Fitch Downgrades Burbank-Glendale-Pasadena Airport Auth (CA) Rev Bonds to 'A'; Outlook Stable

Fitch Ratings has downgraded the rating on Burbank-Glendale-Pasadena Airport Authority's (BUR) outstanding $132.9 million of airport revenue bonds to 'A' from 'A+'. The Rating Outlook has been revised to Stable.

KEY RATING DRIVERS

The downgrade reflects Burbank's continued enplanement base erosion and weakening of financial metrics leading to tighter debt service coverage ratios.

Volatile Traffic Base Tied to a Highly Competitive Market - Volume Risk: Weaker

BUR had 2.1 million enplanements in fiscal year (FY) 2013 (ending June 30), a decline of 1.7% compared to FY 2012. The airport's traffic declined another 3.9% in FY2014. Significant airline concentration risk exists, with Southwest Airlines Co. (rated 'BBB'; Stable Outlook by Fitch) representing 72.8% of enplanements.

Strong Cost Recovery Framework -- Price Risk: Stronger

The airport's residual use and lease agreement, under which residual airport costs are fully passed through to airlines, was recently extended until 2019. Despite the strong pass through, BUR currently has minimal dependence on airline charges, reflecting its low cost structure, resulting in an airline cost per enplanement (CPE) of approximately $2.33 in FY 2013.

Manageable Capital Plan -- Infrastructure Renewal and Development: Midrange

The RITC structure, which includes the Consolidated Rental Car Facility (CRCF) was completed in 2014. Now, several other ancillary projects are being worked on, including the replacement of airfield lighting.

Conservative Debt Structure -- Debt Structure: Stronger

All of BUR's debt is fully amortizing and fixed rate. Gross debt service escalates to maximum annual debt service (MADS) of $11.2 million in FY 2016 and remains flat until FY 2027 when it drops to $5.8 million. Since RITC project was completed, CFC revenues and rental car company rents have been used as an offset to annual debt service.

Moderate Leverage and Exceptionally High Cash Balances

The airport has a very healthy liquidity position, primarily reflecting the $105 million Facility Development Reserve, which Fitch understands to be unencumbered, resulting in 1446 days cash on hand and leverage below zero. If the airport were to deplete the reserve, days cash on hand would drop to 355 and leverage jumps to 8.8 times (x).

Peer Analysis

Burbank's closest peers are other airports within the Los Angeles basin dealing with similar situations, including both Long Beach and Ontario airports. Burbank demonstrates very similar declining enplanement trends, as well as weaker volume risk due to a higher degree of competition from LAX. Its debt service coverage ratio (DSCR) is higher and CPE lower than both peer airports, and, although Burbank also possesses more debt than Long Beach and Ontario its strong cash balances offset associated risk.

RATING SENSITIVITIES

Negative - A depletion of the airport's cash balances to meet airport infrastructure needs leading to a sharp increase in leverage.

Negative - A decision by Southwest to exit or substantially retrench its presence at BUR dramatically reducing the airport's enplanement base.

Negative - A continuation of the downward DSCR trend due to continued falls in general traffic, unsuccessful cost control or inability to maintain revenues by the third-party operator.

CREDIT UPDATE

The airport saw declines in enplanements for the fifth straight year, with enplanements down 1.7% to 2.01 million. Competition from other airports continues to impede any growth, although the airport continues to try and grow enplanements through its relationship with Southwest Airlines as well as a new carrier, Seaport Airlines.

Despite heavy volatility in enplanements, cash flows have been relatively stable due to the airport's prudent management of expense growth at a compounded annual rate of 2.8 since FY 2008, and also as a result of robust non-airline revenues, and operating revenues actually increased for the first time since FY2008 in FY 2013, growing 3.5%. FY 2013 DSCR without transfers increased to 1.88x from 1.63x in FY 2012 due to increased revenues and lower expenses, although FY 2014 DSCR is expected to reflect declines as debt service ramps up. Over the next 5 years, DSCR is expected to average 1.34x, and not dropping below 1.15x. CPE is expected to remain in the upper $2 range at least through 2018, remaining low in comparison to peers.

The airport is located three miles northwest of downtown Burbank, serving the northern Los Angeles area, including Burbank, Glendale, and Pasadena. Since 1978, day-to-day airport management has been handled by TBI Airport Management, Inc, and the airport director has been at the airport since 1988 in various capacities, assuming the role of airport director in 2008.

SECURITY

The bonds are secured by the net revenues generated at the airport.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (July 12, 2012);

--'Rating Criteria for Airports' (Dec. 13, 2013).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Rating Criteria for Airports

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725296

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=905014

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