Hertz bankruptcy underscores pressure on airport car rental bonds
Like the airports they serve, consolidated rent-a-car facilities have seen business drop to record lows in a span of three months.
Since the first ConRAC opened in Sacramento, California, in 1998, at least 42 airports have financed the rental-car hubs, mostly with taxable revenue bonds backed by customer facility charges on each rental. Six more are under construction.
Now ConRACs — already squeezed as auto rentals lost share to internet ride hailing services like Uber — face more financial pressure after the coronavirus pandemic created a virtual shutdown in travel. That led to bankruptcy for the largest car rental firm, Hertz on May 22, and later Advantage Rent-a-Car.
In its Chapter 11 filing in Delaware Bankruptcy Court, Hertz lists four airports among its largest creditors: Chicago, Detroit, Orlando, and San Francisco. The amount of taxes owed to those four come to $10.5 million.
Gregory Scott, a lobbyist for the American Car Rental Association, estimates that rentals have fallen by 50% to 80% since the national emergency was declared in March.
“It’s no surprise that there’s significant financial stress going on in the industry right now,” Scott told The Bond Buyer. “Our members have been talking to the airports about getting rent relief or rent abatement and the airports appear willing to talk about that.”
The three rental car brands owned and operated by the Hertz Corporation — Hertz, Dollar and Thrifty — generally account for about 33% of total car rentals at U.S. airports, according to Moody’s Investors Service. Total rental car revenue represented 8% of all operating revenue at U.S. airports in fiscal 2018.
“Hertz's bankruptcy will have a limited effect on ConRAC customer facility charge collections in the current environment of limited travel,” Moody’s said. “However, Hertz's bankruptcy could reduce the revenues available to bondholders if CFCs collected by Hertz for airports are trapped in the bankruptcy proceedings or if Hertz's operations are significantly curtailed during or following the bankruptcy.”
At Phoenix Sky Harbor International Airport, customer facility charges on car rentals dropped 38% in March and 83% in April, according to airport spokesman Krishna Patel. For the fiscal year that began July 1, CFC collections are down 13.9%. In 2019, the CFC brought in $50 million.
In a June 17 report, Fitch Ratings anticipated rental car and airport parking volume this year falling to 40% of 2019 volume. That is expected to rise to 80% in 2021, and 95% in 2022, returning to 2019 levels in 2023.
In analyzing its portfolio of rated ConRAC debt, Fitch found no immediate threat to liquidity because all of the issuers had sufficient cash and reserves to cover a year of debt maturities.
“For purposes of performing these liquidity metrics, Fitch did not include funds that the airports would be receiving under the Coronavirus Aid, Relief and Economic Security (CARES) Act, even though the federal assistance funds are not restricted to support airport special revenue obligations,” analysts said.
“ConRACs in construction such as those at Cincinnati, Columbus and Hartford benefit from lower debt service burdens at present due to capitalized interest periods, but are still subject to completion risk and ramp-up,” Fitch’s Lehman noted in a May report.
“The safety of the ConRAC bonds eventually relies upon the air traffic recovery, and the related rental car transactions,” said one airport consultant, who asked not to be named due to work with his clients. “Airlines have increased July 2020 seat capacity to 50% of prior year’s level. If the traveler count recovers to 50%, personally I think most ConRAC bonds will do well. New virus cases are spiking at multiple states, so the future of air travel is anyone’s guess.”
At Sky Harbor, Patel said that a portion of the airport’s $148 million CARES grant can be used to make partial debt service payments on the ConRAC special facilities bonds.
ConRAC bonds face the possibility of technical defaults if they fall below debt service coverage ratios. But Moody’s said that will not be considered a default under pandemic circumstances, even if the airports use CARES funding to service debt.
“Most US airports' debt documents specifically exclude grant funds from being included as revenue in the calculation of rate covenants,” said Moody’s analyst Earl Heffintrayer. “However, airports are finding ways to apply the grant funds to support required payments and prevent technical events of default, primarily by using the funds to offset operating expense requirements to increase net revenue or to reduce debt service requirements that must be paid by net revenue.”
The 2019 bonds issued for Sky Harbor come with a debt service coverage fund and a debt service reserve fee on deposit with the trustee.
