Fitch Affirms Burlington's (VT) Airport Rev Bonds at 'BBB'; Outlook Negative

(The following statement was released by the rating agency)

Fitch Ratings-New York-17 March 2021:

Fitch Ratings has affirmed the 'BBB' rating of the Burlington, VT (BTV) approximately $21 million of outstanding airport revenue bonds.

The bonds have been removed from Rating Watch Negative (RWN). The Rating Outlook is Negative.

RATING RATIONALE

The RWN has been removed based on reduced near term pressures to BTV's cashflow and liquidity profiles evidenced by receipt of federal aid as well as management actions to both manage costs and restructure certain debt payments. A refunding bond issue in early 2021 adjusted BTV's debt payment obligations resulting in no debt service due in fiscal 2022 followed by a more limited debt service obligation in fiscal 2023. Fitch expects cash reserves to be maintained in the near term even if traffic volumes have limited recoveries in the coming months.

The rating reflects BTV's small traffic base of nearly 700,000 enplanements prior to the coronavirus pandemic, with some observed historical volatility in a limited catchment area, which is also partially dependent on fluctuating Canadian demand. The rating is supported by BTV's airline agreement with strong cost recovery terms, a limited capital program without additional borrowings needs, and stabilizing leverage. However, while the airline agreement gives the airport the ability to set rates to credit supportive 1.5x coverage levels, the current environment poses risks to its practical effect given the pressures on airlines, thereby diminishing the strength of the cost recovery terms.

The Negative Rating Outlook reflects the substantial adverse impact on operating and financial performance due to the coronavirus and related containment measures, along with uncertainty around the timing and magnitude of recovery. BTV continues to have very limited activity levels and uncertainty continues with respect to the timing of a sustained path towards recovery.

KEY RATING DRIVERS

Primarily O&D Traffic Base with Volatility - Revenue Risk (Volume): Weaker

Prior to the pandemic, BTV provided primary air service, with approximately 693 thousand enplaned passengers in fiscal 2019, for the Burlington MSA with no nearby domestic competition. Traffic is entirely origin & destination (O&D). BTV does not have significant single carrier concentration with only United Airlines having the leading market share of about 31%. Across the airports sector, the coronavirus pandemic has caused significant traffic declines, with BTV fiscal 2020 enplanements declining 25% over the prior year with more severe declines occurring into fiscal 2021. Recovery to date has been below peers, with fiscal YTD enplanements through December down approximately 82% over the prior year.

Moderate Cost Recovery Framework - Revenue Risk (Price): Midrange

BTV transitioned to a residual airline use and lease agreement (AUL) beginning in fiscal 2017; the agreement is in place for five years. The AUL is intended to maintain a debt service coverage ratio (DSCR) of 1.5x going forward, taking into account non-airline revenue performance, with excess net revenue sharing distributed among the carriers. Airline costs remained increased to $8.45 per enplanement in fiscal 2020 as a result of the coronavirus pandemic. Cost per enplanement (CPE) could increase over the next few years given the significant traffic declines from the COVID-19 pandemic, with fiscal 2021 CPE anticipated to increase to over $20 and higher spikes in CPE expected as enplanements continue to decline. However, while the airline agreement gives the airport the ability to set rates to reach 1.5x coverage, the current environment may make it economically ineffective especially in the event of severe enplanement stresses.

Manageable Infrastructure Plan - Infrastructure & Renewal Risk: Stronger

The airport's six-year capital improvement plan (CIP; 2021-2026) is modest in size, totalling $97.5 million, and will be largely funded through grants. Major projects include airfield related improvements, terminal upgrades, and noise mitigation. BTV does not plan to issue additional debt to support their capital program.

Conservative Debt Structure - Debt Structure: Stronger

All BTV's debt is senior, fixed-rate, and fully amortizing. Following a 2021 refunding, debt service in fiscal 2022 and 2023 is significantly reduced, with no debt service due in fiscal 2022 and only approximately $500 thousand due in fiscal 2023. Following fiscal 2023, debt service is level at approximately $3.8 million through fiscal 2031. Structural features contain adequate coverage tests and a 12-month cash-funded debt service reserve fund (DSRF).

Financial Profile

Heading into the current weak aviation environment, BTV's metrics were sound evidenced by a stable 1.5x DSCR. While coverage fell to 1.3x in fiscal 2020, below the target set out under the airline agreement, in order to reduce pressures to airlines, BTV's most recent refunding issuance significantly reduced debt service payments due through fiscal 2023. For successive fiscal periods, the airport anticipates a stable minimum coverage ratio of 1.5x going forward as per the AUL. Under Fitch's conservative rating case, leverage is expected to continue to trend lower, reaching approximately 1.7x by fiscal 2025. However, with the additional cost recovery to maintain required coverage, Fitch rating case CPE increases to an average of over $11, though stabilizes in the $8-$9 range following enplanement recovery.

