Fitch Ratings has assigned an 'A' rating to $211.9 million of series 2021A special transportation project refunding revenue bonds (Baltimore/Washington International Thurgood Marshall Airport) issued by the Maryland Department of Transportation (MDOT) on behalf of the Maryland Aviation Administration (MAA).

The Rating Outlook is Negative.

RATING RATIONALE

The rating reflects Baltimore/Washington International Thurgood Marshall Airport's (BWI Marshall) strong position in the competitive Baltimore-Washington D.C. market as well as its importance to Southwest Airlines (BBB+/Negative) as one of its main hubs. The rating also considers the history of support from MDOT to MAA and the gross revenue pledge on the proposed bonds, which Fitch views positively. MDOT and MAA have historically worked closely in identifying operating and maintenance needs of the airport.

Future financial metrics are expected to provide a stable net debt service coverage (DSCR) profile in the 1.7x range. Given additional planned bond issuances in 2021-2022 under the current plan of finance and the lack of cash balances, due to the flowback of surplus revenues to the State Transportation Trust Fund (TTF), leverage will measurably rise above indicative guidance for 'A' category airports in the near term before devolving and stabilizing around 4x-5x by 2025. However, the gross pledge and support from the TTF serve as mitigants to the lack of airport-level liquidity.

The Negative Outlook reflects the substantial adverse impact on operating performance due to the coronavirus and related containment measures, along with uncertainty around the timing and magnitude of recovery. An extended period of activity weakness in aviation activity and related revenues could lead to elevated risks resulting in a lower rating.

The outbreak of coronavirus and related government containment measures worldwide create an uncertain global environment for the airport sector. Material changes in revenue and cost profile are occurring across the airport sector and will continue to evolve as economic activity and government restrictions respond to the ongoing situation. Fitch's ratings are forward-looking in nature, and Fitch will monitor developments in the sector as a result of the virus outbreak as it relates to severity and duration and incorporate rating and downside case qualitative and quantitative inputs based on expectations for future performance and assessment of key risks.

KEY RATING DRIVERS

Stable, Concentrated Enplanement Base - Revenue Risk (Volume): Midrange

BWI Marshall is a large-hub airport with an enplanement base of 10 million in fiscal 2020 that has historically demonstrated a relatively strong resilience to economic downturns, despite some headwinds from the 737-Max grounding and the coronavirus pandemic. The large presence of Southwest and other low-cost carriers coupled with the regional economic strength of the Baltimore-Washington D.C. area continues to anchor BWI's traffic base.

While BWI's carrier concentration remains high with Southwest, comprising nearly two thirds of total enplanements, this elevated level of carrier exposure is mitigated by the importance of BWI Marshall to its national network, as well as an origination and destination (O&D) base at 73% of total enplanements in fiscal 2020. Coronavirus introduces a degree of uncertainty, though BWI's volume trends have largely followed that of national trends.

Hybrid Agreement, Moderate CPE - Revenue Risk (Price): Midrange

BWI Marshall operates under a hybrid airline use and lease agreement (AUL) through fiscal 2026, which Fitch expects to provide a sound cost recovery methodology given the operating and debt cost profile of the airport. The AUL provides for the calculation of terminal rentals under a commercial compensatory rate-making methodology, with landing fees under residual rate-making methodology.

Extraordinary coverage provision protects the airport in periods of severe underperformance to ensure adherence to the 1.25x rate covenant for the revenue bonds (after taking into account 1.0x coverage on other obligations) on a net basis. The CPE is moderate at $12.55 for fiscal 2020 and is expected to remain competitive under management's projections.

Moderate Capital Plan - Infrastructure Development & Renewal: Stronger

Fitch views the airport's six-year capital program of approximately $843.1 million as moderate in overall size, with funding provided from the TTF, bond proceeds, federal grants, passenger facility charges (PFCs), and customer facility charges (CFCs). The Concourse A/B Connector and Baggage Handling System project will predominantly be funded with new money bonds planned to be issued in 2021 and 2022. The project will accommodate five relocated gates from the existing building, increase concessions space and provide a direct connection between the existing A and B Concourses.

