standard & poor's rating series 2008b b.pdf · june 23, 2008 ... expenses in 2007, at $291...

Summary:

Denver International Airport,Colorado; AirportPrimary Credit Analyst:Robert Hannay, San Francisco (1) 415-371-5038; [email protected]

Secondary Credit Analyst:Mary Ellen Wriedt, San Francisco (1) (415) 371-5027; [email protected]

Table Of Contents

Rationale

Outlook

June 23, 2008

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Summary:

Denver International Airport, Colorado; AirportCredit Profile

US$85. mil Aiport System rev bnds (Denver Intl Arpt) (Amt) ser 2008B due 11/15/2025

Long Term Rating A+/Stable New

Denver City & Cnty Dept of Aviation, Colorado

Denver Intl Arpt, Colorado

Denver City & Cnty Dept of Aviation (Denver Intl Arpt)

Unenhanced Rating A+(SPUR)/Stable Affirmed

Denver City & Cnty Dept of Aviation (Denver Intl Arpt) arpt sys rev bnds ser 2005 C1 dtd 11/10/2005 due 11/15/2025


Long Term Rating A+/A-1 Affirmed, Removed fromCreditWatch

Denver City & Cnty Dept of Aviation (Denver Intl Arpt) arpt sys rev bnds ser 2005 C2 due 11/15/2025


Long Term Rating A+/A-1 Affirmed, Removed fromCreditWatch

Rationale

Standard & Poor's Ratings Services assigned its 'A+' rating to the Denver City and County Department of Aviation,

Colo.'s $85 million series 2008B senior-lien airport system revenue bonds, issued on behalf of the Denver

International Airport (DIA). Additionally, Standard & Poor's affirmed its 'A+' rating and underlying rating (SPUR)

on DIA's outstanding senior-lien general airport revenue bonds. The rating is based on the demonstrated

commitment of United Air Lines (B/Watch Neg), which holds the majority of the market share, to continue using

DIA as a major hub, as well as the strength and resiliency of airline travel demand in a solid service region.

More specifically, credit strengths include:

• Strong growth in enplanements to a historical high of 24.9 million in 2007, a 5.4% increase from the previous

record of 23.7 million in 2006 and a 28.6% increase from the pre-Sept. 11, 2001, record of 19.4 million in 2000;

• Good senior-lien debt service coverage (DSC) in 2007 of 1.80x when including revenues from the coverage

account and a passenger facility charge (PFC) to offset debt service, or coverage of approximately 1.43x on a

cash-flow basis, excluding the coverage account and including PFCs as revenue;

• A strategic location for the east-west flow of domestic traffic and no major competing facilities within 500 miles;

• Excellent airfield efficiency and significant capacity for future growth, with six runways and more than 50 square

miles of land; and

• A proactive, capable management team that has successfully responded to challenging operating environments.

These strengths are mitigated by the following weaknesses:

• Significant additional debt during the forecast period (through 2013) to implement the airport's $987 million

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capital improvement plan (CIP);

• The inherent vulnerability of high air-carrier concentration in United Air Lines, which, including United Express

and Ted, accounted for 53.3% of market share in 2007;

• A high degree of connecting traffic (43% of the total in 2007), which is more elastic than the stable origin and

destination (O&D) traffic; and

• A high cost structure at a projected $10.59 per enplaned passenger in 2008 and an above-average debt load ($165

senior-lien debt per enplaned passenger in 2007).

The bonds are secured by a first lien on the airport system's net revenues. The series 2008B bond issue represents

one piece of the airport's restructuring of its variable rate debt portfolio. The bonds are being issued to refund the

department's outstanding series 2005C1-C2 variable rate demand bonds (VRDBs). The series 2008B VRDBs will be

backed by an irrevocable direct-pay letter of credit (LOC) from Wachovia Bank, NA., which expires June 30, 2011.

In April of this year, the department issued the $609 million senior lien series 2008A1-A4 bonds to refund certain

outstanding auction rate securities (ARS) and VRDBs. This refunding includes $100 million in subordinate lien

auction rate securities, which effectively transfers the debt to the senior lien. The department refunded $100 million

in subordinate lien ARSs with commercial paper, which is now outstanding in the amount of $100 million. In

addition, the department is currently pursuing a conversion of the series 2007F1-F4 auction rate securities to

VRDOs, with standby bond purchase agreements. None of the airport's 21 interest rate swaps will be terminated or

amended as part of this restructuring.

The department has $4.1 billion in outstanding senior-lien revenue bonds and $100 million in outstanding

subordinate lien commercial paper. As of Dec. 31, 2007, the department had $316.6 million in unrestricted funds in

an operating fund and capital fund, an amount equal to a good 398 days' of unrestricted cash and investments on

hand, or about 7.7% of total outstanding senior lien debt.

