SAN FRANCISCO - (Business Wire) Fitch assigns an 'AA-' rating on $62 million Clark County, Nevada, airport system revenue bonds, senior series 2008E (non-AMT). The current issue represents an adjustment to the series 2008E bonds which are now expected to be issued on the senior lien, instead of the subordinate lien. The Rating Outlook is Stable.
Senior lien revenue bonds are secured by a lien on and are payable from net revenues generated from the airport system, the principal asset of which is McCarran International Airport in Las Vegas (McCarran). Subordinate lien debt is secured by net revenues on a subordinate basis to senior debt, and passenger facilities charges (PFC)/airport system revenue bonds secured by PFC revenues and a backup subordinate net revenue pledge. Jet fuel tax revenue bonds are secured with jet fuel tax revenues and a pledge of airport revenues junior to the lien securing the senior and subordinate bonds.
Fitch's ratings on McCarran reflect the system's large, growing O&D passenger base; strong financial margins; significant airline market share diversity; and experienced management. Offsetting credit issues include a large capital program experiencing several years of escalating costs, and a concentrated, tourism-based economy in gaming and entertainment, currently experiencing slower growth.
Rating differentials between the senior lien and subordinate lien are warranted due to the senior lien's low leverage and its consistently very high coverage levels. The subordinate lien serves as the department's working lien to finance capital projects and is expected to shoulder a significant increase in debt over the next several years. Strong historical enplanement growth has supported the increasing debt burden; however, should enplanement growth slow materially, debt levels may pressure the subordinate lien and reduce its financial flexibility. Fitch does not distinguish between its ratings on the PFC/subordinate lien and the subordinate lien because both liens benefit from a parity pledge of net airport revenues. PFC revenues are pledged to the PFC/subordinate lien bonds and typically exceed related debt service requirements. However, a distinction in ratings could be warranted if leverage is increased, thus diluting coverage. Excess PFC revenues are also applied on an 'intend to use' basis to offset a portion of the subordinate lien debt service costs for FAA approved projects.
Good management and the use of a hybrid rate-making methodology generate excellent annual financial results, as reflected by a strong balance sheet: $203 million in unrestricted cash and equivalents and $1.5 billion in restricted assets in fiscal-year (FY) 2007. The FY2007 operating ratio was 35% and non-airline revenues as a percentage of operating revenues remain high at 52%. Debt service coverage (including the coverage funds and offsets) on the senior bonds was 3.78 times (x) and when calculated on an all-in basis including both the senior and subordinate bonds, was 1.90x. Furthermore, the FY2007 airport cost structure was very competitive; the landing fee was $1.12 and the cost per enplaned passenger was $5.53. Preliminary FY2008 financial estimates reflect the increase in landing fees, terminal rents and the adjustments made to professional and maintenance contracts for the in-line explosive detection system and for the new annual contract for elevator and escalator maintenance. Finances remain sound, yet will be challenged during the development of various construction projects, and while experiencing increasing construction, fuel and utility costs.
Credit concerns center on McCarran's increasing debt burden. In addition to the current bond issues, the department's $3.3 billion, five-year capital program contemplates up to an additional $2 billion of long-term bonds, which would result in a $4 billion pro-forma capital structure. The majority of this debt will be in a synthetically fixed-rate mode, supported by numerous interest rate swaps, or in a traditional, unhedged variable-rate mode. Industry standard derivative mitigants are in place such as the use of highly rated counterparties with favorable swap terms and conditions. Fitch recognizes that McCarran's airline costs are currently well below industry average for an airport of its size and are expected to remain below $8.00 per enplanement through the intermediate term. However, the department's ability to maintain low airline rates and charges remains largely contingent on continued enplanement growth, availability of PFCs, and generation of non-airline revenues to offset debt service costs, the latter two of which are tied to enplanement growth. In the absence of these important offsets, airline rates and charges would likely increase and debt service coverage would narrow.
The majority of capital program costs are associated with the department's construction of a new terminal ($1.97 billion) and related projects. While Fitch recognizes that sustained enplanement growth at the airport warrants sizeable investment in a new terminal, rising construction costs over the past five years, much of which has been funded through increased borrowing, is of concern. Continued escalation in the cost of the new terminal project will be monitored, including the financial and economic impact of any additional increase beyond the expected $2 billion.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Fitch Ratings
Jesse Ortega, 415-732-5628 (San Francisco)
Pete Stettler, 312-368-3176 (Chicago)
Media Relations:
Cindy Stoller, 212-908-0526 (New York)
