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Las Vegas Airport’s Debt Bet

SAN FRANCISCO — Like a patron at a Las Vegas buffet, the airport that serves the city is sampling a variety of the bond provisions enacted in this year’s federal stimulus bill.

McCarran Airport, which has already availed itself of the alternative minimum tax holiday, will be back at the table with a Build America Bond issue and more AMT debt later this month.

The airport — owned and run by the Clark County Department of Aviation — plans to issue $300 million of senior-lien taxable BABs, which will garner a 35% direct-pay interest subsidy from the U.S. Treasury.

Also on deck are $184 million of subordinate-lien tax-exempt bonds that benefit from the AMT holiday, during which most new-money private-activity bonds through 2010 are not subject to the federal tax.

The Aviation Department plans to price the new series of airport revenue bonds next week, tentatively Thursday, according to Katherine Ong of Hobbs, Ong & Associates Inc., the co-financial adviser with Public ­Financial Management.

Citi will manage the offerings. Details on the deal structure and call provisions were not immediately available.

The primary use of the proceeds is to finance the ongoing construction of a new terminal at McCarran, a capacity expansion project that started long before the current recession took a huge bite out of Las Vegas tourism.

The decline in tourism, and the city’s overall economy, has resulted in declining traffic at McCarran, which is beginning to affect the airport’s ratings. Standard & Poor’s revised its outlook on the airport’s debt to negative Friday.

“The revised outlook is based on our opinion of the continued downturn in passenger traffic at McCarran, which is occurring as the department plans to issue a substantial amount of debt to finance a large capital program,” Standard & Poor’s analyst Robert Hannay said in a news release. “Should the large decline in traffic continue, we believe the increased debt service costs and weaker revenue growth would likely put pressure on the department’s historically strong financial metrics and ratings.”

Standard & Poor’s affirmed its AA-minus rating on the airport’s senior revenue bonds, and its A-plus rating on the subordinate lien.

“If demand levels weaken at McCarran during the next 12 to 18 months, putting pressure on financial metrics, the department’s long-term ratings could be lowered,” the agency said. “Stability and demonstrated recovery in traffic levels along with improvement in financial performance metrics could return the outlook to stable.”

Moody’s Investors Service in June revised its outlook on the credit to negative and affirmed its Aa2 rating for the senior-level debt and Aa3 for subordinate lien in connection with next week’s deal.

Fitch Ratings, which has not rated new McCarran debt issued since 2008, in July downgraded its ratings on the airport’s outstanding debt, moving the senior-lien bonds to A-plus from AA-minus.

Airport officials say they expect to open the new, $2.3 billion Terminal 3 in 2012.

But even as construction proceeds on the new 14-gate facility, the airport has mothballed 13 gates in its existing terminals since the start of the year, in a move that will save money and also boost concessions in the areas that will remain open, according to McCarran’s first-quarter financial report to the public.

“These areas will remain closed until demand returns,” the report said.

Between January and July, arrivals and departures were down 11.5% compared to the same period a year earlier, highlighted by a 34.5% drop in traffic on US Airways, which has significantly downsized its Las Vegas operations.

The airport’s largest carrier is Southwest Airlines, which is down a little more than 4% for the year and accounted for 40% of McCarran’s 2009 passengers through July.

While Moody’s notes the airport’s “very strong historical and expected debt-service coverage,” its analysis also cites “significant exposure to variable-rate debt and swaps.”

The airport has 18 swaps outstanding, according to Moody’s, including two forward-starting swaps for bonds that are already sold and are to be delivered in 2010 and 2011.

McCarran’s debt portfolio is expected to increase from its current 36.7% variable-rate exposure to 48.8% after issuance of 2010 and 2011 bonds, Moody’s said, “though this is mitigated by ample available liquidity.”

The $150 million Series 2010 subordinate-lien revenue bonds were sold in ­January 2006, and the $275 million Series 2011 bonds, also subordinate lien, were sold in April 2007, according to the ­official ­statement for the airport’s $400 bond ­anticipation note sale in June. But “the sale thereof is subject to certain conditions and there can be no assurance that the Series 2010 bonds or the Series 2011 bonds will be delivered as scheduled,” the statement said.

One way or another, the airport will need to redeem those Bans next June. The Bans, which were private-activity bonds but exempt from AMT under stimulus legislation, were priced to yield 0.85%.

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