Fitch Update: U.S. Airports, Attacks' Impact on PFC Debt.

Business Editors

NEW YORK--(BUSINESS WIRE)--Oct. 5, 2001

The unprecedented shock-loss in air traffic that U.S. airports have experienced since September 11 will have a disproportionately negative impact on passenger facility charge (PFC) stand-alone debt relative to strong general airport revenue bonds (GARBs). Since PFCs are solely a function of passenger traffic at airports, the decline in enplanements in the U.S. will have a direct impact on PFC cash flow collections. However, not all PFC bonds will be equally impacted, and certain stand- alone PFC deals will perform adequately.

This week, Fitch placed the PFC stand-alone debt of the Massachusetts Port Authority (rated `A') on Rating Watch Negative (October 3), the subordinate PFC debt of Chicago O'Hare (rated `A') on Rating Watch Negative (October 4) and Chicago O'Hare's senior debt's (`A+') rating outlook was changed to negative from stable (October 4). Further, on October 4, Fitch affirmed the PFC ratings for Broward County (`A'), Little Rock (AR) (`A-`), and the Port of Seattle (`A'), and on October 5, affirmed the PFC rating for New Orleans International Airport (`A-`).

Fitch's rating methodology for PFC stand-alone debt cites enplanement volatility as the most significant credit risk in these transactions. Therefore, Fitch incorporates various stress case cash flow scenarios into its analysis to ensure adequate debt service coverage during periods of passenger traffic volatility. The stress cases normally include a shock-loss of air traffic or a more gradual decline of traffic over a multi-year period. The attacks on September 11, fear of further terrorism, and the question as to what actual form the U.S.'s `war against terrorism' will take, have amplified an already slowing leisure and business travel market. Although its only been slightly over three weeks since the events, the drop off in U.S. air traffic thus far is unprecedented, and the annual decrease in traffic may surpass what Fitch had previously considered to be an aggressive stress case. However, direct feedback from Fitch-rated airports indicates increasing traffic levels since the opening of the airports following the attacks.

Certain stand-alone PFC deals will perform adequately even in a dramatically decreased passenger environment. Airports have the ability to apply previously collected yet unrestricted PFC moneys to debt service. Airports generally use excess PFCs as pay-as-you-go funding of capital projects, but in the face of decreased passenger volume many airports may postpone future projects until demand can be adequately identified. Fitch has realized that some airports have generated significantly higher PFC revenues than projected, primarily due to increased passenger traffic in the late 1990's and/or the ability of airports to increased the PFC to $4.50 per passenger from the previous $3.00 (as allowed under federal legislation AIR- 21). In addition, PFC debt has been structured to provide a certain amount of financial cushion through conservative leveraging with bonds being sized to pass certain stress case scenarios. Solid PFC transactions also include stringent additional bonds tests, adequate reserve fund levels, and other legal provisions.

In addition to enplanement risk, PFC debt is also subject to bankruptcy risk of the airport's tenant airlines, termination of the PFC program in general by Congress, and termination of PFC collection authority at a particular airport. Termination of the PFC program by Congress is not likely and although termination risk of PFC collection authority at certain airports is possible, to date, no Fitch-rated airport has had its PFC authorization terminated.

Given the currently financial weakened airline industry, the risk of airports not collecting PFCs from bankrupt airlines has increased. The risk is lessened at airports with diverse airline market share concentration. In addition to appropriately sized reserve funds, PFC stand- alone transactions are sized to accommodate a potential loss in PFC collections as a result of certain airlines' non-payment. Further, airports' exposure to PFCs in an airline bankruptcy scenario is generally limited to two months - the time frame in which airlines collect and then must remit PFC revenue to airports.

As a result of the increased risks for PFCs relative to GARBs, PFC ratings are notched off the airport's GARB rating - generally one or two notches lower.

On September 25, the nation's airports, through the Airports Council International (ACI), testified before the Subcommittee on Aviation, Committee on Transportation and Infrastructure for the U.S. House of Representatives. ACI presented various ideas to Congress, which included proposals to increase airports' financial flexibility and expanded allowable uses of PFCs. Fitch, will continue to monitor these discussions and any resultant developments.

Fitch has underlying ratings on approximately $42 billion of debt for 64 U.S. airports, including 28 of the 30 largest airports in the U.S.

For additional commentary on the impact of the September 11 events on U.S. airports, please see Fitch press release, `U.S. Airports, Impact of Terrorist Attacks', dated September 20 and `Fitch Update: U.S. Airports in Face of Air Traffic Decline' dated September 27, available on Fitch's web site at `www.fitchratings.com'.