News Column

Fitch Rates Metropolitan Washington Airports Authority $542MM Revs 'AA-'

May 22, 2014

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'AA-' rating to the Metropolitan Washington Airports Authority's (the authority) approximately $542 million series 2014A airport system revenue and refunding bonds. Fitch has also affirmed the authority's approximately $5 billion outstanding airport revenues bonds at 'AA-'. The Rating Outlook is Stable.

The rating reflects the authority's very strong credit attributes. Among them include:

--The inherent resilience of its complementary dual-large hub airport system serving the strong and growing DC air service area;

--Well-balanced system-wide carrier mix;

--Largely complete capital program that can serve current and projected demands; and

--Stable financial profile.

Some concerns remain given the large debt burden and rising airline cost profile, particularly at Dulles International airport. Additionally, there remains uncertainty over potential revisions to airline rate setting when the expiring airline use agreement is replaced later this year.

KEY RATING DRIVERS

Strong Market Position of Dual-Airport System: The authority's large overall traffic base is anchored by the underlying economic strength of the DC region and complementary service offerings at Dulles (IAD) and National (DCA) airports, which together provide a diverse offering of domestic and international services. Following the 2008-2009 system-wide recessionary losses, enplanement declines at IAD have been offset by solid growth at DCA and the system has recorded slight growth in each year since. (Revenue Risk-Volume: Stronger)

Favorable Rate Setting Approach: The in-place airline agreement provides for a manageable cost structure considering the combined domestic and international profile, enhanced by an extraordinary coverage protection trigger on airline rates. Similar provisions are expected to be rolled into a new agreement to be implemented once the current agreement expires in September 2014. While costs per enplanement (CPE) at DCA have been stable in recent years at approximately $13-$14, airline costs have risen dramatically to over $26 at IAD to support a substantial rise in capital investment costs. Nevertheless, Fitch believes the relatively high airline charges at Dulles are reasonable given the high proportion of international traffic at the airport. (Revenue Risk-Price: Stronger)

Major Capital Needs Addressed: The authority's $5 billion CCP program is nearing completion and requires only minimal additional borrowings in the near term. Major upgrades and renovations have been completed at both airports, resulting in modern facilities and an overall good condition of infrastructure. (Infrastructure Development/ Renewal: Stronger)

Largely Conservative Capital Structure: Approximately 81% of the authority's debt is in conventional fixed rate mode, with another 12% of its obligations synthetically fixed through swap agreements. As a result, only 7% of the authority's debt profile is unhedged variable rate debt. (Debt Structure: Stronger)

Stable Finances but Elevated Leverage Position: The authority's borrowing program results in an elevated leverage position as indicated by the debt to enplanement of $235 ($336 on an O&D basis) and 9.9x net debt/cashflow available for debt service (CFADS) metrics. The debt service coverage ratio (DSCR) has trended down to around 1.4x during fiscal 2013 and is expected to remain largely unchanged in future years. That said, the liquidity position remains favorable at 596 days cash on hand.

RATING SENSITIVITIES

--Significant or unanticipated changes in the airport's current traffic base or shifts in commitments from leading carriers would reflect weakened credit quality.

--Failure of the authority to negotiate a strong new use agreement with airlines that provides for sufficiently robust cost recovery mechanisms at both airports similar to those in the current agreement may pressure the rating.

--Additional leveraging above current expectations due to revisions in the size and scope of the current capital program or for a new capital program may pressure the rating.

--Operational or financial conditions that prevent a downward trend of net debt/CFADS to the 7x-8x range over the next few years could be a cause for rating concern.

--Inability of the authority to manage the airport system cost profile, putting pressure on debt coverage metrics or leading to CPE rising above expected levels, could affect the credit profile.

SECURITY

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

TRANSACTION SUMMARY

The series 2014A fixed-rate bonds are scheduled to price on May 29th. Approximately $106 million of the $542 million bonds being issued are for new money purposes. The balance will refinance outstanding authority bonds for debt service savings expected to exceed $50 million on a net present value basis without extending the current maturity profile.

The authority's two airports performed relatively well in terms of enplanement activity during the 2008-2010 recession, supported by the economic strength of its catchment area and the complementary nature of the dual-airport system structure. System-wide enplanements increased by a modest 0.5% in 2013, broadly consistent with growth of 0.4% in 2012.

