Fitch Ratings has affirmed the 'A' rating on Wayne County Airport Authority, MI's (WCAA) outstanding senior and junior revenue bonds.

The authority has $1.8 billion and $112 million of senior and junior revenue debt outstanding, respectively. The Rating Outlook is Stable.

RATING ACTIONS

Entity / Debt

Rating

Prior

Wayne County Airport Authority (MI)

Wayne County Airport Authority (MI) /Airport Revenues - Subordinated Obligations/1 LT

LT

A

Affirmed

A

Wayne County Airport Authority (MI) /Airport Revenues/1 LT

LT

A

Affirmed

A

Page

of 1

VIEW ADDITIONAL RATING DETAILS

RATING RATIONALE

The 'A' rating reflects WCAA's continued favorable operating and financial long-term profile anchored by its central geographic location, demonstrated essentiality to Delta Air Lines' (BB+/Negative) global operations, and a fully residual long-term use and lease agreement extending through 2032.

In Fitch's view, the airport's debt service coverage ratio and leverage should continue to remain stable, while airline cost metrics return to lower levels as Detroit Metropolitan Wayne County Airport's (DTW) passenger traffic recovers from the coronavirus pandemic. The airport maintains a sizable overall enplanement base that exceeded 18 million in FY 2019, prior to the coronavirus outbreak, with elevated concentration risks to Delta. While the authority utilizes two liens of long-term debt, the junior lien represents a small proportion to the debt structure, effectively leading to key credit metrics including leverage and coverage that are at very comparable levels, thus warranting the same ratings.

KEY RATING DRIVERS

Revenue Risk - Volume - High Midrange

Fitch has revised its assessment of Revenue Risk (Volume) to 'High Midrange' from 'Midrange' following the publication of its Transportation Infrastructure Rating Criteria, which assesses volume risk on a five-point scale.

Dependence on Delta Hub

The airport enjoys limited competition within the metropolitan area, which provides the airport with a catchment population of around six million and a sizable overall enplanement base that exceeded 18 million pre-pandemic. DTW is heavily reliant on Delta, which maintains a significant market share with 74% of airport enplanements. The traffic profile is 36.7% connecting, leaving DTW susceptible to realignment of Delta's hubbing service, although there is a strong track record of Delta's commitment to this facility. The revision to 'High Midrange' from 'Midrange' is due partly to the airport's service offering to over 120 domestic and international locations. Additionally, the airport has worked to expand service offerings with other airlines, including new seasonal and international options. Domestic O&D enplaned passengers experienced a compound growth rate of 11.2% between 2010 and 2019.

Revenue Risk - Price - Stronger

Strong Cost Recovery Structure

Airline use and lease agreements are 100% residual, with signatory airlines committed to cover all airport costs until expiration of the agreements in 2032. Cost per enplanement (CPE) jumped to $20.71 in FY 2020 but decreased to $15.02 in FY 2021. CPE is expected to recover to moderate levels for a hub airport, averaging just under $11 from FY 2022 to 2026.

Infrastructure Dev. & Renewal - Stronger

Modest Capital Needs

The airport comprises of two terminals, both of which are less than 25 years old. The airport's upcoming investment plans are primarily focused on airfield work, but also include power plant lines, parking deck and parking lot rehabilitation and repairs and other airport facility projections. The airport has considerable flexibility in timing for implementation for their well-defined long-term capital planning needs. The FY 2023-2027 capital program is manageably sized at $1.2 billion and is expected to be funded from a combination of bond proceeds, PFCs, grants and future borrowing.

Debt Structure - Senior - Stronger

Debt Structure - Subordinated - Midrange

The senior debt structure assessment reflects the airport's reduction in unhedged variable rate debt in recent years. WCAA employs a two-lien debt structure, with 94% outstanding at the senior lien level. WCAA's division of debt is not expected to materially change even with future borrowings. Around 89% of WCAA's $1.9 billion in long-term debt is fixed-rate with 11% paying an unhedged variable rate and subject to interest cost risk. Currently, the profile is roughly flat, reaching the maximum annual debt service (MADS) in FY 2028, then declines. All reserves are cash-funded and covenants are typical for a large hub airport.

Financial Profile

WCAA's financial performance has been stable in recent years as it has been able to pass along costs to carriers through residual airline agreements. Current overall leverage is relatively high at 8.2x, but is expected to decline over the next five years to under 6.6x in Fitch's rating case. Unrestricted reserves sit at 230 days cash on hand, while FY 2021 indenture-based debt service coverage ratio (DSCR) is 1.4x on the senior lien and 1.3x on the junior lien. Excluding the benefit of a sizable revenue fund balance, the Fitch-calculated DSCR is 1.13x on the senior lien and 1.06x on the junior lien.

As a residual Airport, should economic conditions create a reduction in revenue resulting in a deficit between revenues and expenses, the Authority has the ability to increase rates charged to all Airlines up to the amount of the deficit. Conversely, should revenues exceed expenses, the excess is returned to the Airlines, justifying the 'A' rating.

PEER GROUP

WCAA's peers include Minneapolis St. Paul (AA-/A+: senior/sub) and Philadelphia (A). Both airports serve as major hubs, with Delta representing 72% of traffic at Minneapolis, and American representing 40% of Philadelphia's traffic. Philadelphia and WCAA have similar capital plan sizes of around $1.2 billion, whereas Minneapolis is significantly larger at around $2.7 billion. WCAA's forecasted CPE between $9-$12 is greater than that of Minneapolis ($8-$10), yet smaller than that of Philadelphia ($12-$13). Similarly, WCAA's leverage (total of 8.2x in 2021) exceed that of Minneapolis (7.5x), yet is notably smaller than Philadelphia (12.3x).