“There is also an Improvement Reserve/Surplus Fund available with the Trustee to make debt service payments, if necessary,” Patel said. “Currently, the July 1, 2020 debt service payment is fully funded and on deposit with the Trustee.”
If necessary, airports can increase the rents for rental car companies to support the special facility bonds, but analysts consider that unlikely.
“The airports have not tested the contingent rent mechanism yet and it is not the sole driver of ConRAC credit quality,” Moody’s noted. “That said, we believe that the remaining rental car companies have an incentive to pay the required contingent rent to continue to operate in the airport facility.”
Fitch analyst Seth Lehman noted that special facility airport bonds tend to be structured with strong debt service coverage ratios to offset the risk of a single revenue stream pledge, especially one subject to demand risk.
“Pre-coronavirus rating case DSCRs were forecast to be largely in the 2x–3x range, with the higher rated facilities having the stronger coverage levels,” Lehman said. “However, under the severe downside case, DSCRs fall below 1.8x for many credits.”
One of the largest ConRACs under construction is a $2 billion facility at Los Angeles International Airport that includes a people mover scheduled for completion in 2023. The public-private partnership is partially financed by the consortium L.A. Gateway Partners, which includes PCL Investments and Fengate Capital Management.
Los Angeles Mayor Eric Garcetti said in April that airport traffic was down by 95% from a year earlier.
Fitch rates California Municipal Finance Authority bonds issued for the ConRAC/people mover project BBB-minus, following a one-notch March downgrade reflecting declining counterparty credit quality. The project is a long way from opening, but the pandemic may threaten contractors' ability to keep the project on schedule to receive milestone payments from the airport, the rating agency wrote.
At Newark Liberty International Airport in New Jersey, a $500 million ConRAC project broke ground Sept. 24 with a targeted opening in 2023. Financing was arranged by Conrac Solutions Capital with equity and critical strategic implementation provided by Related Fund Management and Fengate Asset Management.
“The financing structure is both unique and an anticipated model for ConRACs at airports throughout the nation, with the financing supplied by equity partners and then repaid solely out of proceeds received from the Customer Facility Charge applied to rent-a-car transactions,” according to Renton, Washington-based Conrac Solutions.
Conrac Solutions also built the $155 million ConRAC that opened at Austin Bergstrom International Airport in 2015. Nearby San Antonio opened its $178 million ConRAC backed by $5 per rental CFCs in 2018.
At Hartsfield-Jackson Atlanta International the reduction in air travel has had an "adverse effect" on rental car activity, parking, and ground transportation companies, and revenues of the airport, according to a disclosure on the Municipal Securities Rulemaking Board’s EMMA website.
For the upcoming fiscal year starting July 1, the disclosure said car rentals, parking and concessions are projected to be $147.8 million, a reduction of $52 million from previous estimates.
The airport had about $139.4 million of outstanding debt for its consolidated rental car facility project as of fiscal 2019.
The Columbus, Ohio, Regional Airport Authority published a voluntary disclosure May 28 warning of uncertainty ahead for its Con RAC because of the Hertz bankruptcy.
Hertz and at least one subsidiary are original signatories on the concession agreement tied to the bond issue for the facility at the John Glenn Columbus International Airport. They agreed to make up any deficiency in pledged revenues needed to cover debt service once the facility opens, which is expected next year.
The disclosure provided a May 27 letter the airport agency received from Hertz saying “we intend to continue to pay airport authorities amounts that we collect from customers after filing on account of concessions fees and customer facility charges as required under our concession agreements.”
Because pre-petition claims are halted once a company filed to reorganize, Hertz said it has sought special court authority to continue paying certain fees and charges owed to airport prior to the filing.
At the Cincinnati/Northern Kentucky International Airport, rental car revenues are off by 34% for the fiscal year that began in January.
The airport’s $205 million ConRAC is 40% complete and has been fully funded with $140 million of bonds and cash.
Airport officials told the Kenton County, Kentucky, Airport Board May 18 that they don't expect any impact on the rental car project due to COVID-19 and anticipated lower customer facility charges. Interest-only payments are being made during the construction period.
Shelly Sigo and Yvette Shields contributed to this story.