Fitch Downgrades Metropolitan Washington Airports Authority to 'AA-', Outlook Revised to Stable

Fitch Downgrades Metropolitan Washington Airports Authority to 'AA-', Outlook Revised to Stable

Fitch Ratings assigns an 'AA-' rating to the Metropolitan Washington Airports Authority (MWAA or the authority) Series 2011 C (AMT) approximately $134 million Airport System Revenue Refunding Bonds, Series 2011 D (Non AMT) approximately $9.0 million Airport System Revenue Refunding Bonds, and Series 2011E (Taxable) approximately $49 million and downgrades the authority's $5.1 billion outstanding airport revenues bonds to 'AA-' from 'AA'. The Rating Outlook is revised to Stable from Negative.

The downgrade reflects Fitch's view that the authority will maintain a stable yet narrower level of debt service coverage cushion when compared to both its historical performance and previous forecast estimates. Expected debt service coverage ratios will remain close to the 1.30 times(x)level even under conditions of future growth in traffic performance and contained increases in operating expenses. To the extent the airports face moderate to severe stresses to its traffic profile, Fitch believes that the authority may be required to effectuate its extraordinary coverage protection measures, as permitted under the airline use agreements, to satisfy its 1.25x rate covenant terms. Still, the very strong market position afforded by the authority's two major airports within the economically strong Washington DC air trade area provide for a strong credit mitigation to manage well in an uncertain aviation environment.

The authority's ongoing use of borrowings in recent years to fund a majority portion of its Capital Construction Program (CCP) has resulted in an elevated debt burden profile and will require increased reliance on airline charges to meet total airport cash flow requirements. In Fitch's opinion, the rising debt burden places an added measure of risk to the authority's financial profile given the downward revisions in forecasted traffic growth, especially when compared to earlier projections in prior years. In Fitch's view, the forecasted financial metrics would no longer be consistent with 'AA' rating pursuant to Fitch's criteria for airports.

Key Rating Drivers:

--The authority's competitive position, complementary service offerings of both Dulles and National, the inherent strength of a dual airport system serving a domestic hub and growing international traffic segment, and a strong underlying economic region;

--Historically well-managed financial operations of the airports, a firm airline use and lease agreement with extraordinary coverage protections, and a manageable cost structure given the authority's growing international traffic profile and strong market position;

--A primarily fixed rate capital structure, with approximately 16% of the authority's debt in variable rate mode and the remaining 84% in conventional fixed rate mode;

--An elevated leverage position and debt burden of 12.2x Net Debt/CFADS, $250 debt per enplanement, and an adequate liquidity position of 447 days cash on hand as of May 2011;

--The authority's CCP program is nearing completion and requires only minimal additional bonding in the near-to-medium term. Major upgrades and renovations have been completed at both airports, resulting in modern facilities and an overall good condition of infrastructure.

WHAT MAY TRIGGER A RATING ACTION:

--Significant or unanticipated changes in the airport's current traffic base, particularly hub operations and ongoing commitment from its leading carriers;

--Leverage requirements above current expectation due to revisions in the size and scope of the capital program;

--Inability to manage the overall airport cost profile along with adequate coverage metrics.

SECURITY:

The bonds are secured by the net revenues of the authority.

CREDIT SUMMARY:

Enplanement activity at the authority's airports has performed well during the recent recession, which is underpinned by the authority's sound economic catchment area and the complementary nature of the dual system airport structure. In 2010, system-wide enplanements increased 2.3% when compared with 2009. The continued growth in international service captures the strong O&D base within a somewhat insulated region due to the economic activity generated from the federal government and the nation's capital.

