Summary: San Francisco City and County Airport Commission, California San Francisco International Airport; Airport; Joint Criteria.

Transcription

1 March 1, 2010 Summary: San Francisco City and County Airport Commission, California San Francisco International Airport; Primary Credit Analyst: Robert Hannay, San Francisco (1) ; Secondary Credit Analyst: Adam Torres, New York (1) ; Table Of Contents Rationale Outlook Related Research 1

2 Summary: San Francisco City and County Airport Commission, California San Francisco International Airport; Airport; Joint Criteria Credit Profile US$ mil arpt rev bnds (San Francisco Intl Arpt) (Non-Amt) ser 2010C due 05/01/2023 Long Term Rating A/Stable New US$ mil arpt rev bnds (San Francisco Intl Arpt) (Amt) ser 2010B due 05/01/2013 Long Term Rating A/Stable New US$100.5 mil arpt rev bnds (San Francisco Intl Arpt) (Non-Amt) ser 2010D due 05/01/2019 Long Term Rating A/Stable New San Francisco City & Cnty Arpt Comm, California San Francisco Intl Arpt, California San Francisco City & County Airport Commission (San Francisco International Airport) rfd ser 1986 Rationale Standard & Poor's Ratings Services assigned its 'A' long-term rating to the San Francisco City and County Airport Commission, Calif.'s $437 million series 2010B, 2010C, and 2010D revenue refunding bonds, issued for the San Francisco International Airport (SFO). Additionally, Standard & Poor's affirmed its 'A' long-term rating and underlying rating (SPUR) on SFO's outstanding senior-lien revenue bonds. Finally, Standard & Poor's affirmed its 'A-1' short-term rating on the airport's series 2009A and B revenue refunding bonds. The 'A-1' short-term rating reflects our opinion of the airport's strong credit quality and market access. The long-term rating is based on our view of SFO's: Steady passenger demand during the recession, with enplanements decreasing only 0.8% in fiscal 2009 and increasing 4.1% for the first six months of fiscal 2010, year-over-year; Continued growth in low-cost carrier service, which has worked to increase the diversity of airlines serving the airport; and Strong position in the Bay Area air passenger market, representing 97.3% of international passenger traffic and 60.2% of domestic passenger traffic. These strengths are partially offset by our view of SFO's: High airline costs, with its $14.29 cost per enplanement (CPE) in fiscal 2009 projected to increase as debt service increases and the airport implements its capital program; Competition from Oakland International Airport and San Jose International Airport for local domestic Standard & Poor s RatingsDirect on the Global Credit Portal March 1,

3 passengers, although SFO has been increasing its local market share in recent years; and A high debt burden, with debt per enplanement of about $240. The bonds are secured by a pledge of net revenues of the airport. The 2010B and C bonds are additionally secured by the airport's pooled reserve account, and the 2010D bonds are additionally secured by the series 2009 reserve account. We understand that the series 2010B and C bonds are being issued to refund certain outstanding fixed-rate bonds for debt service savings, and that the series 2010D bonds are being issued to refund $99.9 million in series 2008A-1 and A-2 notes, which are due May 1, The airport has approximately $4.47 billion in revenue bonds and notes outstanding, plus $128.6 million in commercial paper (CP), which is secured by a subordinate lien on net revenues. SFO is located 14 miles south of San Francisco in unincorporated San Mateo County. It is the busiest of the San Francisco Bay Area's three airports by passenger traffic, and is the region's primary gateway to international destinations. The terminal complex consists of the International Terminal and terminals 1, 2, and 3. Terminal 2, the former international terminal, is currently closed and is being converted to a domestic terminal. SFO expects the opening date of Terminal 2 will be spring The airport's airfield includes four intersecting runways. Historically, United Airlines (B-) has had the largest passenger market share at SFO, although airline diversity has increased in recent years, in our opinion. In fiscal 2009, United represented 41% of enplanements, down from 48% in fiscal American Airlines, Southwest Airlines, and Virgin America represented the next-largest market shares, at 9%, 7%, and 6% in fiscal 2009, respectively. The initiation of service by Southwest, Virgin, and JetBlue has increased diversity and worked to maintain good demand during the recession, in our view. Passenger enplanements fell only 0.8% in fiscal For the first six months of fiscal 2010, enplanements have actually increased 4.1% from the previous year. While SFO's traffic has been stable, total air passenger traffic at all Bay Area airports (SFO, Oakland, and San Jose) fell 9.0% in fiscal SFO maintained its activity levels by increasing its market share from 60.5% of all Bay Area passengers in fiscal 2008 to 66.1% in fiscal The signatory airlines operate at SFO under lease and use agreements that expire on June 30, The agreements utilize a residual rate-setting methodology, whereby landing fees and terminal rental rates are set to cover the airport's operating expenses and debt service costs, after taking into account non-airline revenues received. Nonsignatory airlines operate under month-to-month operating permits and are charged the same rates. Nonsignatory airlines that use the airport on an itinerant basis pay higher landing fees. Under the agreements, proposed capital improvements are subject to review by signatory airlines. A majority-in-interest (airlines representing at least 50% of landed weight) may require the airport to defer the capital improvement for further review by the airlines, after which time the commission may proceed with the projects. We understand that the airport is currently in negotiations with the airlines regarding new lease and use agreements. Financial performance has generally been good in recent years, in our view, with total operating revenues growing 2.9% in fiscal 2009, to $551.3 million. Operating expenses, excluding depreciation and amortization, increased 6.7% in fiscal 2009 to $320.4 million. Debt service coverage provided by net revenues and pledged passenger facility charge (PFC) revenue has been adequate, in our opinion. Debt service coverage was 1.13x in fiscal 2009, up from 1.09x in fiscal 2008, as calculated by Standard & Poor's. Under the bond indenture, funds held in the contingency account can be included in the numerator of the coverage calculation for rate covenant compliance purposes. Indenture debt service coverage was 1.48x in fiscal 2009, up from 1.41x in fiscal The airport collected $68.8 million in PFC revenues in fiscal 2009, of which $51.0 million was pledged to debt repayment. The 3

