San Jose (City of) CA — Moody’s assigns A2 to San Jose, CA Airport Enterprise’s 2021A, 2021B, 2021C refunding bonds; stable outlook
Rating Action: Moody’s assigns A2 to San Jose, CA Airport Enterprise’s 2021A, 2021B, 2021C refunding bonds; stable outlookGlobal Credit Research – 12 Mar 2021New York, March 12, 2021 — Moody’s Investors Service, (“Moody’s”) has assigned an A2 rating to the City of San Jose Airport Enterprise’s (SJC or Airport) $89.8 million Airport Revenue Refunding Bonds, Series 2021A (AMT), $50.4 million Airport Revenue Refunding Bonds, Series 2021B (Non-AMT) and $297.5 million Airport Revenue Refunding Bonds, Series 2021C (Taxable). Concurrently, Moody’s maintains an A2 rating on approximately $1.09 billion of airport revenue bonds outstanding. The outlook is stable.RATINGS RATIONALEThe A2 rating reflects the airport’s good competitive position within a large and economically dynamic service area, along with solid liquidity and financial flexibility to manage COVID-related pressures. We expect gradual additional deleveraging as growth capital spending is postponed to align with passenger demand, which further supports near-term cost and leverage metrics.SJC has good scale – a medium hub airport with 7.5 million enplanements in fiscal 2019 – and is an important airport within a large, economically dynamic and affluent service area, which supports favorable long-term passenger growth prospects. Pre-COVID traffic performance was robust, with enplanements increasing 57% – for a CAGR of 12% – in the five years from fiscal 2015 to 2019, while SJC’s share of the region’s (i.e., the Bay Area’s) enplanements also increased from 14% to 17%.Passenger traffic has been slower to recover than the sector, reflecting a combination of more stringent lockdowns and above-average exposure to business travel, which comprises roughly 50% of activity for SJC. However, the strong activity pre-COVID allowed the airport to build liquidity, pay down debt and materially lower airline costs, with CPE improving to a 10-year low of $8.21 in fiscal 2019. The airport ended fiscal 2019 with 580 days cash on hand, and liquidity has remained healthy at 540 days cash on hand at the end of fiscal 2020. SJC entered fiscal 2021 with the entire $66 million CARES Act allocation unused, which combines with the $15 million CRRS Act allocation to provide $81 million of support to operating and debt service expenses in fiscal 2021 and 2022. We expect the recently enacted ARP Act will provide the airport an amount near to the CARES act level. Management has lowered operating and capital spending, and meaningful additional relief will come from the current refunding transaction. SJC will lower near-term debt service materially – by 51% in 2022, and 41% in 2023 – primarily by refunding higher yielding debt at current market rates: the airport expects to achieve savings over 20% of refunded principal, with no extension of maturity and only limited long-term increase in scheduled debt service.These actions will help stabilize CPE below $20 over the next five years assuming passenger recovery in line with Moody’s base case forecast. The airport’s financial position is strengthened by a recently executed 10-year hybrid airline agreement in effect through June 30, 2029, which has residual cost recovery for airfield, gates and ticket counters and includes extraordinary coverage protection. The airline agreement additionally authorizes the airport to pursue construction of a new 12-gate south concourse on Terminal B. While we expect the airport will need new terminal capacity over time, the downturn in traffic has provided relief from a facilities perspective and enables the airport to defer implementation of the terminal expansion by 3-5 years, or potentially more. We continue to anticipate expansion will occur within the next 10 years, but that it will be predicated on 1) higher passenger levels and greater visibility around the post-COVID air travel regime and 2) will occur after the benefit of several additional years of debt reduction prior to implementation.RATING OUTLOOKThe stable outlook reflects our expectation that enplanements will recover further over the next 12-18 months, supported by strengthening economic activity, increased vaccinations and control of COVID, and pent-up travel demand. Financial flexibility is supported over the same period as the airport has made expenditure cuts, has strong liquidity on hand along with meaningful undrawn federal grant funds, and will realize the benefit of significantly lower debt service expenses. The airline agreement provides stability to cost recovery and also supports our outlook.FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS- Liquidity maintained in excess of 600 days cash on hand and net revenue DSCR maintained in excess of 1.25x- Debt per O&D enplaned passenger below $150- Increased clarity on the size, cost and schedule of Phase 2 developmentFACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS- Debt per O&D above $300- Days cash on hand below 300- Airline costs rise rapidly and significantly and are maintained at uncompetitive levels relative to regional airportsLEGAL SECURITYThe bonds are secured by net revenues of the airport. The debt service reserve fund requirement relating to the 2021 Series A Bonds and 2021 Series B Bonds is the lesser of maximum annual debt service on all General Account Bonds and Additional Bonds or the amount permitted to be held within the General Account of the Bond Reserve Fund by the arbitrage bond regulations issued by the United Stated Department of the Treasury. The debt service reserve fund requirement relating to the 2021 Series C Bonds is the lesser of maximum annual debt service on the 2021 Series C Bonds, 125% of average annual debt service on the 2021 Series C Bonds, or 10% of the par amount of the 2021 Series C Bonds.The master trust agreement prescribes a rate maintenance covenant that is relatively liberal. The rate covenant requires that net revenues plus any Other Available Funds equal at least 1.25x annual debt service. Other Available Funds include balances in the rolling coverage account, net remaining revenues of the airport, unspent bond proceeds and Customer Facility Charges (CFCs). The rate covenant also allows for net revenues plus other available funds (excluding, however, rolling coverage and any amounts not generated from actual cash receipts during the fiscal year unless otherwise budgeted and included in airline rates and charges for that fiscal year), equal at least 1.00x annual debt service. The rate covenant is balanced by a provision in the airline agreement for signatory airlines to pay extraordinary coverage protection equal to 1.25x debt service.USE OF PROCEEDSProceeds will refund all or a portion of the outstanding Series 2011A-1 (AMT) Revenue Bonds, the Series 2011A-2 (Non-AMT) Revenue Bonds, the Series 2011B (Taxable) Revenue Bonds, the Series 2014A Revenue Refunding Bonds, the Series 2017A Revenue Refunding Bonds, and the Series 2017B Revenue Refunding Bonds as well as fund the Bond Reserve Funds and pay the cost of issuance. There is approximately $136 million in net present value savings expected from the refunding, or 29% of the refunded principal and 12% of all outstanding principal, with no term extension.PROFILEThe San Jose Airport Enterprise, acting through the City of San Jose, owns and operates the Norman Y. Mineta San Jose International Airport (SJC), a medium hub, O&D airport located four miles north of downtown San Jose. The airport facilities include two 11,000 x 150 ft. runways, 1,028,684 square ft. of terminal space, 36 gates (36 equipped with loading bridges), and a Federal Inspection Service (FIS) facility. The airport is served by 11 rental car brands and will have approximately 5,166 public parking spaces available once the construction is completed on the economy lot parking garage. As of December 31, 2020, the airport had 2,593 parking spaces available. Two fixed-base operators serve the airport, including the 29-acre facility for Signature Flight Support completed in fiscal 2016 and an additional 3.5 acre expansion under construction as of mid-2019.METHODOLOGYThe principal methodology used in these ratings was Publicly Managed Airports and Related Issuers published in March 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1140469. 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