Remaining projects in the capital program include system preservation projects as well as replacement of the shuttle bus fleet and taxiway reconstruction.

Amortizing Debt with Adequate Structural Features - Debt Structure: Stronger

Proposed debt is fixed rate and fully amortizing with standard structural features. The series 2021A refunding bonds will be issued under a newly created revenue bond security structure with a gross pledge of airport revenues. The rate covenant and additional bonds test triggers are based on net pledged revenues and set at a 1.25x requirement for the revenue bonds and 1.00x requirement for total obligations, which is standard for airport credits.

The refunding bonds and planned 2021-2022 new money bonds are expected to be supported by dedicated cash-funded debt service reserve funds (DSRF) or a surety based on a three-pronged test. Fitch notes that aside from these DSRFs, BWI Marshall maintains no cash balances due to the flowback of surplus revenues to the TTF after the payment of revenue bond debt service. However, MDOT's history of support to BWI Marshall and the MAA for capital improvements and operating expenses via the TTF mitigates concern about lack of airport-level liquidity.

Financial Summary

BWI's financial profile and metrics are expected to remain stable through the forecast period, even with the planned debt issuances. Unlike most airport credits, BWI Marshall does not retain unencumbered cash reserves and relies on appropriation funds through the state's TTF. The liquidity framework prevents BWI Marshall from establishing a strong days cash-on-hand position and leaves its initial leverage position at a higher level given the projected gross debt position.

Inclusive of the proposed refunding transaction and planned 2021 and 2022 new money issuances, rating case leverage is forecast to be elevated in the near term but stabilize at 4x-5x by 2025. Fitch-calculated coverage, which is calculated using net pledged revenues, will stabilize at 1.7x by 2025. Rating case CPE is projected remain reasonable for an airport of BWI's size and with BWI's capital needs, averaging $12 through the forecast period.

PEER GROUP

Fitch-rated peers include Chicago's Midway Airport (MDW; subordinate lien rated 'A'/Negative) and Dallas Love Field (DAL; 'A'/Negative). Both MDW and DAL serve comparably strong, metropolitan markets with a high level of Southwest concentration and face regional competition from larger, nearby airports. MDW's and DAL's residual frameworks provide for a greater share of cost recovery than BWI's hybrid AUL. However, MDW has higher leverage and DAL's future enplanement growth is limited by gate constraints. Both peers also have a greater than 90% concentration of Southwest traffic relative to BWI Marshall, which has a 66% Southwest share.

RATING SENSITIVITIES

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

A return to a Stable Outlook may be warranted in the near term should Fitch see sustained recovery in traffic and revenues due to the easing of the pandemic, resulting in normal air traffic patterns and credit metrics in line with indicative guidance.

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

Underperformance in traffic recovery and/or borrowings beyond those currently contemplated leading to sustained leverage at or above the 7x range.

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].

TRANSACTION SUMMARY

MDOT plans to issue approximately $211.9 million in special transportation project refunding revenue bonds, series 2021A. The proceeds will be used to refund the outstanding Maryland Transportation Authority airport parking revenue refunding bonds series 2012A&B and the Maryland Economic Development Corporation lease revenue refunding bonds series 2012. The refunding of these two series and the creation of the new special transportation project revenue bonds security structure is expected to contribute to the streamlining of MAA's overall debt structure and provide a gross revenue pledge. The series 2021A refunding bonds are fixed rate with final maturity in 2030.

CREDIT UPDATE

Starting in March 2020, BWI Marshall experienced a significant decline in passenger volumes as air travel was sharply curtailed by the effects of the coronavirus. Enplanements in fiscal 2020 (FYE June 30) were down 25% when compared to the same period in fiscal 2019; however, monthly declines ranged from 54% to 96%. Year-to-date enplanements through four months of fiscal 2021 are currently down 62%, which is in line with observed national trends. BWI's enplanement base is recovering at a faster pace than other airports in the Baltimore-Washington region.

