Fitch Ratings has assigned an 'A-' rating to Burbank-Glendale-Pasadena Airport Authority's (BUR) $857.8 million series 2024A, 2024B, and 2024C airport revenue bonds.

Fitch has also downgraded the ratings of the outstanding airport revenue bonds totaling approximately $83.2 million, and bank notes supporting commercial paper notes series A-1, A-2, B-1, B-2, C-1, and C-2 to 'A-' from 'A'. The Rating Outlook is Stable.

The series 2023 bank note ratings reflect a security pledge on parity with outstanding airport system revenue bonds.

RATING ACTIONS

Entity / Debt

Rating

Prior

Burbank-Glendale-Pasadena Airport Authority (CA)

Burbank-Glendale-Pasadena Airport Authority (CA) /Airport Revenues - First Lien/1 LT

LT

A-

Downgrade

A

Burbank-Glendale-Pasadena Airport Authority (CA) /Airport Revenues - Second Lien/2 LT

LT

A-

Downgrade

A

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VIEW ADDITIONAL RATING DETAILS

RATING RATIONALE

The rating downgrade reflects the significant additional leverage on a long-term basis as result of the proposed borrowings for the replacement passenger terminal project. While the modernization of the passenger terminal will be positive for the airport's service capabilities for its air carriers, BUR will transition from one of the lowest cost airports to one that will be above average for an airport with similar characteristics.

The rating also reflects the airport's secondary position and relatively small, yet predominantly origination and destination (O&D) traffic base within the strong, but competitive Los Angeles basin service area. The large-scale project introduces a degree of execution risk, though a guaranteed maximum price (GMP) is expected before the series 2024 issuance and an amendment to the current airport use agreement (AUA) protects the airport's financial profile in the case of delay.

A new, long-term fully residual airline agreement is anticipated to demonstrate the carrier's commitments to the new terminal project and further insulate the airport from downside risk, however, elevated costs could impact service retention, especially among low- and ultra-low-cost carriers. Liquidity remains a key credit strength though a portion will be drawn down for the project. Leverage will increase measurably, but be partially offset by an agreement that provides a strong cost recovery mechanism, and provide for a new terminal that will be FAA compliant with the ability to operate more efficiently and accommodate larger aircraft for growth.

KEY RATING DRIVERS

Revenue Risk - Volume - Midrange

Volatile Traffic Base; Highly Competitive Market

BUR is a medium hub airport subject to significant air service competition within the strong Los Angeles region, most notably from LAX. The airport has a history of traffic volatility, but more recently BUR has experienced strong enplanement growth (excluding the pandemic) and enplanements now exceed pre-pandemic levels. Overall growth has primarily been driven by airlines expanding routes and increasing capacity and new entrants. Significant airline concentration risk exists with Southwest Airlines Co. (BBB+/Stable) representing approximately two-thirds of enplanements. The replacement terminal project should increase capacity by allowing all gates to accommodate airplane design group III aircraft. Cost per enplanement (CPE) will increase meaningfully to around $22 in Fitch's rating case from the current $2 level with the terminal project, but should remain regionally competitive and carriers appear supportive.

Revenue Risk - Price - Stronger

Strong Cost Recovery Framework

The airport has adopted an amendment to the current hybrid-residual AUL through the earlier of date of beneficial occupancy (DBO) at the Replacement Passenger Terminal, expected to be Oct. 13, 2026, or June 30, 2030. The current AUL will be replaced by a fully residual cost recovery framework on DBO. Positively, the amendment includes provisions to recoup costs related to the terminal project in the case of delay.

Infrastructure Dev. & Renewal - Midrange

Large Terminal Replacement Project

The majority of capital spending over the next five years is tied to the replacement of the existing passenger terminal following a maintenance-focused capital plan the past few years. The terminal replacement project is expected to cost approximately $1.3 billion, and focuses on the construction of a new passenger terminal along with multiple infrastructure improvements associated with a new terminal including roadways, a parking garage, and demolition of the existing terminal. The project is being delivered under a progressive design build method with a GMP expected by financial close of the series 2024 bonds that will shift cost risk to the design builder.