Minneapolis's lower leverage is reflected by the higher rating. Philadelphia and WCAA maintain the same rating despite the leverage variance, due in part to Philadelphia funding a majority their capital plan with proceeds from existing bonds or additional long-term debt.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A marked shift to the traffic base influenced largely by Delta and its hubbing operations;

Increase in airport borrowings and/or operating costs resulting in higher leverage levels sustained above 10x in Fitch's rating case.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Rating case leverage falling below 7x on a sustained basis, including future borrowings for capital needs.

Best/Worst Case Rating Scenario

International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

CREDIT UPDATE

Through November 2022, the airport has totaled 12.9 million enplanements, representing a 21% increase over YTD FY2021, and 77% of YTD FY2019 enplanements, lagging behind the national average post-pandemic enplanement recovery of over 90%. Enplanements increased 67.7% in FY 2021, compared with FY 2020, to 11.8 million. The historical five-year CAGR prior to the pandemic, ending FY 2019, was 2.3%.

With 74% of enplanements, Delta remains the vastly dominant carrier, with increasing share over the past few years. Spirit is now the second-leading carrier, holding 10% of the market.

The proposed 2023-2027 CIP totals $1.15 billion and is largely directed toward airfield projects, including runway and taxiway rehabilitation. $150.8 million of the series 2021 bonds A and B proceeds are being used for reconstruction and rehabilitation of airfield pavement, power plant lines, parking deck/parking lot rehabilitation and repairs and other airport facility projections. The CIP will also be funded with cash, PFCs and grants.

FINANCIAL ANALYSIS

Due to a favorable increase in non-airline revenues, airline revenues YTD through October totaled $131.4 million, reflecting the airport's ability to reduce airline rates and charges by nearly 12%. Airline revenues increased 22% in FY 2021, (FY ended Dec. 31) to $177 million. Pre-pandemic five-year CAGR through FY 2019 stood at 1.1%. Non-airline revenues are up 40.8% yoy through October at $173.9 million. Non-airline revenues grew 49% to $158.3 million in FY 2021, excluding the CARES Act and CRRSA Act. These increases in FY 2021 are largely due to an increase in parking and car rental. Including the addition federal assistance grants through the CARES Act and CRRSA Act, non-airline revenue totaled $197.2 million.

Operating expenses YTD 2022 through October are 9.7% higher compared with 2021 at $203.2 million. Expenses increased 8.0% in FY 2021 due to enplanement recovery from the prior year. The pre-pandemic historical five-year CAGR through FY 2019 was 5.9%, largely driven by hotel expenses starting to be included in total expenses in 2016.

The authority is strategically using federal grants to offset a portion of the increases to terminal rates and the activity fee given the residual airline agreements. In FY 2020, the airport received $141.9 million in CARES Act funds and utilized $113.1 million of it. In FY 2021, the airport utilized the remaining CARES act grant of $28.8 million, and $15.9 million of a total allocation of $27.6 million in CRRSA funding. The airport plans to use the remaining $11.7 million in CRRSA funds in FY2022. Additionally, ARPA will provide approximately $111.7 million in grant funds for the airport and approximately $15.5 million for concessionaire relief, scheduled to be utilized in FY2022 and beyond.

Total leverage in 2021 was 8.2x and is expected to decline under Fitch's cases. 2021 indenture-based DSCR was 1.4x on the senior lien and 1.3x on all debt. Fitch figures were 1.13x and 1.06x, respectively, which reflects Fitch's exclusion of carryover revenue fund balance. As a residual airport, DTW has a senior-basis 'floor' of no less than 1.25x on an indenture basis following all required deposits, but must make an annual settlement to the airlines in the event it exceeds this figure. Cost per enplanement was $15.02 in 2021, down from $20.71 in 2020. A CPE of $11.19 has been projected for FY2022, though management expects to achieve a lower level. DCOH has consistently remained above 200 (not inclusive of LOC).

Fitch Cases

Fitch has developed two scenarios that serve as the basis for this review. The cases are labeled as rating case and the downside case given that WCAA has recovered to just 77% of enplanements from FY 2019 levels. Fitch includes future federal funding in FY 2022 through 2025 in projected nonairline revenues. Due to the residual nature of the use and lease agreement, DSCR is the same annually for both the rating and downside cases.

Fitch's rating case assumes, relative to fiscal 2019, a 77% enplanement recovery in 2022 followed by further recovery to 85% in 2023, and 100% in fiscal 2024. The case further assumes additional borrowing of $200 million in 2023 anticipated under the current capital program.

Under this scenario, Fitch-calculated senior coverage averages 1.3x (1.5x on an indenture basis) and all-in coverage averages 1.2x (1.4x on an indenture basis). All-in leverage under the rating case peaks at 7.1x in fiscal 2023 but falls to 5.7x by the end of the forecast period. Given projected increases in airline revenue, projected CPE increases to over $12 in FY 2023, yet averages under $11 through the forecast period, which is consistent with historical norms.

Fitch's downside case considers a slower pace of enplanement recovery, reaching fiscal 2019 levels in 2025. Similar to the rating case, leverage under this scenario rises to approximately 7.1x in FY 2023 before delevering to 5.7x in 2026. Senior coverage averages 1.3x (1.5x on an indenture basis) and all-in coverage averages 1.2x (1.4x on an indenture basis). Given projected increases in airline revenue, projected CPE increases to over $13 in FY 2023, yet moderates between $9.50-$11.20 in the latter years of the forecast period.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

Additional information is available on www.fitchratings.com

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