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DFW Plans $337M Conversion

DALLAS - Continued turmoil in the auction-rate market has prompted Dallas-Fort Worth International Airportto seek to convert about $337.1 million of auction-rate bonds into fixed-rate debt through a negotiated sale set to price Tuesday.

"We gave ourselves this option in the original covenants for the debt," said Michael Phemister, DFW's vice president of treasury management.

"Here at DFW we have to go back to both cities to get approval, so the board had this option to convert to fixed-rate mode built into the deals with a pre-approval from the cities," he said. "Now we couldn't have foreseen what's happened here in the market, but we did anticipate the possibility auction rates would go up and did contemplate failed auctions."

Phemister said officials of the nation's third-busiest airport do have the option to convert the debt to variable rate with liquidity agreements, but chose fixed rates instead.

"It's our opinion that that seems like jumping from the frying pan to the fire," he said of converting to variable rate. "When this turmoil began we knew we had provisions to fix it out, and felt we had to move as quickly as possible and believe this is an opportune time for this deal."

The fixed-rate bonds are limited obligations of Dallas and Fort Worthsecured by a pledge on revenue and funds derived from the ownership and operation of the airport.

Phemister pointed out that the auction-rate debt worked very well for the airport saving about $40 million in interest costs since 2002. That was until recently when the airport experienced a failed auction.

This week's sale includes six series of bonds and each series will keep the insurance it had from the original issuance of the debt. Five of the series are wrapped with the triple-A insurance of MBIA InsuranceCorp., and the $56.4 million of Series 2003C-2 joint revenue bonds will remain insured by XL Capital Assurance Inc., which is currently rated A-minus by Standard & Poor'sand Fitch Ratings, and A3 by Moody's Investors Service.

Bear, Stearns& Co. is lead book-runner for the deal with M.R. Beal& Co. as co-senior manager.

Phemister said the airport received a guarantee from JPMorgan Chase& Co. in regard to Bear Stearns ability to handle the sale. JPMorgan with assistance from the Federal Reserve acquired Bear last week for about $240 million after the investment bank collapsed due, in part, to too much exposure to the subprime mortgage market.

He said the fixed-rate bonds will come with an 18-month call and officials are confident the deal will be well received in the market this week.

"DFW is a good underlying credit, and while we may pay a higher interest rate than normally, it looks like we may have timed it right by selling [this] week," Phemister said.

There are only a few Texas issuers expected to bring debt to market this week.

DFW is at least the third airport to refinance auction-rate and variable-rate debt in light of the failed auction and resetting of variable rates.

Last week, the Clark County, Nev., airport system and San Francisco International Airport priced similar debt-restructuring issues.

McCall, Parkhurst & HortonLLP and Vinson & Elkins LLP are co-bond counsel to DFW Airport.

First SouthwestCo. and Estrada Hinojosa& Co. are the airport's co-financial advisers.

DFW Airport carries underlying ratings of A-plus from Standard & Poor's and AA-minus from Fitch.

Moody's affirmed its A1 rating on the airport's $3.7 billion of revenue debt outstanding with a positive outlook due to the "expectation of substantial annual revenues" from natural-gas drilling on airport property that "would help to mitigate concern with the airport's narrow debt-service coverage and concentration in American Airlines."

AMRCorp.'sAmerican Airlines and American Eagle accounted for almost 85% of enplanements at DFW in fiscal 2006 and 2007, which is up from 70% in fiscal 2003, and no other airline at DFW accounts for more than 2% of enplanements, according to analysts.

American has sharply increased its activity at DFW following the departure of Delta Air Lines about three years ago.

Phemister said it's too early to accurately gauge the level of revenue generated by the drilling. He said the airport has begun receiving royalty checks from the drilling, but that's only from a few wells and more are planned.

In October 2006, DFW received an up-front payment of $185.6 million from Chesapeake Energy Co. to begin natural-gas exploration on airport property with on-going royalties of 25% of gross natural-gas revenue.

Chesapeake currently has five rigs drilling at the airport with plans for 327 more over the next few years.

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