by the airport, with eligible portions of outstanding debt receiving additional support from PFC and CFC revenues. The series 2007 and 2013A&B bonds are additionally secured by a surety and a cash-funded debt service reserve fund sized to the IRS maximum, respectively.