Regional News

LAX Plots a Big Return to Market

SAN FRANCISCO — Los Angeles International Airport plans to sell $950 million of revenue bonds next month in its first major new-money issue in more than a decade.

Click to enlarge diagram.

The city-owned airport better known by its three-letter moniker, LAX plans to bring the bonds to market around July 23. The deal is the beginning of a $2.5 billion to $3 billion borrowing program that will finance the airport's first major investment in rebuilding since Los Angeles hosted the Summer Olympics in 1984.

"I'm ashamed" that tourists are greeted by a dingy LAX when they arrive to see the glamour of Hollywood, said City Council member Tony Cardenas, who championed the plan. "This should be the first of many investments, to the tune of billions of dollars."

Los Angeles World Airports, which owns LAX and three other airports in the region, has long planned to renovate its facilities. But the city department got bogged down in a $200 million planning process and opposition from neighbors. The airport is located in a densely developed neighborhood in Westchester on the Pacific Coast about 20 miles from downtown.

The upcoming bond issue will finance $500 million of renovations at the Tom Bradley International Terminal and $220 million for rebuilding its south airfield. The projects will prepare the airport for the arrival of huge airplanes like the new Airbus A380, a double-decker, wide-body jet larger than a Boeing 747. Australian airline Qantas this week said it would launch A380 service to LAX in October.

Those big planes are especially important to LAX because they will allow the airport to increase traffic even though it has run out of available land for expansion, Steve Martin, chief operating officer for the airport system, said in an interview.

The projects are well underway. The airport began the projects with money from its commercial paper program and will reimburse itself for the expenditures with the upcoming bonds. Using commercial paper allowed the airport to develop solid cost estimates before coming to market with long-term debt, Martin said.

The deal will also include an as-yet-undetermined amount of refunding bonds. The exact amount and series in the refunding portion will depend on market conditions closer to the sale date, Martin said. He's considering refunding several series in 1995 and 2002.

Martin said the airport has purposefully tried to keep its return to the bond market simple. It hasn't issued a "serious" amount of new-money bonds since 1995 and hasn't been to market at all since 2002, he said. It plans to start back to market with 30-year, fixed-rate bonds.

"We went into the deal saying it's got to be generally a vanilla deal because we wanted that for our first issue in a long time," Martin said. "We didn't want to have a story bond."

LAX needs to familiarize investors and ratings analysts with its credit again after its long absence. It also has to rewrite its bond indentures to match current industry standards.

"We are trying to set up a framework for rebuilding the airport," Martin said. "We expect to be in the market every year for the next four or five years."

That means eschewing the sort of only-at-LAX terms that marked its "unconventional" indenture, Martin said. For example, the old indenture pledged gross airport revenues to debt service instead of the more standard practice of pledging revenues net of operating expenses.

The airport is also updating the indenture to include a pledge of passenger facilities charges, which have been created since the old indenture was written. It also includes a senior- and subordinate-lien structure.

"We were trying to bring ourselves more into the conventions of the industry instead of having LAX always be doing something different," Martin said. "We didn't want to have another story on our hands."

The only innovation is that the airport decided to make the additional-bonds test for its subordinate debt a little tougher than usual. It is promising not to issue more bonds unless it can show that it reasonably expects to maintain revenue available for debt service payments equal to 115% of annual debt service. That's higher than the industry-standard 110% coverage ratio. The additional bonds test for its senior debt is the standard 125% coverage.

LAX officials met with ratings analysts from all three major rating agencies earlier this week. Its bonds are currently rated AA by Standard & Poor's and Fitch Ratings and Aa3 by Moody's Investors Service.

Officials will take bids for bond insurance around the time of the sale.

Martin hopes to maintain those ratings even as the airport dramatically increases its outstanding debt. He points out that even though LAX itself isn't exactly pretty, its balance sheet is.

After spending just $1 billion on capital over more than two decades, the airport now has a mere $200 million of debt outstanding. That gives it relatively low landing fees and the lowest debt per emplaned passenger ratio in the business.

"We'll still be well below the median for large hub airports even after the current issue," Martin said.

"Our goal is to maintain our rating and get through this capital program," he added. "If we do this the right way phase the projects the right way and the revenues keep pace with the bonds issued we should be able to get to the other side of this program and still have a double-A rating."

The challenge that LAX faces is selling a major capital program as the airline industry suffers its toughest year since the terrorist attacks of Sept. 11, 2001. Jet fuel prices have almost doubled as crude oil prices surged over the past year. Air Transport Association chief executive James May told a Senate committee this week that the industry could lose $7 billion to $13 billion this year.

At LAX, the slowdown will mean little growth this year, perhaps even a decline, followed by moderate growth of about 2% a year thereafter, according to Martin. But that doesn't mean the airport can afford to ignore its capital needs, he told the City Council earlier this month.

"If we were building facilities based on forecast, but unrealized, traffic, it might be a little bit more dicey," he said. Instead, LAX is rebuilding existing facilities that are needed to maintain its capacity and market share.

The airport lost lucrative international passenger traffic from Asia in the first half of this decade because it had not invested in the Tom Bradley International Terminal, according to a Los Angeles Times report published last February.

Martin said LAX has credit strengths that should offset the current industry environment. It is the biggest airport in Southern California with 70% of the traffic in the growing, 17 million-person Los Angeles metropolitan area. LAX has no single dominant carrier that could put its finances at risk; American Airlines and United Airlines are the airport's two biggest carriers, each carrying just 15% of its passengers. And as the biggest West Coast airport, it is well positioned to benefit from recent strength in international travel, which has been bolstered by the weak dollar this year.

"I don't know of any other airport in America that has the traffic fundamentals of LAX," Martin said. "A lot of the market is already here for the project we're proposing to build. That's unusual for an airport."

Goldman, Sachs & Co. is the senior book-runner on the negotiated deal. Frasca & Associates of New York and Public Resources Advisory Group of Oakland, Calif., are the financial advisers.



Upcoming Events

Already a subscriber? Log in here
Please note you must now log in with your email address and password.