4 airport levies a $4.50 PFC. Airline costs at SFO are high, in our view, with CPE totaling $14.29 in fiscal CPE is projected to increase during the next five years, partly due to an increasing debt service schedule. During the past two years, the airport has issued bonds with mandatory tender dates and short-term notes that will require the refinancing of $429.7 million in debt through December This debt structure increases market access risk, although in our view management is closely monitoring its debt portfolio and is prudently planning for these refinancings. The series 2010D bonds are refinancing the $ million in notes due May 1, Any impediments to market access in the future prior to a mandatory tender date would be a credit concern. The airport's liquidity position is what we consider good, with funds held in the operating fund and contingency account totaling $288 million as of Jan. 31, 2010, representing about 328 days' operating funds on hand, or 6.6% of debt outstanding. The airport is authorized to issue up to $200 million in CP, with $128 million in CP currently outstanding, according to management. The commission has approved a five-year, $776.1 million capital plan covering projects from fiscal 2011 through fiscal According to management, about $88 million in additional bonds will be issued to help finance the capital plan and about $406 million will be funded with previously issued bonds and CP. Other sources include grants and PFC revenues. Future renovations of terminal 3 and the baggage handling system were added under the plan, which was adopted in February Continuing projects in the plan consist of the renovation of terminal 2 and boarding area D as well as other projects that address safety, security enhancements, airfield improvements, groundside and customer service functions, environmental mitigation, utilities infrastructure upgrades, and seismic retrofits. The airport has eight interest rate swap agreements outstanding, all of which are floating-to-fixed rate swaps (the airport pays a fixed rate and receives a variable rate based on a LIBOR index). Total notional amount outstanding is $585.4 million. JP Morgan Chase Bank NA (AA-) is counterparty to about 50% of notional amount outstanding. According to management, the swaps hedge all of the airport's $535 million in variable rate debt, and about $50 million of the series 2009A and B notes. SFO has been assigned a Standard & Poor's Debt Derivative Profile (DDP) overall score of '1.5' on a four-point scale, where '1' represents the lowest risk. The overall score of '1.5' reflects our view that that the airport's swap portfolio represents a low credit risk at this time. The mark-to-market value of the swap portfolio as of Feb. 15, 2010, was negative $59.5 million, meaning the airport would owe approximately this amount to the counterparties if the swaps were terminated on this day. We view the likelihood of triggering a large involuntary swap termination payment as low. Outlook The stable outlook is based on our expectation that United Airlines will continue to operate a major hub at SFO, passenger demand will remain stable, debt service coverage will remain adequate, and liquidity levels will remain good. We would consider any impediments to market access prior to certain series' mandatory tender dates to be a credit concern. Standard & Poor s RatingsDirect on the Global Credit Portal March 1,

