Fitch Affirms Houston Airport's (Texas) Special Facilities Revs at 'A-'; Outlook Stable

Fitch Ratings has assigned an 'A-' rating to the city of Houston, TX's $37.8 million airport system special facilities taxable revenue refunding bonds, series 2014 (the Consolidated Rental Car Project bonds). In addition, Fitch has affirmed the underlying 'A-' rating on the city's $105 million in outstanding series 2001 revenue bonds, which 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.

The rating reflects the consolidated rental car facility's (CONRAC) solid underlying base of rental car transactions, strong rate setting flexibility, more than sufficient balance of funds for its near term Capital Improvement Program, and proven ability of strong CFC collections.

KEY RATING DRIVERS

Sizable Rental Car Market: Houston's sizable underlying origination and destination (O&D) market of over 9.4 million enplanements support IAH's local car rental market. In 2013, rental car transaction days reached 4.1 million, surpassing last year's total of 3.9 million. IAH has strong diversity in rental operators, with no one company holding more than 26% 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 $4.25, resulting in the CFC comprising roughly 6.6% of average daily rental car rates. The airport has a history of frequently revising its CFC rate (six revisions since 2003); the decision to revise the CFC downward is unusual for the sector, and may expose the credit to narrower cash flow for debt service should rental car transactions underperform.

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 $28.5 million in unreserved funds currently held in its Facility Improvement Fund.

Moderate Project Leverage and Debt Service Coverage: The project's overall leverage equates to approximately 6.1 times (x) net debt to cash flow available for debt service (CFADS). Debt service coverage levels from operating cash flows have improved to the 1.4x-1.6x range in the last two years (1.7x-1.8x with coverage fund). After the 2014 refunding, debt service requirements over the next seven years will be reduced alleviating some of the pressure for CFC revenue growth regardless of transaction days performance.

Modern Infrastructure with Limited Capital Needs: The project is completed and has been operating since 2003. Capital program expenditures through 2018 are expected to total $18 million (expenditures in 2014 and 2015), of which $11 million is expected to be spent on new busses. There are no expectations for future borrowing.

Peer Group: Rated peers to Houston's Consolidated Rental Car Project include Massport (Boston-Logan; 'A-') and Atlanta ('A-') airports given their similar largest RC operator and market share distribution, low CFC rates, and similar financial profile.

RATING SENSITIVITIES

Negative:

--Material changes or volatility in rental car demand. Declining trends in coverage ratios due to transaction activity or management action on CFC rates.

Positive:

--Significant improvement in coverage levels or leverage metrics on a sustained basis would be supportive to a higher rating.

SECURITY

The bonds constitute 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. The special rent payments are the CFC collections. Bonds are also secured by interest earnings on available funds and other pledged funds.

TRANSACTION SUMMARY

The series 2014 bond proceeds will be used to partially refinance the outstanding series 2011 bonds, maturing between 2015 and 2021 years for debt service savings, without extending the maturity profile of the outstanding debt, maturing in 2028.

Rental car demand has historically fluctuated over the past decade, dropping from the peak of 3.77 million in 2007 to 3.09 million in 2009. In 2013, transaction days increased 6.9%, resulting in a 5.5% increase in CFC revenue, despite a rate decrease of $0.25 in 2013. A strong reason for both of these increases is the positive growth seen in the Houston economy, and continued demand despite more modest enplanement figures. Through the first five months of 2014, transaction days were up 2.2% year over year, while CFC revenues have declined by 3.4% compared to the same period in 2013, as a result of the CFC rate reduction implemented in April 2013. CFC surplus funds held in the FIF remain strong at $28.5 million, although this is expected to return to around $20 million later in 2014. Since the airport's surety provider is in bankruptcy, they took prudent action and increased the cash levels sufficient to cover the surety at $12.7 million, in the event that replacement is necessary.

On June 5, 2013, the city provided notice to each rental car operator declaring a default relating to the current and historical calculation of gross revenues under each Concession Agreement. This related to certain specific calculations under the Concession Agreement and payments due from each operator. The default was related to the Concession Agreement, not the agreement governing CFCs, and did not cause any disruptions in collections of CFCs from the operators. Both Avis Rent a Car System, Inc. and The Hertz Corporation defaulted under the Concession Agreement due to a miscalculation of gross revenue in respect to the pre-paid fuel collected by the rental car companies. The airport is not expected to pursue any remedies for the default, though it reserves the right to do so. While neither of these defaults have had a negative effect on CFC collections or other payments, Fitch notes it does raise concern over the relationship between the airport and its rental car operators.

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. Since that time, coverage levels have improved with fiscal 2013 at 1.85x with coverage fund, and 1.55x without the coverage fund.

Under a conservative rental car transaction scenario, including a 15% annual loss in 2015 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 is competitive with rates charged at other major airports that also have consolidated rental car facilities financed as special revenue debt obligations secured solely by CFC revenues.

Additional information is available on www.fitchratings.com.

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance', July 12, 2012.

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=842336

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