Fitch Ratings-San Francisco-12 August 2019: Fitch Ratings has assigned an 'A' rating to the State of Hawaii's airport system customer facility charge revenue bonds, series 2019A; the bonds are being issued by the state's Department of Transportation. Fitch has also affirmed the 'A' rating on the series 2017A customer facility charge revenue bonds. The Rating Outlook for all bonds is Stable.

Key Rating Drivers

Summary: The rating reflects a strong origination and destination (O&D) market in Hawaii tied closely to leisure travel supporting robust rental car transaction day performance and customer facility charge (CFC) collections at the state-wide consolidated rental car facility system (Conrac). Strengths consider the broad CFC collection authority across five main Hawaiian airports, strong coverage at existing transaction levels, favorable progression of the construction program, and conservative covenants and reserves. Additional projects strengths include solid diversity in rental car operators and rate-making flexibility. 

Debt service coverage ratio (DSCR) from CFC revenues alone are expected to average 2.9x through the debt's tenor under the Fitch rating case without the need for upward CFC rate adjustments. High surplus cashflow will allow for support for all Conrac operating costs and strong build-up in cash reserves. Long term demand and volatility risks are partially mitigated due to alternative modes of transportation being unable to meet the needs of the typical Hawaii visitor profile.

Multi-Airport CFC Base - Revenue Risk (Volume): Stronger

The Conrac has experienced average annual transaction day growth of 7.3% since 2009, rising to 16.1 million in fiscal 2018 across the multi-airport system. This volume base is among the highest for a U.S. Conrac credit. Transactions are supported by strong domestic and international visitor arrival levels across all Hawaiian Islands, capturing rental car activity at six airport system facilities. The airport system's ratio of rental car transaction days to visiting enplaned passengers of over 100% is high relative to other facilities due to strong local Hawaiian rental demand. The rental market benefits from a balanced and diverse rental car operator presence, with no single brand representing more than 22% of market share.

Strong Concession, Ratemaking Ability - Revenue Risk (Price): Stronger

Fitch views the 30-year concession and lease agreements, effective upon project completion and extending through the life of the bonds, as providing considerable stability to the project. The department has collected CFCs since 2008, and has the authority to increase the rate as necessary, partially mitigating the narrowness of the CFC revenue stream. The moderate CFC rate of $4.50 compares favorably with rates at other facilities and no increases are anticipated to cover projected Conrac costs. Under the agreement, should CFC revenues be insufficient to cover 1.15x debt service, signatory rental car companies must also pay a minimum annual required deficiency payment. Rental car companies are responsible for project operating costs but can be reimbursed from surplus CFCs after debt service. 

New Facilities Under Construction - Infrastructure Renewal and Development: Stronger

The new facility at Maui achieved completion in May 2019 and is now in service; the Honolulu facility is scheduled for completion in October 2021 (currently 52% complete). Half of the overall project costs are being funded with cash from CFC collections ($499 million or 51% collected through February 2019), with 46% of funding coming from CFC bonds, and the remainder from future CFC collections, grants, and cash. Additional facilities may be constructed in the future at other Hawaiian airports (Lihue, Hilo and Kona), but are expected to be more modest in scope. Future funding for capital needs is expected to be sourced primarily from CFC pay-go starting in 2019, providing additional comfort and limiting further borrowing needs. 

Conservative Debt Structure - Debt Structure: Stronger 

The project's debt structure is conservative featuring senior, fixed-rate debt with a flat amortization profile. Structural features are strong relative to similar rental car credits, including a 1.4x rate covenant (including 25% rolling coverage), a 1.25x maximum annual debt service (MADS) additional bonds test, and cash-funded reserves. Obligations under the bond documents are incorporated into the rental car concession agreement.

Financial Profile: Financial metrics are relatively strong for a CFC transaction with CFC revenues being sufficient to provide 2.4x or better debt service coverage ratios DSCR (excluding rolling coverage) under the Fitch rating case and averages 2.9x through the life of the debt (excluding rolling coverage). Further, the Fitch rating case assumes a 12% drop of transaction days and related revenues, and no increase of the CFC rate. Leverage peaks at 7.3x in 2021 under Fitch's rating case but falls below 3.0x within 10 years. 

Peers: The Hawaii Conrac system ranks among the largest for a rated financing in terms of CFC transactions and collections. Comparable Fitch-rated peer Conrac facilities include Massachusetts Port Authority (Massport; rated A/Stable) and the Miami Intermodal Center (A/Stable). The projects have similar long-term leverage profiles of 3x to 4x and benefit from sizable transaction bases and diversity in rental car service providers. Massport and Hawaii both benefit from coverage levels at or above the 2.0x level (excluding coverage account), with Miami's debt service coverage being slightly lower around 1.5x.

Rating Sensativities

Developments That May, Individually or Collectively, Lead to Negative Rating Action:

  • Coverage levels falling below 2.0x resulting from a significant drop in rental car transactions without a corresponding increase in CFC rate;
  • A sustained significant reduction in rental car activity in excess of 20% .

Developments That May, Individually or Collectively, Lead to Positive Rating Action:

  • While not likely until final completion of the Honolulu project and clarity on funding of future car rental facilities, sustained outperformance of CFC collection could lead to a positive rating action.

Transaction Summary

The series 2019 bonds are being issued to pay the costs of design, development and construction of Conrac projects at Maui and Honolulu Airports, and to refund $76 million in outstanding EB-5 short-term loans. Bond proceeds will also fund the rolling coverage fund requirement, cash funded at 25% of MADS at closing, the debt service reserve fund (DSRF) requirement, equal to 1.0x MADS, and cover costs of issuance. The bonds are fixed rate with level debt service of roughly $11 million through final maturity in 2047.