5 Related Research USPF Criteria: Airport Revenue Bonds, June 13, 2007 USPF Criteria: Municipal Swaps, June 27, 2007 USPF Criteria: Debt Derivative Profile Scores, March 27, 2006 Ratings Detail (As Of March 1, 2010) San Francisco City & Cnty, California San Francisco Intl Arpt, California San Francisco City & Cnty (San Francisco Intl Arpt) second ser rev rfdg bnds (San Francisco Intl Arpt) ser 2009 A&B Short Term Rating A-1 Affirmed San Francisco City & Cnty (San Francisco Intl Arpt) Second ser rev nts ser 2008A Long Term Rating A/Stable Affirmed San Francisco City & Cnty Arpt Comm, California San Francisco Intl Arpt, California San Francisco City & Cnty Arpt Comm (Intl Arpt) sec ser var rate rev rfdg bnds (Non-AMT) ser 36A Long Term Rating AAA/A-1+ Affirmed San Francisco City & Cnty Arpt Comm (Intl Arpt) sec ser var rate rev rfdg bnds (Non-AMT) ser 36B Long Term Rating AAA/A-1 Affirmed, Removed from CreditWatch San Francisco City & Cnty Arpt Comm (San Francisco International Airport) arpt (ASSURED GTY) San Francisco City & Cnty Arpt Comm (San Francisco International Airport) VRDB (Non-AMT) Ser 34A (ASSURED GTY) Long Term Rating AAA/NR/Negative Outlook Revised San Francisco City & Cnty Arpt Comm (San Francisco International Airport) (wrap of insured) (FGIC & AGM) (SEC MKT) San Francisco City & Cnty Arpt Comm (San Francisco International Airport) (wrap of insured) (FGIC & AMBAC) (SEC MKT) San Francisco City & Cnty Arpt Comm (San Francisco International Airport) (wrap of insured) (FGIC) (MBIA - SEC MKT) (National) San Francisco City & Cnty Arpt Comm (San Francisco International Airport) (wrap of insured) (MBIA & Assured Gty) (SEC MKT) San Francisco City & Cnty Arpt Comm (San Francisco International Airport) (wrap of insured) (MBIA & AGM) (SEC MKT) San Francisco City & Cnty Arpt Comm (San Francisco International Airport) 2nd ser VRDB ser 36D (AGM) San Francisco City & Cnty Arpt Comm (San Francisco International Airport) 2nd ser VRDB ser 37D (AGM) San Francisco City & Cnty Arpt Comm (San Francisco International Airport) 2nd ser VRDB (Non-AMT) ser 36C (AGM) 5

6 Ratings Detail (As Of March 1, 2010) (cont.) San Francisco City & Cnty Arpt Comm (San Francisco International Airport) 2nd ser VRDB (Non-AMT) ser 37C (AGM) San Francisco City & Cnty Arpt Comm (San Francisco International Airport) 2nd ser (Issue 12 A&B) ser 1996 San Francisco City & Cnty Arpt Comm (San Francisco International Airport) 2nd ser 28B (MBIA) (National) San Francisco City & Cnty Arpt Comm (San Francisco Intl Arpt) Second ser rev rfdg bnds (San Francisco Intl Arpt) ser 2010A due 05/01/2030 Long Term Rating AAA/A-1+ Upgraded Unenhanced Rating A(SPUR)/Stable Rating Assigned San Francisco City & Cnty Arpt Comm (San Francisco Intl Arpt) 2nd ser rev rfdg bnds ser 34 C,D,E & F Long Term Rating A/Stable Affirmed \San Francisco City & Cnty Arpt Comm (San Francisco International Airport) VRDB (Non-AMT) ser 34B (ASSURED GTY) Long Term Rating AAA/NR/Negative Outlook Revised San Francisco City & Cnty Arpt Comm (San Francisco Intl Arpt) San Francisco City & County Airport Commission (San Francisco International Airport) San Francisco City & County Airport Commission (San Francisco International Airport) (CIFG) Many issues are enhanced by bond insurance. Complete ratings information is available to RatingsDirect on the Global Credit Portal subscribers at and RatingsDirect subscribers at All ratings affected by this rating action can be found on Standard & Poor's public Web site at Use the Ratings search box located in the left column. Standard & Poor s RatingsDirect on the Global Credit Portal March 1,

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