Fitch Ratings assigns an 'A-' rating to the Wayne County Airport Authority, Michigan's (WCAA or the Authority) approximately $1.033 billion senior lien airport revenue refunding bonds (GARBs) series 2010A-D issued for Detroit Metropolitan Airport (the Airport) and affirms the 'A-' rating on the approximately $838 million outstanding senior lien and $180 million subordinate lien GARBs. The 'A-' rating on both the senior and junior debt reflects the nominal financial coverage distinction between the two lien levels based on existing debt secured by airport net revenues. The Rating Outlook for all WCAA bonds is Stable.
RATING RATIONALE:
The Authority is issuing $1.033 billion in refunding debt as part of its 2010 Finance Plan that is aimed at optimizing the airport's current debt structure. The refundings are also expected to provide economic savings of as much as $58 million (in present value terms over the life of the bonds) subject to interest rate trends. Fitch views the Authority's restructuring of its debt as a positive step given the economic savings and the shift to a more conservative fixed rate debt structure. At forecasted traffic levels, the CPE will marginally increase to a $10-$12 range. However, Fitch views that the sizable airport debt will continue to pressure costs should traffic under perform management expectations in the short term.
Credit strengths include:
--The large underlying market and traffic
base in the service area complemented by its central geographic position
that can support a major connecting hub;
--Minimal airport
competition within the metropolitan area and the modern airport
facilities - completion of the North Terminal in 2008 - and substantial
airfield and terminal processing capability absent major capital
spending going forward;
--Stable coverage levels supported by a
long-term full airport residual lease agreements expiring in 2032 with
its signatory carriers;
--Delta Airlines' (Delta; Issuer Default
Rating [IDR] 'B-' with a Stable Outlook) ongoing commitment to the
Detroit regional market and its substantial connecting and international
service constitute an important positive credit consideration. Any
downsizing or elimination of service by Delta would not reduce the
financial obligations covered under the agreement;
--Minimal new
money debt is expected to be issued as part of the airport's 2011-2015
capital improvement program considering that a large share of the
airport's capital plan has been fulfilled.
Credit concerns include:
--Concerns that WCAA's long-term financial
flexibility and airline cost competitiveness may be subject to increased
levels of stress given the existing high airport debt burden;
--Potential
for sustained economic weakness in the airport air trade service area
that supports the O&D traffic;
--Elevated dependence on Delta's
market share concentration and high connecting traffic operations.
Delta's market share accounted for an estimated 80.6% of total traffic
in fiscal 2010 as the carrier adds service and connects 52% of airport
traffic;
--The expected increase in fixed costs resulting from the
North Terminal completion. Pressure on airline costs will be higher in
future years as the Authority completes its expected drawdown of the
Passenger Facility Charge (PFC) fund balance by fiscal 2011 that has
previously subsidized a portion of the debt service costs.
Cost per enplanement (CPE) stood at a competitive $8.81 as of fiscal 2010 and is anticipated to increase to $9.91 in fiscal 2011. This new CPE base is not expected to adversely affect airport competitiveness vis-a-vis other comparable large hubs. Fitch also recognizes that an increase in costs associated with the recently completed terminal facility is passed through to carriers' rates and charges. To date, management has limited this cost pressure by drawing on its previously built up PFC fund balance over the past few years for use on the eligible PFC portion of debt service. Fitch notes that the airport's unrestricted liquidity is improving but remains a limiting factor in the airport's flexibility to manage operations in deteriorating traffic or market conditions. Fiscal 2010 ended with $121.5 million in unrestricted liquidity (240 days cash on hand) in contract to the fiscal 2009 level of $97 million (187 days cash on hand).
The new debt structure includes a cancellation of all existing debt related interest rate swap agreements in December 2010 without termination costs. The resulting Authority debt will comprise 80% fixed-rate debt and 20% unhedged variable-rate demand obligations, in contrast to 82% fixed-rate debt, 8% synthetic fixed-rate debt, and 10% variable-rate debt under the current structure. The refunding issue does not increase future debt service obligations and does not extend final maturity.
On Aug. 2, 2010, Fitch downgraded the WCAA senior lien airport general revenue bonds to 'A-' from 'A' due to the heightened credit concerns that WCAA's long-term financial flexibility and cost competitiveness may be subject to increased levels of stress given the existing high debt burden, the potential for sustained economic weakness in the airport air trade service area, and Delta's elevated market share and connecting traffic operations.
The Stable Outlook reflects Fitch's expectation that post-merger Delta service levels and traffic at Detroit will remain largely stable as has been the case since the merger completion in late 2008. Fitch also considers the possibility for a more stabilizing traffic environment with potential growth of the Detroit hub resulting from Delta's shift of connecting service from Cincinnati, the addition of international service to new destinations, and continued management of expenses. Fiscal 2010 enplanements of 15.8 million ended flat compared to fiscal 2009. Management's expectation for fiscal 2010, at the time the credit was reviewed in August 2010, was a modest drop of 1.5% in enplanements. The Airport Authority anticipates traffic to shift to positive territory in fiscal 2011 with a 1.3% increase in enplanements followed by a 3.5% and 3.1% growth for 2012 and 2013, respectively.
KEY RATING DRIVERS:
Future rating actions are likely to be influenced by:
--Shifting
trends in enplanement activity associated with locally based traffic
demand;
--A material reduction in or elimination of connecting
traffic;
--A higher than expected airport cost structure, and a
change in the region's (Detroit and surrounding area) economic condition.
Security:
The senior debt has a first lien pledge on net airport
revenue while the junior debt has a second lien pledge of net airport
revenues.
CREDIT SUMMARY:
Historical financial margins and metrics remain stable and consistent with a residual airline rate setting methodology. Net operating revenues plus allowable fund balances of approximately $49 million for fiscal 2010 provided 1.41 times(x) coverage on the senior lien bonds and 1.36x combined coverage (senior and junior). This marks an improvement compared to fiscal 2009 results of 1.27x coverage and 1.23x combined coverage (senior and junior lien bonds). The lower overall coverage in fiscal 2009 is a reflection of retirement of outstanding debt that was previously issued to refinance the costs of various capital projects. CPE has shifted higher to the $8 range in fiscal 2009 due to the lower traffic experienced at the airport and is expected to move to the $10-$12 range during the next four years as the airport aims to increase fees and charges as PFC draws will be reduced. While the sponsor's forecast assumes a 2.3% CAGR for the 2010-2020 period, Fitch's forecast include a no growth scenario and a 50% loss of connecting traffic. While Fitch acknowledges the strength of the Delta use and lease agreement supporting the credit, under sensitivity scenarios, there is a potential for CPE to rise into the $20 range should Delta pull out 50% of its connecting based service. The airport's five-year $500 million capital improvement program ending does not call on any major capital spending in that period. The remaining airfield projects are expected to be partially funded through federal grants, airport discretionary funds, and some additional debt issuance not exceeding $213 million.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
'Rating Criteria for
Infrastructure and Project Finance' (Aug. 13, 2010).
Applicable Criteria and Related Research:
Rating Criteria for
Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548345
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Contacts:
Fitch Ratings
Primary Analyst:
Michael M. Murad,
+1-212-908-0757
Associate Director
Fitch, Inc.
33
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New York, NY 10004
or
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Lehman, +1-212-908-0755
Senior Director
or
Committee
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Managing
Director
or
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brian.bertsch@fitchratings.com