CHICAGO - St. Louis enters the market next week with up to $230 million of Lambert St. Louis International Airport revenue bonds to raise $126 million for projects and to refund bonds through a tender option designed to take advantage of the relief provided by the federal stimulus from the alternative minimum tax.
Ahead of the Lambert issue next week, the city, through its Municipal Finance Corp., on Thursday will issue $55.1 million of leasehold revenue bonds, including a $26 million series of Build America Bonds.
Rating agencies weighed in with unusually varied perspectives on Lambert's $800 million of revenue-backed debt. The ratings now range from the low single-A to the mid-triple-B category.
Standard & Poor's raised the credit to A-minus from BBB-plus and assigned a stable outlook. Moody's Investors Service revised the outlook for its Baa1 rating to negative from stable. Fitch Ratings downgraded its rating to BBB from BBB-plus and revised the previously positive outlook to negative.
Following the upgrade, Comptroller Darlene Green, who manages the city's debt, said: "The positive financial state of our airport and the upcoming terminal renovations says a lot about our commitment to being a first-class destination and the region's economic engine."
Goldman, Sachs & Co. and Stifel Nicolaus & Co. are the senior managers, with a group of 13 others as co-managers. Siebert Brandford Shank & Co. and Gardner Underwood & Bacon LLC are financial advisers. Edwards Angell Palmer & Dodge LLP is bond counsel and the Stolar Partnership LLP is co-bond counsel. Armstrong & Teasdale LLP is special counsel, Hardwick Law Firm LLC is underwriters' counsel, and Gallop Johnson & Neuman LC is co-underwriters counsel.
The new money is included in an A-1 series for $104.5 million tentatively set to mature serially between 2016 and 2034 with undetermined term bonds as well as an A-2 series for $21.9 million maturing between 2010 and 2015 with possible term bonds.
Net airport revenue secures the bonds, including a portion of the airport's passenger facility charges. Proceeds of the new money will finance various long-planned terminal renovations that include upgraded concessions, and ticketing and baggage areas. They also will fund a debt service reserve.
St. Louis is considering insurance from Financial Security Assurance, according to the preliminary offering statement. FSA, which is being acquired by Assured Guaranty Ltd., is rated Aa3 by Moody's, which put the credit on review for a downgrade last month. It is rated AAA with a negative outlook from Standard & Poor's and AA-plus with a negative watch by Fitch.
The city originally intended to enter the market last fall but the deal was put on hold after the chosen senior manager, Lehman Brothers, filed for bankruptcy and market conditions quickly eroded.
The size of Series B - up to $104.7 million - will depend on the amount of bonds tendered from St. Louis' Series 2007B airport revenue bonds. The city will use proceeds of the new series to purchase the tendered bonds.
The move allows the airport to save on interest costs by taking advantage of the provisions in the federal stimulus package that allow issuers of private-activity bonds to refund bonds issued in 2004 on which interest was subject to the AMT as non-AMT bonds.
Issuers, however, can't simply undertake a straight refunding, as most private-activity bonds cannot be advance refunded, so issuers like St. Louis are turning to tender offers.
The mixed ratings reflect a difference of opinions over the airport's financial profile and its prospects among rating analysts. Lambert is still struggling to recover from a decline in passengers initially driven by American Airlines' decision to decommission its connecting St. Louis hub inherited when it acquired the former Trans World Airlines.
American's decision in 2003 has led to a 50% passenger decline and the airport now mostly serves an originations and destinations market.
It began to recover in fiscal 2006 and 2007 but the recession is now taking its toll, with a decline of nearly 12% expected in fiscal 2009 and an additional 5% drop expected in fiscal 2010.
At its peak, Lambert recorded 15.2 million passengers, while in fiscal 2008, it served 7.6 million.
Standard & Poor's attributed its upgrade to the airport's stable financial performance despite a challenging operating environment. In particular, analysts praised management's efforts to provide additional fiscal cushions through a rate-mitigation fund and debt stabilization fund.
Analysts there also praised other steps taken following American's decision, which include imposing cost control measures and adding a portion of passenger facility charges to the list of revenue streams pledged to debt repayment.
"We expect actual financial results to meet the current forecast - specifically, debt service coverage ratios and fund deposits, despite forecasted passenger declines," said Standard & Poor's analyst Adam Torres.
Fitch took a more negative view of the sharp decline in passengers and the airport's limited prospects for a "meaningful recovery" in the near term due to the recession's effect on air travel.
"In light of these conditions, as well as the airport's already high debt burden and fixed cost increases related to the Series 2009A bonds, Fitch expects the airport to face a higher cost profile and reduced financial flexibility in the near term," analyst wrote.
Annual debt service costs will rise over the next three years by more than 20% to nearly $78 million, pressuring financial operations if future traffic increases don't meet forecasts. Operating revenues are also down for the first nine months of fiscal 2009 by 9.5% compared to last year, but expenses are down 7%.
Fitch's negative outlook reflects concerns over Lambert's ability to meet passenger growth forecasts beginning in fiscal 2011 and the need for healthy and sustained improvement in non-airline revenue sources.
Moody's analysts attributed their decision to shift to a negative outlook to "expected declines in passenger enplanements, rising airline costs to operate ... as well as narrowed debt service coverage and liquidity margins."
Debt service coverage of 1.29 times is expected in fiscal 2009. Future coverage ranges from 1.25 times to 1.35, depending on passenger growth levels and revenue.
The airport serves a large, stable population and slow-growing base of 2.8 million in 16 counties in Missouri and western Illinois. American is the top carrier at the airport, representing 44% of travelers, followed by Southwest Airlines, which accounts for 29%.
A hub airport, Lambert's connecting traffic historically represented between 45% to 53% of total passengers through 2003. Connecting traffic is now down to 23%, with originations and destination traffic accounting for 77% of travel. Lambert's five-year capital improvement program totals $334.5 million.
The deal set for Thursday through the Municipal Finance Corp. includes $29 million of compound-interest leasehold revenue bonds and $26.1 million of junior-lien leasehold revenue bonds that will sell under the taxable Build America Bond program.
The city will apply for a direct-pay interest subsidy offered by the federal government under the economic stimulus package. Series A will mature serially from 2021 to 2038 and the BABs will mature in a single term bond in 2038 and are callable in 10 years.
The bonds and other city leasehold debt totaling $389 million are rated Baa1 by Moody's and A by Standard & Poor's. They will carry insurance from Assured Guaranty.
Series A will fund various convention center improvements and Series B will fund various capital projects. The bonds are secured by the city's appropriation pledge, with hotel taxes going to repay Series A and restaurant taxes to repay the BABs.
Stifel Nicolaus & Co. is senior manager and Public Financial Management Inc. is pricing adviser.
"We expect the city to save as much as 40 to 50 basis points by using the BAB program over a traditional tax-exempt bond," said Stifel public finance banker Lorenzo Boyd.
