Fitch Rts $67.8MM City Of Houston Airport Sys Rev Bds 'A+'.

Business Editors

NEW YORK--(BUSINESS WIRE)--Aug. 31, 2001

City of Houston, Texas' Airport System's (HAS) $67,805,000 series 2001A (alternative minimum tax) subordinate lien revenue refunding bonds (GARBs) are rated 'A+' by Fitch.

The bonds, which consist of both serial bonds and term bonds, are secured by a subordinate lien on HAS' net revenues. Final maturity is in 2021. The bonds are scheduled to sell during mid-September through negotiation via a syndicate led by Ramirez & Co. Inc. and Bear Stearns & Co. Inc.

Proceeds of the 2000 bonds will be used to refund HAS' outstanding series 1991A airport system subordinate lien revenue bonds and pay issuance-related costs. Currently, although there is a senior lien indenture, there is no long-term debt outstanding and management has stated its intent to continue issuing long-term debt only off the subordinate indenture.

The airport system includes three separate and distinct facilities, George Bush Intercontinental Airport (Intercontinental or IAH), William P. Hobby Airport (Hobby or HOU), and Ellington Field. Both Intercontinental and Hobby provide commercial passenger service, while Ellington Field is a general aviation, military and cargo facility. The three facilities provide different types of service, as Intercontinental provides both international and domestic service and its dominant carrier Continental Airlines utilizes the airport as a major connecting hub in its system. Hobby primarily serves the local population base (origination and destination passengers) with Southwest Airlines as its dominant carrier providing low cost airfares. Fitch rates Continental Airlines' senior unsecured debt 'BB' and Southwest Airlines' senior unsecured debt 'A'.

Credit strengths include the airport system's diversity, strong overall enplanement growth, solid financial operations, and the expansive diversifying service area. IAH, one of the nation's busiest airports, has seen its enplanements almost double from calendar years 1990-2000, registering a 99% total growth, from 8.8 million to 17.5 million. Unlike many other large-hub airports, IAH has experienced positive growth during 2001, while other airports are experiencing declines in airline traffic. HOU experienced slower growth, from 4.1 million in 1990 to 4.5 million in 2000. Utilization of a compensatory rate-setting methodology has generated significant revenue growth especially in terms of non-airline revenues for HAS, which accounted for 50% of operating revenues in fiscal year 2000 up from 44% in 1995. Net revenues continue to expand resulting in excess cash that the system uses for capital improvements. Further debt service coverage remains well in excess of the relatively weak rate covenant (110%) at 2.74x in fiscal year 2000. HAS does not collect passenger facility charges. Future financial projections are adequate with coverage estimated at 1.54x in 2006, despite HAS' large capital plan. Lastly, the airport system's service area is the eight county Houston-Galveston-Brazoria CMSA, which includes Houston the nation's fourth largest city.

Credit concerns center primarily on airline concentration, specifically Continental's dominance at IAH. Continental Airlines accounted for 82% of all enplanements at IAH and approximately 50% of those are connecting passengers traveling within the airline's network from or to a different origination or destination point in fiscal year 2000. However, this concern is somewhat mitigated by several factors, including the airport's sizable O&D base and the fact that Houston is Continental Airline's headquarters. Additionally, the airport and Continental, as well as Southwest Airlines, have concluded both their lease negotiations and discussions regarding the CIP and development of facilities tailored for these carriers. The airport's sizable CIP is another credit concern as it increased to a current $2.7 billion from approximately $1.6 billion in 1998. Although the increase is a result of redefining the program and tailoring it to the carriers' needs, a significant amount of future airport debt is planned which will increase overall airport costs-the cost per enplanement is estimated at between $9.10-$9.19, in 2006. Fitch will continue closely monitoring the CIP and resulting costs.

After issuance of the series 2001A bonds, HAS' outstanding subordinate lien debt will include: $32,745,000 series 1997 GARBs, $63,710,000 series 1998A GARBs, $479,940,000 series 1998B GARBs, $150,905,000 series 1998C GARBs, $327,225,000 series 2000A GARBs, $269,240,000 series 2000B GARBs, $50,000,000 series 2000P-1 GARBs, and $50,000,000 series 2000P-2 GARBs.