The number of enplaned passengers at DCA increased by 4.2% in 2013 but was offset by a traffic reduction at IAD resulting from the net effect of lower domestic enplanements combined with a slightly higher level of international traffic. In first quarter-2014, system-wide passenger traffic was down 3.6% over the same period in 2013. This was largely the result of harsh winter weather, yet management forecasts traffic to be more or less flat for the full year.

The authority generated a 1.40x DSCR in 2013 - slightly above the authority's previous estimate of 1.34x and coverage of 1.35x for 2012. Fitch's calculation of DSCR, which treats passenger facility charges (PFC) as revenues rather than debt service offsets, was 1.36x. The 2013 financial results demonstrate a continuation of the recent trend of lower coverage levels when compared to historical levels.

As detailed in current forecasts, the authority's management case DSCR will remain around 1.40x. This forecast reflected assumptions of a 1.6% traffic compound annual growth rate (CAGR) between 2013 and 2018 and management of expenses to a 2.8% CAGR over the same period. If PFCs are treated as revenues instead of being used to offset annual debt service, coverage levels are in the 1.33x-1.38x range through 2018.

Fitch also developed a rating case scenario under which system-wide enplanements decline by 9% in 2015 - in line with the aggregate loss experienced in the 2006-2009 timeframe - followed by recovery in the form of 2%-3% annual growth rates through 2018. Revenues and expenses were adjusted to reflect weaker performance in terms of enplanements, such that the 2013-2018 CAGRs for operating revenues before transfers and operating expenses were 2.7% and 2.9%, respectively. As a result, DSCR levels in this scenario drop to 1.29x, indicating less financial flexibility; the impact on CPE is an increase over the management case of approximately $3 at each airport by 2018.

The airport's 2013 CPEs were largely in-line with previous forecasts. The authority reported a $26.48 CPE at IAD in 2013, nearly $2 below forecast, however CPE is still expected to exceed $28.00 in 2014 and remain near or above $30.00 through 2018. CPE levels at DCA on the other hand rose to $14.08, exceeding the $12.27 forecast, however management indicated this reflected several one-time charges to build internal liquidity.

Therefore, CPE at DCA is actually forecast to drop and remain in the $12-$14 range through 2018. Fitch notes however that should enplanements fall short of forecast or management not be able to contain expenses, CPE could rise to levels inconsistent with the current rating, especially at Dulles International.

The authority's 2001-2016 capital construction plan is nearing completion. The total plan is estimated at approximately $5 billion. Of that amount, 62% was funded with previously issued bonds, 24% with PFCs, 10% from state and federal grants. The final 4% will come from a combination of the series 2014A bonds and an anticipated 2015 new money issuance of approximately $100 million. Fitch recognizes the quality of both airports following the completion of the CCP and the minimal additional borrowing needs in the near- to medium-term.

As a result of the significant level of past borrowings applied to the capital program, Fitch views the current 9.9x net debt to CFADS to be somewhat elevated for an 'AA' category airport. However, Fitch notes that this metric is expected to evolve to a more moderate 8x level over the next few years, even when factoring in the expected additional debt issuance in 2015. Operational or financial conditions that prevent a downward trend of this leverage metric would be a cause for rating concern.

The current airline use and lease agreement has provided for relatively stable financial performance over the last 25 years. Fitch conducted this review under the assumption that a broadly similar framework would remain in place through the forecast period and will monitor the situation for any credit relevant developments.

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

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (July 12, 2012);

--'Rating Criteria for Airports' (Dec. 13, 2013).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Rating Criteria for Airports

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725296

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=831354

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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 THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Jeffrey Lack

Associate Director

+1-312-368-3171

Fitch Ratings, Inc.

70 W. Madison St.

Chicago, IL 60602

or

Secondary Analyst

Seth Lehman

Senior Director

+1-212-908-0508

or

Committee Chairperson

Saavan Gatfield

Senior Director

+1-212-908-0542

or

Media Relations

Elizabeth Fogerty, +1-212-908-0526

elizabeth.fogerty@fitchratings.com


Source: Fitch Ratings


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