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Fitch Upgrades Burlington's (VT) Airport Rev Bonds to 'BBB'; Outlook Revised to Stable.

San Francisco: Fitch Ratings has upgraded Burlington, VT's approximately $35 million of outstanding airport revenue bonds to 'BBB' from 'BBB-'. The Rating Outlook is revised to Stable from Positive.

The upgrade reflects the airport's improved fiscal profile demonstrated in recent years, which is bolstered by a recently implemented airline agreement that provides strong cost recovery mechanisms. This agreement serves to partially mitigate the impact of a stagnant traffic base with risk of volatility. In Fitch's Base and Rating cases, Burlington International Airport's (BTV) traffic and cost profile remains intact, resulting in a manageable cost per enplanement (CPE) level as well as growing liquidity and stable coverage at 1.5x while leverage continues to evolve downward.


The rating reflects BTV's small traffic base of 600,000 enplanements with some observed volatility in a limited catchment area, which is also partially dependent on fluctuating Canadian demand. The rating is further supported by BTV's implementation of an airline agreement with strengthened cost recovery terms, a limited capital program without additional borrowings needs, and stabilizing debt service coverage ratios (DSCR) and leverage.

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

BTV provides primary air service with about 600,000 enplaned passengers for the Burlington metropolitan statistical area (MSA) with no nearby domestic competition. Traffic is entirely origin & destination (O&D), with approximately 19% of enplanements driven by Canadian demand. BTV does not have significant single carrier concentration with only United Airlines having the leading market share of about 32%. Still BTV is exposed to traffic volatility from carrier service and current enplanements are still 20% below peak levels in 2009.

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 provides improved cash flow visibility as compared with the previous rate setting agreement, which was a monthly hybrid AUL offering substantial airline subsidies and less robust cost recovery mechanisms. The new AUL is intended to maintain a DSCR of 1.5x going forward, taking into account non-airline revenue performance, with excess net revenue sharing distributed among the carriers. Airline costs have been increasing in recent years, though they did decrease from $7.21 to $6.78 per enplanement in fiscal 2017. CPE could increase over the next few years.

Manageable Infrastructure Plan - Infrastructure & Renewal Risk: Stronger

The airport's four-year capital improvement plan (CIP) totals $74.8 million and will be largely funded through grants and passenger facility charges (PFCs). Major projects include airfield related improvements, terminal upgrades, and an environmental/land acquisition project. 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 with a level debt service profile of approximately $3.7 million through 2028, stepping down to $1.5 million in the final two years. Structural features contain adequate coverage tests and a 12-month cash-funded debt service reserve fund (DSRF).

Financial Profile

BTV's metrics are expected to remain stable at 1.5x as a result of the airports residual AUL, while net debt-to-cash flow available for debt service (CFADS) continues to devolve down to about 2.6x. However, with the additional cost recovery to maintain required coverage, rating case CPE increases to over $14.


BTV's peers include Dayton (BBB/Stable) and Fresno (BBB+/Stable). Burlington serves a smaller service area than either Dayton (951,000) or Fresno (741,000). 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.


Future Developments That May, Individually or Collectively, Lead to Negative Rating Action:

--Sustained declines or volatility in passenger traffic levels.

--Leverage increasing materially above 4x on an ongoing basis.

Future Developments That May, Individually or Collectively, Lead to Positive Rating Action:

--Significant and sustainable passenger growth may support positive rating action.


Performance Update

Traffic has experienced fluctuations and declines since peaking in 2009, though volatility has diminished in recent years. Enplanements fell below 600,000 in 2016, representing a 1% decrease from the previous year. Enplanements increased by 0.4% to 597,800 in 2017. The airport has recently also undertaken various steps to increase demand, including offering new service incentives and launching aggressive marketing campaigns for new domestic routes for two years of operation. Recovery is moderate, with FY18 enplanements up 4.3%.

Airline revenues decreased by 5.5% in 2017 due to adjusting revenues based on the airport's cost recovery needs. Non-airline revenues increased 1.5%. Overall, total operating revenues increased 2.4% in 2017. Preliminary 2018 operating revenues are up 5.8%. BTV switched to a five year residual AUL in 2017 (previously a monthly hybrid AUL), and airline revenues are expected to increase in the future.

Operating expenses in 2017 grew just 1.8% due to increases in employee salaries and benefits. The airport also took over management of the garage parking attendants in FY17. Preliminary 2018 expenses are up 9.6%.

Under the new AUL, coverage came in at the expected 1.5x. Cash increased in 2017, and net leverage reduced to 5.3x. Airport liquidity (with unrestricted cash and DSRF only) increased to 189 DCOH and CPE declined to $6.78. Under the AUL, Fitch expects coverage to remain stable at 1.5x going forward, while CPE will increase to over $8.

BTV's four year capital plan is manageable and totals $74.8 million (down from $85.9 million last year). 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.

Fitch Cases

Due to the residual nature of the AUL, Fitch's base and rating cases both assume a stable annual DSCR maintained at 1.5x. Fitch's base case assumes conservative enplanement growth of 1% in 2019, followed by flat growth thereafter, with expenses increasing 3% each year and unrestricted cash levels held flat. This profile results in average leverage of 3.6x, with CPE reaching between $8-$9 by fiscal 2023. Liquidity is expected to average 146 DCOH.

Fitch's rating case is similar but applies an 8% traffic stress in 2019, followed by flat growth thereafter. Operating expenses are increased by 0.5% above base case levels. With the residual AUL, coverage is still maintained at 1.5x, but CPE is inflated to over $14 by fiscal 2023. Leverage remains the same as the base case, averaging 3.6x, while liquidity is expected to average around 144 DCOH.

Asset Description

BTV airport is owned and operated by the City of Burlington and serves Vermont, north-eastern New York, New Hampshire, and portions of southern Canada. The airport is on 1100-acre site in South Burlington, about four miles from the city's downtown. The airport's terminal facility is a 120,000-square-foot building. Airfield facilities include two intersecting runways extending 8,320 feet and 3,611 feet, respectively. Parking facilities consist of 2,078 garage parking spaces and 420 long-term surface spaces for a total of 2,498. The Vermont Air National Guard occupies and maintains about 265 acres of the airport's eastern portion.


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

A January 2018 district court ruling that dismissed claims regarding payment of Puerto Rico Highways and Transportation Authority debt has raised questions about the scope of protections provided by Chapter 9 of the U.S. bankruptcy code to bonds secured by pledged special revenues. Fitch's rating criteria treat special revenue obligations as independent from the related municipality's general credit quality. The outcome of the litigation could result in modifications to Fitch's approach. For more information, see "What Investors Want to Know: The Impact of the Puerto Rico Ruling on Special Revenue Debt" available at
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Geographic Code:1U9CA
Date:Dec 27, 2018
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