Fitch Rates Ontario (CA) Airport's Revenue Bonds 'A-'; Outlook Negative
(The following statement was released by the rating agency)Fitch Ratings-New York-16 March 2021:
Fitch Ratings has assigned an 'A-' rating to the Ontario International Airport Authority's (OIAA) approximately $115.1 million senior revenue bonds series 2021ABC. In addition, Fitch has affirmed ONT's $33.4 million outstanding airport revenue bonds at 'A-'. The Rating Outlook is Negative.
The ratings reflect ONT's position as a secondary O&D airport in the highly competitive Los Angeles air trade region. The airport benefits from steady growth in passenger volumes since the 2008 recession and prior to the pandemic, with cargo operations providing additional diversification. ONT's residual airline use agreement is expected to result in sound debt service coverage ratios (DSCR) and a growing cash position.
Leverage and cost per enplanement (CPE) are expected to rise due to debt issuances in 2021 and 2022, although both metrics should remain manageable. The rating further considers stable performance following the 2016 transfer of ONT to OIAA from Los Angeles World Airports (LAWA).
The Negative Outlook reflects the substantial adverse impact on operating performance with limited recoveries to date, due to the coronavirus pandemic and related containment measures, along with uncertainty around the timing and magnitude of recovery.
KEY RATING DRIVERS
Secondary Airport in Competitive Region - Revenue Risk (Volume): Midrange (revised from Weaker)
ONT acts as a secondary airport in the large and highly competitive Southern California air service market, primarily serving passengers from the Inland Empire region. The airport's traffic profile has shown considerable volatility and declines during the 2008-2009 recession; however, traffic has steadily recovered since 2014 with enplaned passenger levels remaining above two million, which justifies the revision of the assessment from Weaker to Midrange.
The pandemic has adversely impacted passenger traffic activity and complete recovery is likely to take several years. Airline concentration is elevated despite increased air service offerings, with carrier services focused mainly on western region markets, and with Southwest accounting for almost half of total enplanements. Air cargo represents over half of landed weight at ONT, which provides some revenue diversification and has buoyed performance through the pandemic.
Strong Airline Agreement Constrained by Elevated Costs - Revenue Risk (Price): Midrange
The airport operates under a long-term residual AUL agreement expiring in 2024, which provides the basis for strong cost recovery. All primary passenger and cargo airlines are participants to the agreement. Although the airport has the ability to pass costs on to the airlines, increasing CPE above its currently elevated level could put the airport at a competitive disadvantage to competing airports in the region.
Flexible Capital Plan, Majority Debt-Funded - Infrastructure Development & Renewal: Midrange
The comprehensive five-year capital improvement plan (CIP) through fiscal 2026 is estimated to cost $424.1 million, significantly higher than previous capital needs. While a majority of the projects are deemed necessary to maintain and rehabilitate existing facilities and benefit from airlines support, 82% of funding for the CIP comes from the current or future debt issuances, including issuances planned in fiscal 2022 and after fiscal 2026, which could pressure leverage and rates going forward and may require delaying some non-essential projects. This risk is mitigated by the authority's flexibility to re-evaluate capital needs in the future in coordination with airlines.
Conservative Debt Structure - Debt Structure: Stronger
The authority's rated debt profile consists entirely of senior, fixed-rate, and fully amortizing bonds with final maturity for series 2016 in 2026, and series 2021 in 2051. Annual debt service is decreasing from around $11 million through 2026, and flat between $7 million and $8 million thereafter (around $12 million including the expected 2022 issuance). Reserves for the series 2016 bonds are surety-funded at 10% of the original par amount, and are expected to be cash- or surety- funded for the series 2021 bonds. The series 2021 bonds refund the $34 million in bank anticipation notes (BANs) taken as a result of the constraint on additional borrowing prior to final LAWA settlement payoff. By settling all payments owed to LAWA with proceeds from the 2021 issue, the airport may now issue additional debt on the senior lien.
ONT's past financial performance has been stable with coverage ratios comfortably above covenant levels. Fiscal 2020 DSCR was robust at 3.0x (2.7x when removing the 25% of adjusted debt service added to revenues per the Master Trust Indenture), lifted by higher net pledged revenues. Due to the residual nature of the AUL, Fitch expects DSCR to remain above 1.4x. CPE has historically been elevated for a medium hub and reached $11.12 in fiscal 2020, and is set to remain above the historical average in the medium term as traffic recovers to pre-pandemic levels.
Net debt-to-cash flow available for debt service (CFADS) was negative prior to the issuance of the 2021 series and is expected to rise above 8.0x in fiscal 2021 before declining below 6.0x by fiscal 2024 despite the expected 2022 issuance. Fitch anticipates OIAA's cash and reserves will remain adequate, with liquidity building up over the forecast horizon from current levels of around 200 DCOH.
ONT's peers include Burbank, CA (Burbank; A/Negative) and Long Beach, CA (Long Beach; A-/Negative). All three airports are secondary airports located in the Los Angeles air trade area. Compared to ONT, Burbank shares similar enplanement levels over two million, a residual AUL with full cost recovery, and negative rating case leverage, but has significantly lower CPE around $2.00. Long Beach has higher leverage of 3.0x on average compared to ONT and lower coverage, but higher liquidity (over 400 DCOH). Both Burbank and Long Beach have more modest capital improvement plans, with substantially less expected new money issuance.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
--Positive action is unlikely in the near term given the current airport profile;
--However, a revision of the Outlook back to Stable is possible in the next one to two years, if recovery in traffic and revenues is sustained as the pandemic recedes, resulting in normal air traffic patterns and credit metrics in line with indicative guidance.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
--A return to sustained traffic declines or elevated volatility resulting in reduced enplanements and/or inability to manage costs, which leads to unsustainable CPE levels;
--Borrowings beyond those currently forecast resulting in leverage above 4.0x absent a strong airline cost-recovery agreement.
