Fitch Rates Wayne County Airport Auth, MI's $11.6MM Airport Revs 'A'.

NEW YORK -- Fitch Ratings assigns an 'A' rating to Wayne County Airport Authority (the authority), Michigan's approximately $11.6 million airport revenue bonds, series 2004 (subject to AMT). The Rating Outlook is Stable. The bonds are scheduled for negotiated sale by Goldman Sachs and Co. on Oct. 22, 2004. Dated as of delivery, the bonds will be issued as auction-rate securities with a final maturity date of Dec. 1, 2034. Proceeds will refinance the authority's outstanding series 1994 revenue bonds and complete the hedging and refinancing program initiated last year. The variable interest rate on the series 2004 bonds will be converted to a synthetic fixed-rate through a forward swap agreement executed last year with Goldman Sachs Capital Markets. Fitch also affirms the 'A' rating on the county's $1.7 billion of outstanding senior lien airport revenue bonds and the 'A-' rating on the authority's $107 million of outstanding junior lien debt.

The 'A' rating reflects the Detroit Metropolitan Wayne County Airport's (Metro, airport) consistently sound financial operations, competitive airline operating costs, and the growing demand for air carrier service. Credit concerns include the significant market share held by Northwest Airlines (Northwest, senior unsecured debt rated 'B' by Fitch), which operates a major hub at Metro, exposing the airport to potential fluctuations in passenger levels related to the scheduling decisions of the airline.

A total of 22 airlines currently serve the airport, led by Northwest, which utilizes Metro as its largest system hub. Northwest and its regional affiliates, Mesaba Airlines and Pinnacle Airlines, accounted for approximately 77% of the airport's enplanements for the fiscal year ended Sept. 30, 2003. Spirit Airlines accounted for the second largest amount of passengers during fiscal 2003, at 5.4% of total enplanements, followed by American Airlines at 3.1%, and Southwest Airlines at 2.5%.

Reflecting the strength of both the local and national economies, as well as Metro's status as a key Northwest hub, enplanements at the airport increased 4%, on average, annually from fiscal years 1993-2003. This period includes the sharp 13.1% drop in passenger demand that occurred in fiscal years 2001 and 2002, which reflected the national economic recession and the aftermath of the events of Sept. 11. As the economy strengthened over the past year, the airport recorded a 6% increase in enplanements for fiscal 2003. The 16.3 million passengers enplaned at the airport that year were on track with the 16.2 million passengers forecasted in the 2003 feasibility study and ranked the facility as the seventh busiest in the nation. The airport consultant's feasibility study forecasts passenger activity to grow at a 3.2% average annual rate, to 20.2 million enplanements, through 2010. Fitch believes this forecast is reasonable based on the airport's consistent enplanement history.

The net revenues generated from the operations of Metro secure the bonds. Net operating revenues provided 1.34 times (x) coverage of annual debt service. Based on its projection of passenger activity at the airport through 2010 and incorporating the costs associated with the airport's capital program, the airport consultant estimates the cost per enplaned passenger will peak at $8.12 in operating 2008, while debt service coverage exceeds the airports 1.25x rate covenant. Metro's cost per enplaned passenger equaled $7.12 in fiscal 2003, which was slightly higher than the estimated $6.33 median for other Fitch-rated large hub airports.

The authority initiated its hedging program in December by entering into a series of current interest rate swaps and a forward swap (the series 2004 bonds) with Goldman Sachs Capital Markets as the counterparty, which are expected to reduce the authority's future debt service by $10.2 million. However, the hedging program does expose the authority to several risks that may affect its long-term credit rating, including termination risk and basis risk. Fitch believes that the authority has taken prudent steps to mitigate termination risk by obtaining termination insurance and including strong legal protections against a counterparty-initiated termination. However, the authority is exposed to basis risk, which arises from its use of a fixed percentage of the taxable London Interbank Offered Rate (LIBOR) as the index for the swaps, as opposed to the tax-exempt Bond Market Association (BMA) index. While the BMA index usually trades at a stable level relative to LIBOR, should this relationship vary due to market conditions, the payments received by the authority under the swap agreements may not match the payments due on the variable-rate bonds and result in higher overall debt service costs for the authority.

The airport's current $709 million capital program includes the reconstruction of the north terminal complex, an expansion of the McNamara Terminal, and various other infrastructure improvements. The airport plans to finance the remaining elements of the capital program through a mix of federal grants, passenger facility charge revenues, airport revenues, and approximately $455 million of additional bonds.