PEER GROUP

BTV's peers include Dayton (BBB/Negative) and Fresno (BBB+/Negative). Burlington serves a smaller service area than either Dayton or Fresno. Both Burlington and Dayton have lower coverage metrics and higher leverage metrics as compared with Fresno, though Burlington's leverage is lower than Dayton's and is expected to decline below Fresno's as Fresno takes on additional debt for its capital plan.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

--Significant and sustainable passenger growth while maintaining a very low sustained leverage profile may support positive rating action.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

--A lack of meaningful improvement to traffic levels resulting in credit metrics, including coverage holding below 1.5x and leverage rising above 4.0x, aligned to the downside scenarios could result in a multi-notch downgrade.

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].

CREDIT UPDATE

Traffic has experienced fluctuations and declines since peaking in 2009, though volatility has diminished in recent years. However, the coronavirus pandemic represents a unique shock to the airport sector, with particularly negative effects to domestic and international traffic volume. Fiscal 2020 enplanements declined 25% over the prior year to 519.8 thousand. Fiscal YTD 2021 enplanements through December have continued to decline, down 82% over the prior period.

To combat these losses, management has taken a variety of actions, including planning to issue refunding bonds sized at approximately $5.2 million. As a result of the refunding, the airport will have no debt service due in fiscal 2022 and only approximately $500 thousand of debt service in fiscal 2023, mitigating the risk of debt service default over the next two full fiscal years. In addition, management has reduced budgeted expenses in fiscal 2021 as well as applied CARES Act funding to offset operating expenses. Liquidity remains strong at 268 days cash on hand (DCOH; with unrestricted cash, O&M reserve, and DSRF only) in 2020, and is expected to remain above 200 DCOH even in Fitch's Severe Downside Case.

Airline revenues declined 9.3% in 2020 due to the coronavirus pandemic, with non-airline revenues decreasing by 20.7%. Overall, total operating revenues decreased 17.9% in 2020. The CARES Act funds provided approximately $2.3 million in additional funding for fiscal 2020, and is expected to provide another $7.4 million in fiscal 2021. Management expects fiscal 2021 airline revenues to be down an additional 19% over fiscal 2020 and non-airline revenues to be down over 30% over fiscal 2020. Due to the projected use of $7.4 million of CARES Act Funding, total budgeted fiscal 2021 revenues are expected to be up 10% over fiscal 2020. 2020 operating expenses grew 4.5% over fiscal 2019, and fiscal 2021 budgeted expenses are expected to hold relatively steady at approximately $14.5 million, which includes significant cost cutting over the prior fiscal 2020 budget.

Due to the coronavirus pandemic, DSCR came in at 1.3x in fiscal 2020. Cash increased due to a revenue anticipation note issued by the City of Burlington, with leverage remaining stable at 3.8x (not including the RAN). Airport liquidity (with unrestricted cash, O&M reserve, and DSRF only) declined to 268 DCOH and CPE increased to $8.45. Due to the declining debt profile and increasing cash levels, leverage is expected to continue to decline, reaching 1.5x by 2025 in Fitch's conservative coronavirus rating case.

BTV's six-year CIP is manageable and totals $97.5 million. The plan includes land acquisition, airfield and terminal projects, a new quick-turnaround facility for rental cars, and other major maintenance projects. The plan is primarily funded by grants and PFCs, and to a lesser extent by CFCs and airport cash flow. There are no plans to issue additional debt for the program.

FINANCIAL ANALYSIS

Fitch modelled two coronavirus downside cases to reflect deep traffic declines as well as prolonged recovery back to 2019 levels. Fitch's downside case reflects severe enplanement declines of 75% in fiscal 2021, with a recovery of 55% in fiscal 2022, 85% in fiscal 2023, 55% in fiscal 2024, and 100% recovery of 2019 levels by fiscal 2025. Operating expenses grow at a five-year CAGR of 3.3%, broadly reflecting management's expectations. Under the Fitch Coronavirus Rating Case, the leverage profile declines to approximately 1.7x by 2025. CPE increases to an average of over $11 over the next five years.

Fitch's Severe Downside Case adopts an enplanement decline of 85% in fiscal 2021 over 2019 levels in line with year to date enplanement performance, and models in more severe declines in fiscal 2022 and 2023, returning to 90% of 2019 levels of enplanements in 2025. Operating expenses grow at a five-year CAGR of 3.3%. In the Severe Downside Case, coverage remains at the 1.5x level starting in 2023 and leverage is 1.7x in 2025. CPE normalizes at an average of over $12 during the limited recovery period.

SECURITY

The bonds are secured by the airport's pledge of net revenues from operations.

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.
ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

Burlington (VT) [Airport]
----Burlington (VT) /Airport Revenues/1 LT; Long Term Rating; Affirmed; BBB; Rating Outlook Negative

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