While the coronavirus pandemic represents a unique shock to the air travel sector, Fitch continues to view BWI Marshall as an airport with an important role in both national aviation and Southwest's strategy and route network. Although Southwest has a majority market share at 66%, this exposure is somewhat mitigated by the airline's historical commitment to the airport, with BWI Marshall accounting for 5% of the total scheduled departing seats in Southwest's system in 2019. Fitch further notes that the high proportion of O&D traffic at the airport (over 70% in fiscal 2020) provides a strong traffic base at BWI Marshall and somewhat offsets the carrier concentration risk.

In light of the pandemic, management took many measures to protect the airport's operational and financial viability including deferring terminal rents through June 1, 2020 with repayment in fiscal 2021 and suspending the minimum annual guarantees for rental car agreements, terminal concessions and the fixed-base operator. BWI Marshall also received $87.6 million of federal assistance under the CARES Act, which helped to mitigate deferred and permanent revenue losses in fiscal 2020. The CARES funds were used to pay certain capital costs ($12.5 million), debt service requirements ($14.3 million), and operating expenses ($60.8 million) in fiscal 2020. The airport also applied $2.4 million in additional CARES funding that was received through the state's COVID-19 relief fund to cover expenses.

Operating Expenses are paid from the TTF as appropriated annually by the State General Assembly. MDOT and MAA have historically worked closely in identifying operating and maintenance needs of the airport. Due to ongoing cost containment efforts, operating expenses are projected to be lower than the appropriated $217 million for fiscal 2021. In the event of any unexpected operating expenses, MDOT may request a supplemental appropriation through the budget amendment process.

FINANCIAL ANALYSIS

Given the current economic environment due to the coronavirus, and the unlikeliness of a stable operating environment over the near term, Fitch has developed two scenarios that serve as the basis for this review. The cases are labeled as the 'Coronavirus Rating Case' and the 'Coronavirus Severe Downside Case'. The rating case and severe downside case both incorporate the concern that the economic impact of the health crisis will be deeper and more prolonged, and the resulting effects on the underlying economy will cause a less robust recovery that may extend beyond 2022. The differences for each case focus on the level and speed of the recovery starting in 2021 and through the next several years.

Fitch's rating case assumes, relative to fiscal 2019, a 55% enplanement decline in 2021 followed by recoveries reverting the losses to 25% and 15% in fiscal 2022 and 2023, respectively, and a 95% recovery by fiscal 2024. While non-aeronautical revenues are mostly fluctuating with passenger traffic, airline payments are driven by cost recovery terms under the airline agreements.

Near-term coverage metrics are distorted by low refunded debt service and pressures due to the coronavirus pandemic. Under this scenario, Fitch-calculated DSCR averages 3.6x and stabilizes at 1.7x by the end of the forecast period. Leverage remains elevated following the proposed refunding transaction and planned new money bond issuances in 2021-2022, but then migrates downward to 4x-5x by 2025.

Fitch's coronavirus severe downside case considers a maximum traffic reduction of 70% in fiscal 2021 followed by a slower pace of recovery through fiscal 2026. Under this scenario, near-term DSCR and leverage profile are weaker relative to the rating case and CPE levels would be modestly higher in each year; however, Fitch-calculated DSCR similarly stabilizes at 1.7x and leverage migrates down to 5x by the end of the forecast period.

SECURITY

The revenue bonds will be secured by Pledged Revenues, consisting of MAA operating revenue and investment income. Operating revenues include revenues from airline activities, parking revenues, concessions and rents and exclude CFC and PFC revenues.

DATE OF RELEVANT COMMITTEE

25 January 2021

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.

RATING ACTIONS

ENTITY/DEBT	RATING

Maryland Aviation Administration (MD) [Airports]

Maryland Aviation Administration (MD) /Airport Revenues/1 LT

LT	A 	New Rating

VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

(C) 2021 Electronic News Publishing, source ENP Newswire