The number of enplaned passengers at Reagan increased by 6.3% in the first 7 months of 2011, relative to the same period in 2010, driven by increased service offerings by Delta and JetBlue. The authority expects some of this increase to moderate in the later half of the year, with enplanements forecasted to increase by 4.6% at Reagan in 2011 from 2010. For the first seven months in 2011, enplanements at Dulles are down 1.0% relative to 2010, reflecting softness in domestic travel and sluggish economic conditions. The authority expects total enplanements at Dulles will be down 0.8% in 2011 compared to 2010, in-line with advanced flight schedules showing a 1.7% reduction in departing seats at the airport. From 2012 - 2016 (the forecast period), the authority expects system-wide enplanements will grow by 1.8% per annum, with Dulles accommodating the majority of the increase due to the restrictions in place at Reagan. To the extent that overall economic conditions remain weak or the leading carriers reduce its service or capacity at either airport, these forecasts may face underperformance.

In 2010, the authority generated a 1.47 times (x) DSCR per indenture, above the authority's 2010 forecast of 1.34x. Under Fitch's coverage calculation methodology of treating passenger facility charges (PFC) as revenues rather than debt service offsets, the DSCR was 1.35x. Nevertheless, the authority's 2011 financial forecast shows a substantial deviation from its historical levels and narrower financial margins than previously envisioned.

Under the authority's base case, debt service coverage levels per indenture will range from a high point of 1.35x in 2011 to a low point of 1.30x in 2013. When compared to the authority's 2010 financial forecast, the authority forecasted to hit similar lows of near 1.30x but expected to meet the 1.36x-1.40x threshold by 2014. In contrast, the current coverage forecasts show the authority will stay near the 1.30x range through 2016, even with 1.8% CAGR traffic growth and managing expenses to a 3.0% per annum growth rate. Alternatively, if PFCs are added to revenues instead of being used to offset annual debt service, coverage levels fall to the 1.27x level in 2012 and slowly climb to 1.29x in 2016.

Fitch reviewed two additional sensitivity cases. The first assumed no traffic growth starting in fiscal 2012 for both airports while the second scenario stressed enplanements at Reagan and Dulles by 20% and 30%, respectively, when compared to the authority's baseline forecast. Under the no growth scenario, coverage levels would remain at or near 1.30x with minimal impact to airline costs.

Under the more stressful scenario, the authority would be required to increase airline costs pursuant to extraordinary coverage protection provisions in order to meet the 1.25x rate covenant. As a result, debt service coverage levels drop to 1.25x system-wide and CPE levels climb to the $18 and $40 levels at Reagan and Dulles, respectively. Fitch believes this sensitivity case would not be a likely scenario given the local market strength; however, it does indicate the authority's thinner financial cushion with coverage ratios remaining close to the rate covenant level, even under the authority's baseline financial forecast.

The airport's CPE levels are largely in-line with previous forecasts. In 2010, the authority reported a $16.40 CPE at Dulles and expects CPE to reach the $27.00 range by 2012 and remain at this level through 2016. CPE levels at Reagan are more in a steady state mode as the majority of debt issued has been for capital projects at Dulles. As an airport catering to business travelers with higher airfares, Reagan's CPE levels are manageable and will marginally increase from $13.52 in 2010 to $13.91 in 2016.

Fitch estimates that net debt to CFADS is currently about 12.0x but will evolve to a more moderate 9.0x level in several years, even when factoring in additional debt issuances by 2013 of approximately $173 million. Fitch notes that these levels are well above average for an 'AA' category large-hub airport.

The authority's 2001 - 2016 capital construction plan is nearing completion. The total plan is estimated at approximately $5.1 billion of which $3.0 billion was funded with previously issued bonds. After the 2011 issue, the authority expects to borrow an additional $173 million in 2012 and 2013. Major projects left within the CCP at Reagan include runway overlay and rehabilitation and in-line baggage screening systems. At Dulles, the remaining projects include an in-line baggage screening system and taxiway Y reconstruction. The authority intends to substantially complete its total capital plan by 2014.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (Aug. 16, 2011);

--'Rating Criteria for Airports' (Nov. 29, 2010).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648832

Rating Criteria for Airports

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=578745

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