The DB contract includes liquidated damages, but the airport is further protected from project delays by provisions in the AUA amendment and the airport is not reliant on project completion for revenues as the existing terminal will continue to operate until the replacement terminal opens. BUR also has a six-year CIP (2024-2029) totaling approximately $22 million that is focused on general rehabilitation. Upon completion of the current terminal replacement project (expected in 2026), an ongoing capital program with less reliance on additional borrowing may result in revision of the assessment score to Stronger.

Debt Structure - 1 - Stronger

Conservative Structure

The airport bonds have a senior lien on net revenues and all of BUR's long-term revenue debt is fully amortizing and fixed-rate, while short-term obligations include $200 million in pari-passu CP notes. As a result of the terminal relocation project, gross debt service, including future issuances, quickly increases to just under $90 million and is flat thereafter through maturity in 2056 compared with annual debt service of around $10 million at present. Debt service reserve funds are fully cash funded according to the lesser of the three-prong test.

Financial Profile

The airport has a very healthy liquidity position, primarily reflecting the $205 million facility development reserve (the reserve), which is not legally encumbered, resulting in over 1,545 days cash on hand (DCOH) and negative leverage at FYE 2023. Excluding the reserve, DCOH remains solid at 355 days and leverage is approximately 0x. BUR is expected to spend down $100 million of the reserve in conjunction with the replacement terminal project. Fitch-calculated debt service coverage (including CFCs as revenue and including transfers) was 4.3x in FY 2023. Leverage will significantly increase following the new issuances for the replacement terminal and the new AUA will target around 540 DCOH and indenture debt service coverage ratio (DSCR) of 1.25x.

PEER GROUP

Burbank's most comparable fitch-rated peers include other regional airports within the Los Angeles region, such as Long Beach (A-/Stable) and Ontario (A-/Stable) airports. All three are small or medium hubs with Southwest as the dominant carrier and subject to competition among one another as well as with larger SNA and LAX airports. Burbank demonstrates similar volatility in its traffic base but is currently protected by higher debt service coverage and lower CPE as compared with both peer airports. However, due to the replacement terminal project and anticipated residual AUL, Burbank's coverage is expected to fall below that of its peer airports, while CPE and leverage are expected to increase materially.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Increased project costs and associated borrowings that cause leverage to rise and remain above Fitch rating case assumptions;

Traffic declines or enhanced volatility with an emphasis on Southwest's service decisions;

Rising CPE trends that pressure air service retention and growth.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Though not likely over the medium-term, sustained leverage below 6.0x following successful project completion in Fitch's rating case.

TRANSACTION SUMMARY

The Burbank-Glendale-Pasadena Airport Authority is issuing approximately $857.8 million in Airport Senior Revenue Bonds, 2024 Series A, B, and C. The 2024 Bonds are being issued to finance a portion of the cost of the Terminal Relocation Project at Bob Hope Airport (commonly known as Hollywood Burbank Airport), retire a portion of the Authority's outstanding Commercial Paper Notes, pay interest to accrue on the 2024 Bonds, to fund the Senior Debt Service Reserve Fund, and to pay costs of issuance.

CREDIT UPDATE

Year to date fiscal 2024 enplanements through February have come in at 3% above 2023 levels. Fiscal 2023 enplanements came in at a 9% increase over FY 2019 enplanements, reflecting a full recovery.

Total operating revenues increased 12.1% in fiscal 2023 to approximately $73 million, representing a total increase of nearly 25% over pre-pandemic revenue levels. The airport's increase in operating revenues was slightly offset by an increase in operating expenses of 12.2% over the year prior. Overall, net revenues available for debt service (including federal funding) rose 53% in FY 2023

The airport was awarded $52 million in federal relief grants, of which approximately $13.8 million remained as of December 2022. Revenue losses in fiscal 2020, fiscal 2021, and fiscal 2022 were offset by approximately $3.3 million, $17.8 million, and $14.9 million from the three rounds of federal funding respectively. The airport has utilized the remaining federal funds as of fiscal 2023.

Due to the airport's strong financial position, airport reported coverage came in at 7.28x in fiscal 2023, and cash balances continued to exceed outstanding debt, causing leverage (defined as net debt-to-cash flow available for debt service) to remain negative. CPE decreased to approximately $2.00, which remains very low compared with peers. The airport states days cash on hand at 1,545 due to growing their facility development reserve to fund $100m of the terminal project.

