Fitch Affirms Houston Airport's (Texas) Special Facilities Revs at 'A-'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed the 'A-' rating for the city of Houston, TX's $102 million airport system special facilities taxable revenue and refunding bonds series 2001 and 2014 (the Consolidated Rental Car Project bonds). The bonds were originally issued to finance the construction and maintenance of a consolidated rental car facility at Houston Intercontinental Airport (IAH). The Rating Outlook remains Stable.
KEY RATING DRIVERS
The rating reflects the consolidated rental car facility's (CONRAC) solid underlying base of rental car transactions, strong rate setting flexibility, proven customer facility charge (CFC) collection history, and more than sufficient balance of funds to satisfy its near term Capital Improvement Program and overall liquidity requirements.
Sizable Rental Car Market: Houston's sizable underlying origination and destination (O&D) market of over 10 million enplanements support IAH's local car rental market. In 2014, rental car transaction days reached 4.4 million, a 5% increase over the prior year and up over 40% since the recession low in 2009. IAH benefits from diversity in rental operators with no one company holding more than 25% market share.
Rate Setting Flexibility: Houston's rental car customer facility charge (CFC) has been effective since 2001 and covers all car rental operators whether located on-airport or off. The CFC is assessed without cap or sunset by approval of the airport director. The CFC rate structure was revised downwards in April 2013 when management reduced the rate to $4.00, from S4.25, resulting in the CFC comprising roughly 7.4% of average daily rental car rates in 2014. The airport has a history of multiple revisions to its CFC rate (six revisions since 2003). No further revisions are expected in the near to medium term.
Modern Infrastructure with Limited Capital Needs: The project is complete and has been in operation since 2003. Capital program expenditures through 2019 are viewed as manageable and are expected to total $18 million, with over half of plan spending already having taken place and the majority of remaining expenditures taking place in 2015 and 2016. There are currently no expectations for future borrowing.
Adequate Security Package: The project benefits from good structural protections including rental facility agreements executed with all operators serving the airport running through the maturity of the bonds. Strong levels of unencumbered reserves have greater relevance at the current rating level given the project's lack of a cash funded debt service reserve fund or a highly rated surety provider. Mitigating this concern is the sizable balance of unreserved funds maintained in the Facility Improvement Fund ($23.7 million at the end of fiscal 2014).
Moderate Project Leverage and Debt Service Coverage: Overall leverage, at 5.8x net debt to cash flow available for debt service (CFADS) in fiscal 2014, is considered moderate for an airport car rental project Debt service coverage levels from operating cash flows have steadily improved to the 1.5x - 1.7x range in the last two years, or to 1.8x - 2.0x including the coverage fund as revenues. Additionally, rental car transactions have risen from approximately 3.1 million in 2009 to 4.4 million in 2014, constituting growth of over 7% annually. The 2014 refunding transaction reduced annual debt service through 2021, lessening the need for CFC revenue growth in the medium term.
Peers: Rated peers to Houston's Consolidated Rental Car Project include rental car projects at Massport (Boston-Logan: rated 'A-' by Fitch) and Atlanta (rated 'A-') given their similar largest rental car operator and market share distribution, low CFC rates, and similar financial profiles.
Positive: A continuation of improving coverage level trends based on transaction growth or positive rate adjustment, or declining leverage metrics on a sustained basis would be supportive to a higher rating.
Negative: A sustained decline in rental car demand coupled with management inaction on CFC rates leading to declining coverage ratios could pressure the rating.
SUMMARY OF CREDIT
Rental car demand at IAH has demonstrated significant improvement since 2009 with car rental transaction days rising over 40% to nearly 4.4 million annually. However, Fitch notes that volume has fluctuated historically, dropping from a prior peak of 3.7 million in 2007 to 3.1 million in 2009. Following that period, transaction days have rebounded strongly showing annual growth of between 8% and 10% in the 2011 - 2013 timeframe. For 2014, rental car transaction days increased a moderate 2.1% over a year prior. Increases in transaction days are attributed to of increased passenger activity, and a higher percentage of those passengers renting vehicles. For the first eight months of fiscal 2015 through August, transaction days are flat versus the same period in 2014.
CFC revenues have shown robust growth since 2010, partly driven by rate increases in 2009 and 2011. For 2012, CFC revenues increased 11% to $16.5 million, and rose a more modest 5.5% in 2013. In 2014, growth was near flat at $17.5 million; and CFC revenues remain flat year to date through August 2015. In April 2013, the CFC rate was decreased to $4.00 from $4.25. This resulted in comparatively lower CFC revenues in fiscal 2014 compared to the prior year. While Houston's CFC rate has been revised in the past more frequently than has been the case for comparable rental car facilities, with six revisions since 2003, no revision is anticipated by management in the near to medium term.
Capital projects for the CONRAC through 2019 are modest, comprised of $18 million in projects, including $9.8 million in projects completed through 2014. Recently completed projects include retrofitting garage lighting with more energy efficient fixtures and controls; replacing 28 existing shuttle busses; and enabling GPS in the rental garage. $7.3 million in additional projects are budgeted through 2016. The Facility Improvement Fund remains adequate to fund near-term capital needs of the CONRAC ($23.4 million balance as of December 2014, expected to rise to $35.6 million by end of 2015).
Project financial performance has been volatile through the recession period including a period in 2009 where CFC revenues alone were insufficient to meet coverage requirements and necessitated reliance on a transfer from the Rate Stabilization Account. However since that time, improved CFC revenue performance together with debt service savings from the 2014 refunding issuance have resulted in improved coverage levels. Fiscal 2014 saw coverage of 1.96x including the coverage fund, and 1.66x excluding the coverage fund. Fiscal 2015 is expected to see similarly strong coverages with DSCRs of 1.98x and 1.68x (including and excluding the coverage fund, respectively). Project leverage under 6x is consistent with the current rating level. However, in the absence of new borrowings, leverage will likely evolve to a lower range over time.
Under a conservative rental car transaction scenario, including a 16% annual loss in 2016 followed by 2% growth through 2019 and 1% growth thereafter, coverage is in the 1.6x - 1.8x range through maturity (including coverage account) assuming no rate increases. Fitch notes that the current $4.00 CFC rate compares favourably with CFC rates charged at other major airports that have CONRACs financed by standalone CFC backed obligations. While debt service payments are structured to rise modestly each year, to a maximum level of $12.7 million, the revenue stream is not exposed to project operating costs, which should limit the long term pressure on growing CFC revenues to meet overall project costs.
The bonds are a special limited obligation of the issuer payable solely from the special rent payments received by the city pursuant to the Master Special Facilities Lease. Bonds are also secured by interest earnings on available funds and other pledged funds. Revenues and other airport funds of Houston Airport System are not pledged to the payment of the bonds.