Best/Worst Case Rating Scenario
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit [https://www.fitchratings.com/site/re/10111579].
ONT is expected to issue three 2021 series of airport revenue bonds, all senior secured, fixed rate, and fully amortizing parity with similar structural features to the outstanding bonds. The bonds are estimated to be issued in a par amount of $115.1 million. The proceeds of series 2021 will fund the LAWA Repayment of $24.8 million required under the Settlement Agreement, effectively lengthening the duration of this obligation from 2026 (final year of the Settlement Agreement) to 2051, the maturity of the bonds. The rest of the proceeds will be used to retire outstanding subordinated series 2019 note ($34.7 million) and finance the remaining costs of the 2021 Project.
This bond issuance will expedite the completion of the Settlement Payment obligation to LAWA.
Fiscal 2020 saw an overall decrease in enplaned passengers of 17.6% from fiscal 2019. Enplanements have decreased 61.3% over the first seven months of fiscal 2021 (July 2020 through January 2021) compared to the prior year. While this drop is substantial, Fitch notes that the airport's traffic has been the least affected by the pandemic among Southern California airports. For CY 2020, ONT experienced a decrease in passengers of 54.7% versus 67.4% for LAX, for example.
Cargo continues to perform well, in line with the pre-pandemic trend and serving to offset recent declines on the passenger side. Total landed weight actually increased 5.3% in fiscal 2020, primarily due to a 13.4% increase in cargo landed weight, thanks to a strong presence of UPS and growing activities from FedEx and Amazon. The airport is expecting to reap significant revenues from a new facility leased to FedEx and future rents, and over 200 acres it plans to lease in the near term. Fitch views these developments positively, as they would diversify the airport's revenue.
The airport was awarded $22.2 million in CARES Act grants. $6.6 million of CARES Act grants were used in fiscal 2020 on M&O expense reimbursement, and ONT intends to use the remaining $15.6 million to reimburse M&O expenses again in fiscal 2021. The authority was allocated through the Airport Coronavirus Response Grant Program (ACRGP) an estimated additional grant funding of $8.8 million from the Consolidated Appropriations Act, 2021 (CAA). The authority has not decided how to allocate these additional grant funds.
Fiscal 2020 operating revenues, excluding CARES Act funds and other operating grants, increased 3.0% from fiscal 2019, mainly from yoy growth from ground transportation, rental car, and news and gifts concession revenue. With the inclusion of $7.1 million in CARES and other grants, total operating revenue actually increased 11.9% overall. For July through December fiscal 2021, operating revenues without including CARES funds decreased 19.6% compared to the same six-month period in fiscal 2020.
Fiscal 2020 M&O expenses increased 1.9% compared to fiscal 2019. Through the first six months of fiscal 2021, the authority has reduced M&O expenses by 22.7% compared to the same six-month period in fiscal 2020.
ONT's capital plan through fiscal 2026 is significant ($424.1 million) and will require further debt issuance in fiscal 2022 (anticipated $79.4 million) and possibly in fiscal 2026 (anticipated $172.0 million). However, management maintains some flexibility to adjust project schedules and funding needs based on activity and coordination with the airlines. Projects currently being implemented are deemed necessary to maintain and rehabilitate the existing facilities and are proceeding as expected.
Given the current economic environment due to the pandemic and the unlikeliness of a stable operating environment over the near term, Fitch's Coronavirus Rating Case is also considered the Base Case.
Fitch's coronavirus rating case assumes, relative to fiscal 2019, a 55% enplanement decline in 2021 followed by recoveries reverting the losses to 25%, 15%, and 5% in fiscal 2022, 2023 and 2024, respectively, and a full recovery by fiscal 2025. While non-aeronautical revenues are mostly fluctuating with passenger traffic, airline payments are driven by cost recovery terms under the rate agreements and adjusted by CARES funding for costs.
The case does not include federal relied from the CAA, since those funds have not been budgeted by the airport yet. Results indicate a total Fitch-calculated DSCR profile averaging about 1.8x, exceeding covenant levels, while cost per enplanement peaks above $18 in 2021. Leverage is initially 8.1x, but then migrates downward below 6.0x by fiscal 2024.
Fitch also ran the coronavirus severe downside scenario, which shows a maximum traffic reduction of 65% in fiscal 2021 relative to fiscal 2019, and assumes a prolonged recovery. Additionally, a 10% stress on cargo landed weight, an important revenue driver for ONT, is assumed in fiscal years 2021-2025. Under this scenario, the DSCR and leverage profiles are the same as the rating case given the fully residual AUL. However, CPE peaks at $28 in fiscal 2021 and stays above $15 before decreasing below $11 in fiscal 2025.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria.
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Ontario International Airport (CA)
----Ontario International Airport (CA) /Airport Revenues/1 LT; Long Term Rating; Affirmed; A-; Rating Outlook Negative
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