Operating revenues have shown consistent growth during the past several years, with revenues in 2007 at $530

million, representing a 4.3% increase from 2006. Operating expenses have also increased during this period.

Expenses in 2007, at $291 million, represent a 10.8% increase from 2006. This relatively large increase in expenses

can be attributed, in part, to snow removal and increased personnel expenses. Senior-lien debt service coverage

(DSC), as calculated according to the indenture, was solid at 1.80x in 2007, allowing rolling coverage and a PFC

revenue offset to debt service. On a cash flow basis, if rolling coverage is excluded and PFC revenues committed to

debt service are included as revenues (rather than as an offset to debt service), then coverage was good at 1.43x.

Cash flow debt service coverage is expected to decline, but remain adequate going forward, as the airport

implements its large CIP. The PFC revenues above represent the first $3.00 of the $4.50 charge levied at the airport.

Since 2002, enplanements have increased in each year at a compound annual rate of 6.94% to a record total of 24.9

million in 2007. Of those enplanements, 57.1% were O&D, and 42.9% were connecting. United Airlines and

Frontier Airlines represent the largest market share at the airport, accounting for 53.3% and 22.7% of total

enplanements, respectively, in 2007. Southwest Airlines began service on Jan. 3, 2006, and enplaned 3.3% of the

market in 2006; in 2007, Southwest's market share increased to 5.3% of enplanements.

On April 10, 2008, Frontier Airlines filed for bankruptcy protection. To date, the airline has continued operations

at Denver International Airport. Frontier utilizes 15 gates at DIA on an exclusive basis, six gates on a preferential

basis, and one common-use international gate on a subordinated basis. Frontier has not yet assumed or rejected its



Summary: Denver International Airport, Colorado; Airport

use and lease agreement with the city, and it is uncertain when it will do so. Prepetition charges, which include

landing fees and other charges due to the airport, total $3.3 million. Credits due to Frontier total about $8.4

million. Pursuant to the use and lease agreement, Frontier holds a LOC in the amount of $3 million. It is also

current on its post-petition obligations.

The Frontier bankruptcy, coupled with announced capacity cuts from United and other airlines, will likely create

challenges during the near term. Although traffic has continued to increase year-over-year through April 2008,

growth will likely fall below the high levels seen in recent years. Given the current uncertain airline industry

environment, management has prudently chosen to delay construction of the $280 million Concourse C expansion

project, the design of which will be completed this summer. Should Frontier relinquish gates in Concourse A, the

additional capacity would delay the need for additional gate expansion in Concourse C. The 2008-2013 CIP, which

includes the delayed Concourse C expansion project, is large at $987 million, and will be financed, in part, with

future debt.

Outlook

The stable outlook is based on our expectation that United Air Lines will continue to operate a major hub at DIA,

that debt service coverage will remain good, and that the airport will maintain a good liquidity position. Prudent

implementation of the airport's capital plan during the current challenging airline industry environment will be an

important rating factor going forward.

Ratings Detail (As Of June 23, 2008)





Denver City & Cnty, Colorado


Denver City & Cnty (Denver Intl Arpt) Aiport System rev bnds (Denver Intl Arpt) (Term Rate-Amt) ser 2008A due 11/15/2032

Long Term Rating A+/Stable Affirmed

Denver City & Cnty (Denver Intl Arpt) (FSA)





Long Term Rating A+/Stable Affirmed

Denver City & Cnty Dept of Aviation (Denver Intl Arpt) arpt (MBIA) (ASSURED GTY - SEC MKT) (wrap of insured)




Denver City & Cnty (Denver Intl Arpt)


Denver City & Cnty (Denver Intl Arpt) arpt




Ratings Detail (As Of June 23, 2008) (cont.)


Denver City & Cnty (Denver Intl Arpt) arpt sys


Denver City & Cnty (Denver Intl Arpt) VRDB ser 2007G1


Long Term Rating AAA/A-1+/Stable Affirmed

Denver City & Cnty (Denver Intl Arpt) VRDB ser 2007G2


Long Term Rating AAA/A-1+/Stable Affirmed

Many issues are enhanced by bond insurance.

Complete ratings information is available to subscribers of RatingsDirect, the real-time Web-based source for

Standard & Poor's credit ratings, research, and risk analysis, at www.ratingsdirect.com. All ratings affected by this

rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com; under Credit

Ratings in the left navigation bar, select Find a Rating, then Credit Ratings Search.




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standard & poor's rating series 2008b b.pdf · june 23, 2008 ... expenses in 2007, at $291...

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