Rating Action: Moody's upgrades to A1 Wayne County Airport Authority, MI's senior lien revenue bonds, junior lien revenue bonds to A2; outlook is stable

New York, February 25, 2020 -- Moody's Investors Service has upgraded Wayne County Airport Authority, MI's (WCAA or authority) $1.6 billion outstanding senior lien revenue bonds to A1 from A2. Simultaneously, Moody's has upgraded the $130.3 million outstanding junior lien revenue bonds to A2 from A3. The outlook is stable.

RATINGS RATIONALE

The ratings upgrades reflect the continued growth in origin and destination (O&D) traffic at Detroit Metropolitan Wayne County Airport (DTW or airport). Growing O&D enplanements are primarily the result of the stabilization of economy in the greater Detroit, MI (Ba3 positive) metro area, which incorporates six counties in total including Wayne County, MI (Baa1 stable), Oakland County, MI (Aaa stable) and Macomb County, MI (Aa1 stable). O&D enplanements reached a record of 10.1 million in fiscal 2019 and have increased in nine of the past ten fiscal years since fiscal 2010. Through the last three months of 2019, total enplanements are up 5.6% versus the last three months of 2018 and reached 18.3 million for the full calendar year. While persistent out-migration, Detroit's fiscal challenges and economic concentration in automobile manufacturing somewhat cloud the Detroit-Warren-Ann Arbor combined statistical area's (CSA) longer-term economic outlook, demand for air travel in the sizable CSA of 5.3 million remains strong. Moody's expects O&D enplanements to grow at or above the gross metro product growth rate and in line with national trends for large hubs in the absence of a broad economic recession and if inflation-adjusted average air fares stay at their currently low levels.

O&D enplanement growth is complemented by stable connecting traffic provided by Delta Air Lines, Inc.'s (Delta) (senior unsecured, Baa3 positive) hub operations at DTW. Connecting enplanements have been steady around 8.0 million over the last few fiscal years. Delta has maintained DTW's status as the third largest airport as measured by total enplanements in its network, only behind Atlanta and Minneapolis, despite the airline's focus on building out its operations at coastal airports like Seattle-Tacoma and Boston-Logan. Additionally, Delta has stated that DTW has been and will remain a key part of its domestic and international route network because of its geographically well-positioned market and low and stable cost to airlines around $10 per enplanement.

The upgrade also considers the authority's solid financial position. The fully residual airline use and lease agreement extends through 2032, and ensures full cost recovery of all operating expenses and debt service on a timely basis. Steady debt amortization and O&D enplanement growth have resulted in declining leverage. Leverage, as measured by adjusted debt per O&D enplanement, reached $214 at the end of fiscal 2019 from over $300 in fiscal 2010, when the North Terminal opened two years earlier and Delta officially merged with Northwest Airlines. The authority's 2020-2024 capital improvement program totals approximately $615 million, a modest figure given the size of the airport. The capital plan compares favorably to other A-rated large hub airports. WCAA plans to issue approximately $200 million, or roughly $20 per O&D enplanement, in 2021 to partially fund capital projects. Other funding sources include previously issued bond proceeds, grants, passenger facility charges and future bond proceeds, although the ultimate quantum and timing of any future issuance besides the aforementioned $200 million in 2021 is uncertain at this time and will need to be approved by the weighted majority of signatory airlines. The upgrade additionally reflects the cost advantage Delta will have for connecting traffic above United and American at Chicago-O'Hare, where airport-issued projections anticipate airline cost per enplanement (CPE) will exceed $40 by the end of the decade. DTW will be well below that figure absent unanticipated capital expansion plans.

Finally, flat debt service requirements over the next several years, growing non-airline revenues and a demonstrated ability to control operating expense growth has allowed cost to airlines to remain competitive. Moody's expects this to be sustainable given the modest amount of debt in the 2020-2024 capital improvement program.

The ratings are constrained by persistent out-migration in the greater Detroit region that will limit the longer term growth trajectory of O&D enplanement levels at the airport. Additional rating considerations include the authority's relatively weak liquidity around 200 days cash on hand as of fiscal year end 2019, a relatively high percentage of connecting traffic that is subject to material shifts in airline strategy in the medium-to-long term, concentration risk in a single airline, albeit one with investment-grade credit quality for almost three-quarters of passengers, and less than a full 12-month indenture required debt service reserve fund. The rating additionally reflects the minor risk posed by exposure to interest rate risk on over $200 million variable rate bonds, but this risk is mitigated by automatic cost recovery of interest expense increases under the residual lease.

The A2 rating for the junior lien bonds reflects the subordinate position in the flow of funds relative to senior debt and the lower aggregate rate covenant of 1.10x versus 1.25x for the senior lien bonds.

RATING OUTLOOK

The stable outlook reflects Moody's expectation of continued modest enplanement growth and the fact that financial metrics will remain stable based on the strong cost recovery nature of the full residual airline use and lease agreement. Moody's additionally expects moderate future debt needs along with increases in non-airline revenues to keep future airline CPE relatively low.

FACTORS THAT COULD LEAD TO AN UPGRADE

    - Sustained growth in service area economy which generates increased demand for air service and accelerates enplanement growth more in line with the national environment

    - Stronger than historic liquidity levels, represented by days cash on hand above 600 days on a sustained basis

    - Leverage below $100 adjusted debt per O&D enplanement

FACTORS THAT COULD LEAD TO A DOWNGRADE

    - Significant reductions in enplanements, including a substantial reduction in hub activity by Delta

    - Economic weakness in the service area that materially affects demand for air travel and in turn results in O&D enplanement losses

    - Liquidity below 200 days cash on hand on a sustained basis

    - Leverage above $300 adjusted debt per O&D enplanement on a sustained basis

LEGAL SECURITY

Senior bonds are secured by a senior lien on net revenues of the authority. Junior lien bonds are secured by revenues derived by the authority from the operations of DTW (not Willow Run Airport) and available after net revenues have first been set aside as required to pay the principal and interest of senior lien bonds. The authority's legal structure includes rolling coverage and permits the use of Passenger Facility Charge (PFC) revenues for debt service.

The rolling coverage requirement provides for a 25% coverage factor on the senior lien debt service. Airport rates and charges can be reduced by the amount of PFC revenues that have already been received by the trustee. The airport benefits from a full residual airline use and lease agreement that allows it to fully recover its operating and capital costs from the airlines through increased landing fees.

PROFILE

Created by state statute in 2002 the authority is a separate legal entity from Wayne County though the county holds fee simple title to the primary airport real estate. The airport is located on 6,255 acres, 20 miles southwest of downtown Detroit. The airport has four parallel north-south runways and two cross-wind runways. The 2.4 million square foot, 105-gate McNamara Terminal opened in 2002 and is primarily occupied by Delta and other SkyTeam members. The 850,000 square foot 29-gate North Terminal serves all other carriers.

METHODOLOGY

The principal methodology used in these ratings was Publicly Managed Airports and Related Issuers published in March 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

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