The Capital Improvement Plan (CIP) of the Authority for fiscal years 2025 to 2029 has an estimated budget of $21.9 million. This budget will be financed through a combination of FAA grants, Passenger Facility Charge (PFC) revenues, and the Authority's own funds. The planned projects in the CIP include the rehabilitation of Runway 8-26 in FY 2025, replacement of Aircraft Rescue and Fire Fighting (ARFF) vehicles in FY 2026, an update to the Airport Layout Plan and a Master Plan also in FY 2026, rehabilitation of Runway 15-33 in FY 2028, and rehabilitation of the Vehicle Service Road in FY 2029.

The Project involves constructing a new 355,000 square foot terminal with 14 gates at the northeast section of the Airport to replace the existing terminal in the southeast area. Additional developments include an aircraft ramp, GSE facility, cargo area, a parking structure for automobiles, an employee parking area, a new loop access road, reconfiguration of service roads, and the demolition of the current terminal and its parking structure.

The project will primarily be financed by $1.0 billion in Senior Airport Revenue Bonds, which includes $691.7 million from Series 2024 Bonds and a future $346.2 million in additional bonds. The FAA's Airport Improvement Program (AIP) is set to contribute $55.6 million, comprising $13.5 million in Entitlement grants and $42.2 million in Discretionary grants. Further funding includes $39.9 million from BIL-AIG, with $15.8 million already received by February 2024, and $47.3 million in BIL-ATP funding. Additionally, $48.4 million of Passenger Facility Charge (PFC) funding is approved for design purposes, and the Authority has allocated $100.0 million from its Facility Development Reserve.

The Authority has AUAs with all eight passenger airlines operating at the Airport, set to expire on June 30, 2025, ahead of the scheduled opening of the new Project on October 13, 2026. These agreements use a hybrid-residual methodology for determining the rents and fees that airlines must pay, with rates established by the Authority each Fiscal Year. Additionally, the Authority is required to share relevant information with the Signatory Airlines before starting any capital improvements and must generally secure the airlines' consent before adjusting rent and fees to finance such improvements.

The existing AUA sets fixed rates for airline rents and fees, with the Authority having the option to adjust these rates annually based on its budget. The Authority can also levy significant fee increases during the fiscal year if needed to cover Airport operational expenses.

In contrast, the Replacement AUA adopts a full residual methodology where the Authority will estimate the costs to run the Airport's various areas before the FY begins and set rents and fees accordingly. After the FY ends, a reconciliation will take place to adjust for any discrepancies between estimated and actual costs. Airlines will be billed for any underpayment or credited for overpayment, with credits usable for future payments within a year.

FINANCIAL ANALYSIS

Fitch views the sponsor assumptions as reasonable and incorporated them into the Fitch base case. Fitch's Base Case assumes annual enplanement growth of 1.9% in fiscal 2024 over fiscal 2023 levels followed by 2% growth per year thereafter. Airline revenues grow at a five-year CAGR of 20.1% as the residual replacement AUA takes effect. Operating expenses grow at a five-year CAGR of 5.1%. Leverage significantly rises due to the upcoming 2024 and anticipated 2026 bond issuances, to 47.3x in fiscal 2024 before normalizing just under 12x in fiscal 2028. Fitch-adjusted coverage (including CFCs as revenues rather than debt service offsets) rises to 5.3x in fiscal 2026 before the residual AUA takes affect resulting in coverages above 1.2x thereafter. CPE increases from $2 in fiscal 2024 to approximately $18 in fiscal 2028 after an anticipated 2026 issuance.

Fitch's Rating Case assumes base case enplanement growth, until a hypothetical recessionary decline of 10% in fiscal 2028, followed by a slower recovery. Airline revenues grow at a five-year CAGR of 23.9% due to the replacement AUA, while non-airline revenues fluctuate in line with enplanements. Operating expenses grow similar to the base case. Due to the residual nature of the AUA, DSCR and leverage profiles remain similar relative to the base case. However, CPE levels rise in each year to generate these results, increasing to nearly $24 by fiscal 2028.

SECURITY

The bonds are secured by a pledge of the revenues of the authority.

An additional $109 million letter of credit from Barclays and $109 million letter of credit from Sumitomo Mitsui secure the CP of $200 million principal plus interest.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

Additional information is available on www.fitchratings.com

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