Last week, the mayor’s office let the public know that Standard & Poor’s Ratings Services had revised its outlook on Pensacola, Fla.’s airport revenue bonds issued for Pensacola International Airport (PNS) to stable from negative. At the same time, Standard & Poor’s affirmed its ‘BBB’ rating on the bonds.
The City press releases gave the impression that food concessions – Einstein Bros., Freshens and Pensacola Beach House were the cause – by including in the release data the April gross food concession revenue figures.
The actual reported credited the outlook revision to S&P’s view of “debt service coverage (Standard & Poor’s-calculated) and liquidity that we expect will continue at sufficient levels for the rating.â€
What did S&P see as the credit weaknesses?
· Below average (although adequate) debt service coverage (DSC; Standard & Poor’s-calculated) and liquidity position for an airport this size;
· Fluctuating enplanement trends; and
· Moderately high exposure to Delta Air Lines Inc. and its affiliates, which accounted for approximately 43% of fiscal 2014 total enplanements.
S&P did feel that the city’s enplanement prediction for 2015 was too optimistic. Here is its description of the fluctuating enplanement trends:
Much like many airports, PNS’ demand fell in fiscal years 2008 and 2009 because of record fuel prices in the summer of 2008, the recession, and most airlines’ resulting reduction in domestic capacity. The airport’s enplanement trends, however, fared worse than national trends for scheduled domestic enplanements, with 13.9% fewer passengers at fiscal year-end 2009 (Sept. 30), while domestic scheduled enplanements on U.S. airlines fell 7.2%. Enplanements for fiscal year-end 2010 and 2011 increased 2.7% and 8.3% respectively. Enplanements in fiscal 2012 fell again by 3.1%, before increasing 0.3% in fiscal 2013 and 2.1% in fiscal 2014 to nearly 774,000. PNS benefits from its proximity to Pensacola’s military bases, which provide a good base of air travel demand. A financial forecast management provided shows enplanements steadily increasing to 890,000 in fiscal 2020 from about 778,000 in fiscal 2015, which we believe might be too optimistic given the airport’s fluctuating enplanement trends.
S&P was also concerned with the sirport’s indenture coverage, which includes transfers from the previous period, exceeded the 1.25x requirement.
Indenture coverage was 1.84x in fiscal 2012, 1.62x in fiscal 2013, and 1.80x in fiscal 2014. Although the airport has the legal flexibility to satisfy its rate covenant with unlimited use of previous-year transfers, we expect management will operate PNS such that annual debt service coverage per our calculations will consistently exceed 1x.
Also liquidity – which has improved since 2012:
The airport’s liquidity levels have been a credit concern before recently improving to levels we consider adequate. PNS’ unrestricted cash position was only $611,000 (16 days’ cash on hand) in fiscal 2012 before improving to $7.8 million (225 days) in fiscal 2013 and $10.7 million (319 days) in fiscal 2014. We expect the airport’s liquidity to remain adequate. Management reported an unaudited unrestricted cash and investments balance of approximately $8.5 million as of March 31, 2015, which management projects will continue at or above this level through fiscal 2020.
The Outlook for the Pensacola airport is optimistic but S&P has some caveats:
The stable outlook reflects expectation that PNS will maintain consistently adequate DSC (Standard &
Poor’s-calculated) and liquidity position and enplanements will be near current levels.We could lower the rating if the airport fails to maintain adequate DSC (Standard & Poor’s-calculated) and liquidity position or if it experiences a material drop in demand.
We don’t expect to raise the rating in the next two years, but could beyond then if DSC (Standard & Poor’s-calculated) and liquidity improve to levels we consider good and sustainable, and demand is relatively stable.
And that is the rest of the story. Read men_doc
