Fitch Ratings has affirmed its ratings on the following Kansas City, Missouri revenue bonds:
--Approximately $165.7 million outstanding senior lien Kansas City International Airport (KCI) revenue bonds at 'A';
--Approximately $103.8 million passenger facility charge (PFC) revenue bonds at 'A';
--Approximately $44.2 million subordinate lien airport revenue bonds at 'A-'.
The Rating Outlook on all bonds is Stable.
KEY RATING DRIVERS:
--High O&D Base with Some Concentration: KCI enjoys a 95% origination and destination (O&D) enplanement base without a competitive airport within 170-plus miles. There is some concentration as Southwest comprises approximately 40% of enplaned passengers. After leveling out in fiscal 2011, enplanements appear to be on the rebound as fiscal year-to-date traffic is up 5% over the same period a year prior.
--Weak Contractual Framework with Limited Cost Recovery: KCI's hybrid use and lease (AUL) agreement restricts its ability to pass-through airport cost requirements to the airlines at approximately 33%, leaving the airport more exposed to traffic dependant non-airline revenues and expense management than its peers.
--Low Leverage and Adequate Financial Metrics: KCI's debt to enplanement of $44.68 and net debt-to-cash flow available for debt service (CFADS) of 3.9 times (x) is very low compared to its peers. Liquidity of 310 days cash on hand (DCOH) is viewed as a key offset to the more limited AUL. Senior lien general airport revenue bonds (GARB) coverage improved to 1.65x and total GARB coverage was up to 1.26x from a low of 1.02x in fiscal 2010.
--Robust Capital Structure with Limited Subordinate Lien Covenants: KCI has 100% fixed rate amortizing debt, meaning it has no exposure to the capital markets. However, the legal covenant of 1.0x coverage for the subordinate lien provides minimal protection in a downside scenario.
--Manageable Capital Improvement Program: KCI's five-year capital plan of approximately $183 million is modest and is primarily funded with grants and passenger facility charge (PFC) revenues. Management does not expect to issue additional debt for the plan.
--Strong PFC Coverage: Healthy and growing PFC debt service coverage (over 2.1x) and PFC reserve balances ($42.4 million as of April 30, 2011) from existing collection levels provides adequate protection for the standalone PFC bonds.
WHAT COULD TRIGGER A RATING ACTION:
A decline in non-airline revenue or inaction to control costs would likely result in lower coverage levels, particularly the subordinate lien GARBs which could face more immediate credit pressure.
The senior and subordinate bonds are secured by a first and second lien on the net revenues of KCI's operations and certain funds under the bond resolution. The PFC bonds are solely secured by a lien on the PFC revenues with no airport general revenue support.
Following two years of recessionary declines in enplanements, KCI's enplanements remained level for fiscal 2011 at approximately 4.9 million. Enplanements have grown in each of the 10 months since, for a cumulative year-over-year growth of 5% (through February), possibly signaling that an inflection point has been reached. Fitch believes that the airport may continue to face ongoing risk to economic conditions, which anchors its passenger base. The lack of significant competition and predominantly all O&D traffic should mitigate this to some degree.
Historically, KCI has covered its operating costs and debt service from a diverse mix of revenues. Less than 30% of its total operating revenues came from airline payments due to the cost recovery terms of its hybrid AUL. Fitch notes that the airline agreement has limitations to recover the overall costs from the carriers due to compensatory terms as was evident by the marked declines in margins in fiscal years 2009 and 2010. Further, the rate covenant for the GARB debt requires only sum sufficient total coverage, which provides no meaningful coverage cushion and can constrain financial flexibility during downturn periods, particularly for the subordinate bonds. This is mitigated to some degree by KCI's balance sheet liquidity of 310 DCOH. Fitch notes that modifying the current AUL when it expires in April 2014 to allow for greater cost recovery would lead to added stability in the subordinate lien at its current rating level.
Operating revenues rebounded 4.1% in fiscal 2011 to $96.8 million, in large part due to parking rate increases. Parking revenue is the leading non-airline revenue source, contributing to more than 40% of operating revenues. Excluding customer facility charge (CFC) and transportation facility charge (TFC) revenues ($11.4 million), operating revenues peaked at $99.6 million in fiscal 2008 but declined 1.6% and 5.1%, respectively in fiscal 2009 and 2010. A leveling out of enplanements, cost control, and improvements in operating revenues contributed to KCI's operating margin rebounding to 19.1% in fiscal 2011, after dropping to a low of 14.1% in fiscal 2010.
KCI's coverage levels of its senior and subordinate lien GARB debt improved in fiscal 2011 to 1.65x and 1.26x, respectively, from 1.31x and 1.02x, respectively. Low leverage of the PFC credit has allowed debt service coverage to remain above 2.0x during the enplanement downturn.
KCI's current leverage is manageable at $44.68 GARB debt/enplanement or 3.9x on a net debt-to-CFADS basis. The five-year capital program totals $182.7 million with approximately $75.2 million being funded with airport funds and $25.6 million with PFC revenues. In the long term, KCI expects to review the possibility of building a new consolidated terminal facility, which is expected to be financed with debt.
Kansas City's Aviation Department is wholly controlled by Kansas City and operated as a financially separate enterprise fund. Missouri law requires voter approval for the issuance of airport revenue bonds. On Aug. 8, 2000, voters approved up to $395 million of issuance. Since that time KCI has issued $154.6 million, leaving $240 million of remaining issuance authority.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria & Related Research:
--'Rating Criteria for Infrastructure and Project Finance', dated Aug. 16, 2011;
--'Rating Criteria for Airports', dated Nov. 28, 2011.
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
Rating Criteria for Airports