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Fitch Rates Wayne County Airport Authority, Michigan's Bank Bonds 'A'; Outlook Negative

Posted on: Wednesday, 15 October 2008, 18:00 CDT

Fitch Ratings has assigned an 'A' underlying long-term rating to Wayne County Airport Authority, Michigan's (the authority) approximately $30 million bank bonds corresponding to the variable rate demand obligations (VRDOs) series 2008B which has a letter of credit from Landesbank Baden-Wurttemberg (LBBW), acting through its New York Branch. In addition, Fitch has affirmed the following ratings for the authority:

--$2.0 billion outstanding senior lien revenue bonds 'A';

--$180.4 million outstanding junior lien bonds 'A-'.

The Rating Outlook on all bonds is Negative. The series 2008B bonds are secured by a pledge of the net revenues derived from the operations of the authority, whose largest asset is Detroit Metropolitan Wayne County Airport. The airport operates under a fully residual airline use and lease agreement.

Although approximately 17% of the authority's $2.0 billion outstanding debt consists of variable-rate debt and roughly $30 million is currently held as bank bonds, the authority's interest rate and term-out risk exposure on VRDOs is manageable. The authority had $91 million in unrestricted cash in fiscal year 2007 which can be used to accommodate any increased principal and interest requirements in the near term. Under an alternative Fitch scenario that contemplates the potential for the maximum amount of bank bonds, the authority exhibits an ability to withstand this exposure, even during a five-year period of an accelerated prepayment of principal. However, this alternative scenario assumes that some adjustments would need to be made to both capital and operating expenditures, while efforts to maximize revenues are executed in order to meet the rate covenant.

The cure period for the reimbursement agreement related to the letter of credit from LBBW is 180 days. Bank rates are set for the first 30 days as the higher of the base rate, defined as the higher of the prime rate plus 2% or the Fed funds rate plus 3.0%, and the maximum rate of 12%. Between the 31st day and the 90th day, bank rates are set at the higher of the base rate plus 1.0% and the maximum rate of 12%. On the 91st day, interest rates are set at the higher of the base rate plus 2.0% and the maximum rate of 12%.

The senior and subordinate lien ratings reflect the airport's central geographic position, substantial airfield and terminal processing capability that position it well as a large hub, its limited airport competition within the metropolitan area, and a significant source of non-airline revenue. In addition, the new North Terminal which opened on September 17, 2008 positions the airport with modern facilities and adequate airfield and terminal capacity for the next 15 to 20 years.

Credit concerns center on the weakness of the regional economy, the increasing reliance on its dominant carrier, Northwest Airlines (Northwest), with approximately 77% of total enplanements in fiscal 2008, 55% of which is connecting traffic.

The Negative Rating Outlook reflects the potential decline in enplanements and non-airline revenues in the near- to medium- term due to the continued economic deterioration of the Detroit regional economy and system wide changes in the airline industry with scheduled reductions of 7% or more. The regional economy has weakened considerably in the past several years, with the Detroit area and the state in general having suffered, exemplified by an unemployment rate of 9.4% compared to the nation at 6% in July 2008. In addition, the MSA ranked as the nation's 61st wealthiest in 2006 which is down sharply from its ranking of 43rd in 2005 when it was 109% of the national average.

The Negative Rating Outlook also reflects the uncertainty in the medium-term with respect to the pending merger of Northwest and Delta Air Lines (Delta), which is awaiting final approval from the U.S. Department of Justice. While the two airlines compete directly on only 12 of approximately 1,000 city pair routes flown by both carriers, past airline mergers have indicated enplanement reductions, following a period of transition, that have resulted in double digit declines. Enplanements for fiscal 2008 (ends Sept. 30) of 18.4 million enplanements are up 1.8% over fiscal 2007 of 18.1 million enplanements. However, this does not reflect reductions announced for the fourth quarter of calendar 2008 which could result in a reduction of at least 7.0% for fiscal 2009.

Fitch does recognize the airport's new infrastructure and management's efforts to impose a workforce reduction by approximately 15% over the next 2.5 to 3 years as well as streamlining its police and maintenance expenses to deal with these pressures. A downgrade of the airport's rating could occur should there be additional service reductions and increased pressure on its financial margins over time.

Financial margins and metrics remain low but steady. The airport's net operating revenues are expected to provide 1.53 times (x) coverage of senior lien bonds in fiscal 2008 and 1.24x combined coverage for senior and junior lien bonds. Coverage of senior lien bonds is projected to decline to a low of 1.34x in fiscal 2009 and rise only slightly to 1.37x through the forecast period. A portion of this reduction in coverage is due to the receipt of federal funds and the resulting prepayment of approximately $52.0 million in subordinate lien bonds that were originally scheduled to mature in 2010. However, projected coverage in fiscal years 2011-2013 is lower due to the new terminal and also due to lower projected volume. The airport's cost per enplaned passenger (CPE) is expected to rise to $6.02 in fiscal 2008 from $5.13 in fiscal 2007, a 17.4% increase. In fiscal 2009, the CPE is expected to increase an additional 32.1% to $7.95 and reach $9.79 in fiscal 2013, 19% higher than recently forecasted in April 2008. Fitch recognizes that part of the increase was expected given the completion of the North Terminal project. The remainder is attributed to the projected declines in enplanements relative to forecasts made previously.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of site.

Source: Business Wire

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