Fitch Ratings has assigned an 'A-' rating to
Fitch has also downgraded the ratings of the outstanding airport revenue bonds totaling approximately
The series 2023 bank note ratings reflect a security pledge on parity with outstanding airport system revenue bonds.
RATING ACTIONS
Entity / Debt
Rating
Prior
LT
A-
Downgrade
A
LT
A-
Downgrade
A
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VIEW ADDITIONAL RATING DETAILS
RATING RATIONALE
The rating downgrade reflects the significant additional leverage on a long-term basis as result of the proposed borrowings for the replacement passenger terminal project. While the modernization of the passenger terminal will be positive for the airport's service capabilities for its air carriers, BUR will transition from one of the lowest cost airports to one that will be above average for an airport with similar characteristics.
The rating also reflects the airport's secondary position and relatively small, yet predominantly origination and destination (O&D) traffic base within the strong, but competitive
A new, long-term fully residual airline agreement is anticipated to demonstrate the carrier's commitments to the new terminal project and further insulate the airport from downside risk, however, elevated costs could impact service retention, especially among low- and ultra-low-cost carriers. Liquidity remains a key credit strength though a portion will be drawn down for the project. Leverage will increase measurably, but be partially offset by an agreement that provides a strong cost recovery mechanism, and provide for a new terminal that will be
KEY RATING DRIVERS
Revenue Risk - Volume - Midrange
Volatile Traffic Base; Highly Competitive Market
BUR is a medium hub airport subject to significant air service competition within the strong
Revenue Risk - Price - Stronger
Strong Cost Recovery Framework
The airport has adopted an amendment to the current hybrid-residual AUL through the earlier of date of beneficial occupancy (DBO) at the
Infrastructure Dev. & Renewal - Midrange
The majority of capital spending over the next five years is tied to the replacement of the existing passenger terminal following a maintenance-focused capital plan the past few years. The terminal replacement project is expected to cost approximately
The DB contract includes liquidated damages, but the airport is further protected from project delays by provisions in the AUA amendment and the airport is not reliant on project completion for revenues as the existing terminal will continue to operate until the replacement terminal opens. BUR also has a six-year CIP (2024-2029) totaling approximately
Debt Structure - 1 - Stronger
Conservative Structure
The airport bonds have a senior lien on net revenues and all of BUR's long-term revenue debt is fully amortizing and fixed-rate, while short-term obligations include
Financial Profile
The airport has a very healthy liquidity position, primarily reflecting the
PEER GROUP
Burbank's most comparable fitch-rated peers include other regional airports within the
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Increased project costs and associated borrowings that cause leverage to rise and remain above Fitch rating case assumptions;
Traffic declines or enhanced volatility with an emphasis on
Rising CPE trends that pressure air service retention and growth.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Though not likely over the medium-term, sustained leverage below 6.0x following successful project completion in Fitch's rating case.
TRANSACTION SUMMARY
CREDIT UPDATE
Year to date fiscal 2024 enplanements through February have come in at 3% above 2023 levels. Fiscal 2023 enplanements came in at a 9% increase over FY 2019 enplanements, reflecting a full recovery.
Total operating revenues increased 12.1% in fiscal 2023 to approximately
The airport was awarded
Due to the airport's strong financial position, airport reported coverage came in at 7.28x in fiscal 2023, and cash balances continued to exceed outstanding debt, causing leverage (defined as net debt-to-cash flow available for debt service) to remain negative. CPE decreased to approximately
The Capital Improvement Plan (CIP) of the Authority for fiscal years 2025 to 2029 has an estimated budget of
The Project involves constructing a new 355,000 square foot terminal with 14 gates at the northeast section of the Airport to replace the existing terminal in the southeast area. Additional developments include an aircraft ramp, GSE facility, cargo area, a parking structure for automobiles, an employee parking area, a new loop access road, reconfiguration of service roads, and the demolition of the current terminal and its parking structure.
The project will primarily be financed by
The Authority has AUAs with all eight passenger airlines operating at the Airport, set to expire on
The existing AUA sets fixed rates for airline rents and fees, with the Authority having the option to adjust these rates annually based on its budget. The Authority can also levy significant fee increases during the fiscal year if needed to cover Airport operational expenses.
In contrast, the Replacement AUA adopts a full residual methodology where the Authority will estimate the costs to run the Airport's various areas before the FY begins and set rents and fees accordingly. After the FY ends, a reconciliation will take place to adjust for any discrepancies between estimated and actual costs. Airlines will be billed for any underpayment or credited for overpayment, with credits usable for future payments within a year.
FINANCIAL ANALYSIS
Fitch views the sponsor assumptions as reasonable and incorporated them into the Fitch base case. Fitch's Base Case assumes annual enplanement growth of 1.9% in fiscal 2024 over fiscal 2023 levels followed by 2% growth per year thereafter. Airline revenues grow at a five-year CAGR of 20.1% as the residual replacement AUA takes effect. Operating expenses grow at a five-year CAGR of 5.1%. Leverage significantly rises due to the upcoming 2024 and anticipated 2026 bond issuances, to 47.3x in fiscal 2024 before normalizing just under 12x in fiscal 2028. Fitch-adjusted coverage (including CFCs as revenues rather than debt service offsets) rises to 5.3x in fiscal 2026 before the residual AUA takes affect resulting in coverages above 1.2x thereafter. CPE increases from
Fitch's Rating Case assumes base case enplanement growth, until a hypothetical recessionary decline of 10% in fiscal 2028, followed by a slower recovery. Airline revenues grow at a five-year CAGR of 23.9% due to the replacement AUA, while non-airline revenues fluctuate in line with enplanements. Operating expenses grow similar to the base case. Due to the residual nature of the AUA, DSCR and leverage profiles remain similar relative to the base case. However, CPE levels rise in each year to generate these results, increasing to nearly
SECURITY
The bonds are secured by a pledge of the revenues of the authority.
An additional
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
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
Additional information is available on www.fitchratings.com
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