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Fitch Rates Denver, CO's $750MM Series 2012A-C Airport System Revenue Bonds 'A+'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings assigns an 'A+' rating to the City and County of Denver, Colorado's $750 million series 2012A-C airport system revenue bonds issued on behalf of the Department of Aviation (DIA).

The series 2012A-C bonds will be used to fund portions of the 2013-2018 capital plan and refund approximately $301 million of the series 1999B, 2002E, and 2003A bonds as well as $56 million of commercial paper and reimburse $8.2 million of airport equity. DIA anticipates a present value savings of approximately $25.9 million through the life of the refunding bonds. DIA may also choose to refund additional bonds, depending upon market conditions. The taxable series 2012C bonds may be issued in lieu of the series 2012A bonds depending upon market conditions. The bonds are expected to price the week of Oct. 8, 2012.

In addition, Fitch affirms the 'A+' rating on DIA's approximately $3.7 billion of outstanding airport system revenue bonds. The Rating Outlook is Stable.

KEY RATING DRIVERS

SIZABLE TRAFFIC BASE SUBJECT TO CONNECTING EXPOSURE: DIA is the primary airport for a large air trade service area and serves as a major hub for United and Frontier. In addition, Southwest has increased its presence at the airport in recent years offsetting reductions by other carriers. The high dependence on three carriers, together accounting for over 80% of enplanements, does leave DIA vulnerable to airline scheduling decisions.

STABLE RATE SETTING STRUCTURE: DIA operates on a hybrid cost recovery model which is compensatory in the terminal and residual on the airfield. Under the existing use and lease agreements the airlines also provide a 'safety net' rate setting mechanism for coverage purposes. The agreement with United is through 2025. The airport expects to have new agreements in place with the other carriers, with no major changes, by the end of the year. The original agreements expired on Dec. 31, 2011.

HEALTHY FINANCIAL METRICS: DIA has a relatively high debt burden with aggregate debt outstanding, including the 2012A-C new issuance, of approximately $4.2 billion which is among the highest for a U.S. airport. The significant debt burden is partially mitigated by high enplanement levels that produce a debt per enplanement ratio of $159 and cash reserves providing a net-debt to cash flow available for debt service (CFADS) ratio of 9.81, both of which are consistent with a large hub airport in this rating category. Management has an internal policy to maintain coverage on the senior lien of 1.6x.

VARIABLE-RATE DEBT AND SWAP EXPOSURE: Approximately 24% of the outstanding debt is variable rate most of which is hedged via a series of swap transactions which provides some counterparty risk and renewal risk.

DEBT SUPPORTED CAPITAL PROGRAM: The current $1 billion CIP requires close to $550 million in additional borrowing through 2018. Management plans to issue a portion of the new debt on a subordinate basis to maintain the strength of the existing senior lien.

WHAT COULD TRIGGER A RATING ACTION

--Significant traffic deterioration by DIA's three dominant air carriers;

--To the extent the new hotel project is not self-sustaining and becomes a hindrance to the airport's overall financial performance negative rating pressure would likely result;

--Ability to maintain healthy financial coverage and cost metrics as the airport increases its debt burden.

Security:

The outstanding bonds are secured by a senior lien on the net revenues of DIA.

CREDIT UPDATE:

Of the $390 million in expected new money proceeds approximately $290 million is for the South Terminal Project with $180 million for a 500 room hotel and $110 million for other South Terminal Projects. The remainder of the new issuance will be used towards standard CIP including the airfield.

The city expects to enter into a fixed price contract with Mortensen-Hunt-Saunders tri-venture for construction of the hotel and train station with contract terms consistent with comparable city projects. The contract terms include liquidated damage penalties and a payment and performance bond for the full amount of the contract value (estimated at $350 million). The city is acting as its own program manager for the South Terminal Project as it does for other city projects.

The airport is responsible for any cost over-runs related to the construction of the hotel project and any revenue short-falls from the operation of the hotel, which is an added level of risk for an airport to assume. The risk associated with the hotel project is partially mitigated by the 'safety net' features of DIA's airline use and lease agreement, which applies to all GARB senior bonds regardless of use. In addition, the amount of debt tied to the hotel project represents less than 5% of DIA's aggregate outstanding debt and DIA has strong enough financial matrices to absorb the added risk. However, the airport's credit could be pressured should the hotel project not perform as planned, either in construction or operations, resulting in a financial drain on DIA.

Overall credit fundamentals of the airport are largely unchanged since Fitch's March 2011 review. Enplanements were up 1.66% to 26.5 million in 2011 and are essentially flat year-to-date 2012, which is consistent with Fitch's base case. Revenues through June are up $12.4 million (4.11%) from the same period in 2011. The higher revenues are attributed mostly to higher concession and parking revenues. Expenses are down $3.8 million (2.21%) from the same period in 2011. The lower expenses are mainly attributed to lower repair, remodel, and major maintenance costs thus far in 2012.

United Airlines (rated 'B'/Stable by Fitch) remains the dominant carrier with 42.9% of enplanements in 2011 followed by Frontier at 22.3% and Southwest (rated 'BBB'/Stable by Fitch) at 21.8%, which is consistent with recent performance. DIA recently reached agreement to pay-off all debt associated with unused and un-needed baggage system space with the goal of driving down costs for all carriers and making DIA more competitive. The agreement to pay-off the baggage system debt was particularly beneficial to United which DIA management hopes will stem the loss of United traffic DIA has experienced in recent years. Fitch will monitor United longer-term commitment to DIA and the subsequent responses from other carriers as it assesses DIA going forward.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (July 12, 2012);

--'Rating Criteria for Airports' (Nov. 28, 2011).

Applicable Criteria and Related Research:

Rating Criteria for Airports

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=656970

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

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Fitch Ratings
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Scott Zuchorski, +1 212-908-0659
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Source: Fitch Ratings