Fitch Affirms Denver, CO's Sr. Airport Revs at 'A+' & Subs at 'A'; Outlook Stable

Fitch Ratings has affirmed the 'A+' rating for the City and County of Denver, Colorado's approximately $3.6 billion senior lien airport revenue bonds. Fitch has also affirmed the 'A' rating on the approximately $719.9 million subordinate lien airport revenue bonds. The Rating Outlook is Stable.

Denver International Airport's (DIA) ratings reflect a large air trade service area that serves as a strategically located connecting hub and has seen recent growth in its origination and destination (O&D) base. The airport's cost per enplanement, leverage and liquidity are comparable to its peer group.

KEY RATING DRIVERS

Revenue Risk - Volume: Stronger

Sizable Traffic Base Subject to Connecting Exposure: DIA is the primary airport for a large air trade service area with a long term history of positive traffic trends. In addition, DIA has a unique and successful role serving as a hub airport for three different airlines with United, Frontier, and Southwest each operating major connecting service at the airport. However, Frontier has begun reducing its connecting operations. United and Southwest, together accounting for over 70% of enplanements, do leave DIA vulnerable to airline scheduling decisions.

Revenue Risk - Price: Stronger

Stable Rate Setting Structure: DIA operates on a hybrid cost recovery model which is compensatory in the terminal and residual on the airfield, in addition to a 'safety net' rate setting mechanism for coverage purposes. The agreement with United was recently amended to go through 2035 while the agreement with all other carriers concludes at the end of 2016. Current cost per enplanement (CPE) of $12.22 is expected to rise to the $13 range in the next five years, which is moderate but consistent with other airports of DIA's size.

Infrastructure & Renewal Risk: Midrange

Debt Supported Capital Program: The airport's current CIP program is $1.2 billion through 2019, which includes the remaining works for the hotel transit center project and over $600 million for maintaining the airport infrastructure. The hotel is currently expected to open in November with train service commencing in spring of 2016. Given that DIA is now 20-years old, it is expected to continue to have capital improvement needs on an ongoing basis. Additional senior and subordinate bonds are expected to be issued to finance a portion of these improvements.

Debt Structure: Stronger/Midrange (Senior/Subordinate)

Variable-rate Debt and Swap Exposure: Approximately 20% of the current outstanding debt is variable rate most of which is hedged via a series of swap transactions which provides some counterparty risk and renewal risk. The recent series 2013AB transaction established a dual lien capital structure and the airport is likely to use both liens for future new money and refunding transactions. Covenants and reserve levels are at adequate levels for large-hub airport credits.

Healthy Financial Metrics: DIA has a relatively high debt burden with aggregate debt outstanding of approximately $4.3 billion, which is among the highest for a U.S. airport. The significant debt burden is partially mitigated by high enplanement levels which produce a total debt per enplanement ratio of $160 and cash reserves providing a moderate total net-debt to cash flow available for debt service (CFADS) ratio of 6.1x. Indentured-based debt service coverage ratio (DSCR) using passenger facility charges (PFCs) as an offset to debt service and a coverage account has been in excess of 1.8x since 2010, but using PFCs as a revenue, coverage is narrower at just above 1.6x.

Peer Analysis: Comparable rated airport peers include Chicago O'Hare ('A-'/Positive Outlook) and Dallas-Fort Worth('A'/Outlook Stable) both of which have high legacy carrier concentration in a large air trade service area. Although DIA's debt level is elevated, its leverage is materially lower than Chicago O'Hare and Dallas-Fort Worth.

RATING SENSITIVITIES

Negative - Traffic Declines: Material traffic deterioration by Southwest or United.

Negative - Upcoming Capital Needs: Additional leverage above current plans without corresponding net revenue growth to preserve coverage levels.

Positive - Improving Financial Metrics: Ongoing outperformance of traffic projections, which would lead to lower cost per enplanement and higher coverage levels than currently forecasted, may result in positive rating action.

CREDIT UPDATE

Enplanements increased 1.7% in 2014, driven by a 6.4% growth in O&D traffic. In recent years the O&D share of traffic has increased from 53.5% in 2010 to 60.5% in 2014 and is projected to improve further to 64.7% in 2015. The surge in O&D traffic is a direct reflection of the strength in Denver's economic service area.

Through the first seven months of 2015, O&D traffic is up an additional 7% but overall traffic is down 0.7% due to Frontier transitioning to ultra-low cost carrier status. Frontier has reduced their seating capacity by 33% for 2015, but other carriers have picked up the losses led by Southwest and United, up 7.7% and 4.4% respectively.

Total revenues increased 5.8% to $786.4 million in 2014 primarily due to a 5.3% increase in parking revenues (accounting for 21% of total revenues), 7.4% increase in concessions, and a 19.3% increase in car rental income, all indicators of the strengthening O&D base. Management prudently managed operating expenses, only increasing 1.7% to $355.8 million. Debt service coverage ratios (DSCR) remained strong with senior coverage over 2.2x and subordinate coverage over 1.8x in 2014.

As of June 2015, the overall hotel transit center program was 93% complete with construction being 94% done. The hotel is planned to open on Nov. 19, 2015, while the train service is expected to begin in spring of 2016. As the project approaches completion, the City and DIA are assessing the approach to fund the project cost overruns of around 7% over budget. DIA plans to reduce its 795 days cash on hand to near 500 as well as issue approximately $45 million of senior lien and $307 million of subordinate lien debt, which will fund the difference and fund other capital projects in the current CIP program.

Fitch's base case scenario is derived from management's projections through 2021, which incorporate flat enplanement growth in 2015, a 2.6% increase in 2016 driven by the continued strong rebound seen in offsetting Frontier's seat reduction and growth in the O&D market, and a long-term annual growth rate of 1.7%. Above average cost assumptions over 4.8% growth and an increasing debt service profile lead to coverages declining to 1.8x range for the senior lien and 1.6x range for the subordinate lien. CPE is projected to increase to the $13 range by the end of the forecast period.

The airport's financial metrics hold up adequately under Fitch's rating case scenario, which in 2016 assumes a hypothetical 5% O&D enplanement loss which recovers in two to three years, a 10% connecting loss with no recovery, and a 50 basis point increase to O&M growth. DSCRs on both liens dip around 10 basis points from the base case with CPE reaching the $14 range.

SECURITY

The outstanding senior lien bonds are secured by a senior lien on the net revenues of DIA and the subordinate bonds are secured by a subordinate lien on DIA net revenues.

Additional information is available on www.fitchratings.com

Applicable Criteria

Rating Criteria for Airports (pub. 13 Dec 2013)

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

Rating Criteria for Infrastructure and Project Finance (pub. 28 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=870967

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