Performance Update

Transaction and revenue growth has been consistent over time, and in fiscal 2018, were both steady at 3.0%, resulting in CFC revenues of $72.6 million. Management expects fiscal 2019 CFC revenues to fall slightly to 72.0 million, a 0.7% decrease reflecting impacts from the volcanic eruption on Hawaii Island and flood-related road closures on Kauai. Despite this slight decline, Fitch continues to view Hawaii's CFC collections as strong with 2018 CFC revenues sufficient to cover future projected debt obligations with a DSCR over 2.4x excluding rolling coverage, under the Fitch rating case. While the Hawaii Department of Transportation can raise the CFC without additional legislative approval, the CFC rate is anticipated to remain at $4.50 in the near to medium term. Comparatively, other U.S. airports that have recently financed Conrac projects have set rates at $6 or higher on a per transaction day basis.

Alternative ground transportation options are relevant long term risks for Conrac credits. In the case of Hawaii, Uber, Lyft and other transportation network companies (TNCs) have operated at Honolulu (HNL) since December 2017 and their presence so far has not materially or adversely affected rental car revenues. TNCs have led to market share dilution among taxis and shuttles. Management views the future opening the Honolulu rail system in the coming years as unlikely to impact rental car volumes as the rail will not extend into many popular tourists destinations or places of interest.

The construction of two new rental car facilities at the Maui (OGG) and HNL airports continues to progress, with an estimated total cost of $948 million (up from $901 original estimated cost). The OGG facility was completed in May 2019 and is now in operation, with over 1.6 million square feet of leasable space. OGG recently completed an electric tram that will offer service to and from the new facility. The OGG facility remained on time and budget, with no material changes to project scope. 

The HNL facility is expected to achieve final completion in October 2021 and has achieved 52% completion as of June 2019, with substantial completion slated for April 2021. This represents a slight departure from the completion date previously anticipated of June 2020 due to changes in project scope and delays resulting from the building site condition. During construction, HNL has been operating a temporary rental car facility that will be converted back into a parking garage in early 2022, which will mark full completion of the new HNL facility. The HNL facility is anticipated to have approximately 600,000 square feet of leasable space. In contrast to the new electric tram system at OGG, the HNL facility will use a consolidated operation consisting of a fleet of 28 electric busses. 

The airport's management team has indicated that there are no definitive plans to issue additional debt to fund the Conrac program in the near term although these plans of finance could evolve. It is currently anticipated that the Conrac program will maintain a balanced funding composition, with approximately 50% of funding being derived from CFC collections, and the remainder from bond and grant proceeds, limiting future borrowing needs.

Fitch Cases

Fitch reviewed a set of sponsor forecasts extending through fiscal 2025 including a moderate growth base case as well as stress case scenarios that incorporate modest total reductions in rental car transaction days over a five year period resulting from a combination of lower visitor arrivals and propensity to rent. The sponsor baseline forecast projects average DSCR through 2025 of about 3.4x.

Fitch conducted additional forecast analysis to evaluate the coverage performance that extends through final maturity. In Fitch's view, the longer-term view is more appropriate given the potential for emerging technologies to affect rental car demand in the later periods of the full bond term.

Under Fitch's base case scenario, rental car transaction days are assumed to grow at a CAGR of 1.6% while rental car transaction day grow at a CAGR of 1.1% over the full term. No adjustments to the current CFC rate of $4.50 were needed to make required payments. In this case, the Conrac would be able to generate at least 2.9x DSCR on CFC debt service and an average DSCR at about 3.4x through final maturity. Given the excess revenues after debt service, cash reserves should rapidly increase and allow project net leverage to fall below zero by fiscal 2032.

In Fitch's rating case, visitor arrivals are stressed by 8.0% in 2020, recovering to 1.5% annually thereafter. Transaction days are stressed 12%, followed by 1% recovery thereafter. CFC rates were held at the current $4.50 levels. Under these assumptions, the Conrac can generate a minimum and average DSCR of 2.4x and 2.9x, respectively from CFC receipts alone. Hawaii's ability to increase the CFC rate at any time provides room for substantial protection against downside scenarios. Similar to the Fitch base case, the excess CFC revenues after debt service should allow cash reserves to rapidly increase, with project net leverage falling below zero in fiscal 2043.

Fitch also constructed additional stress and breakeven scenarios. The stress scenario considers the rating case assumptions supplemented by zero growth starting in year 10 (fiscal 2030) as a result of technology advancements further impairing rental car demand. Under this scenario, the Conrac can generate an average DSCR of 2.7x from CFC receipts alone. These outputs do not assume Hawaii adjusting its CFC rate or imposing contingent rent to the rental car operators. Predicated upon the Fitch rating case, Fitch ran a breakeven scenario assessing the maximum reduction in demand in year 20 to allow cashflow DSCR to remain at a minimum 1.0x level, excluding the coverage account. The outputs indicate that Hawaii can withstand a nearly 65% demand loss in rental car transactions activity to maintain a breakeven coverage level without using additional levers such as rate increases or contingent rent.

Security 

The series 2019 bonds are secured by a gross pledge of CFC revenues and a minimum annual deficiency payment from the rental car operators. A rolling coverage fund sized to 25% of MADS and a debt service reserve account sized to 1.0x MADS also secure the Conrac bonds.