LAX Making Use of Stimulus With $898M Deal

SAN FRANCISCO — The Los Angeles Department of Airports plans to sell $898 million of revenue bonds next week to finance the rebuilding of the Tom Bradley International Terminal at Los Angeles International Airport.

The private-activity bond issue will be tax-exempt due to the alternative minimum tax holiday authorized by the American Recovery and Reinvestment Act.

The senior-lien bonds are backed by general airport revenues at LAX, the nation’s third-busiest airport by passenger traffic.

“We’re estimating about $100 million in present-value savings,” said Marla Bleavins, debt and treasury manager at the Department of Airports.

Interest on bonds that finance infrastructure like airports and seaports is ­usually subject to the AMT because the projects benefit private users, such as

airlines and shipping companies. That limits the market for the bonds and forces

airports to pay higher interest than other governmental borrowers.

ARRA, the federal economic stimulus package passed in February 2009, allows private-activity bond issuers to sell fully tax-exempt debt during 2009 and 2010.

The Airports Department — which also runs Ontario International Airport, Palmdale Regional Airport and Van Nuys ­Airport — is trying to complete much of the financing for its $5.6 billion LAX capital improvement plan this year to take full advantage of the stimulus legislation. It plans to be back in the market in ­November.

The current deal will help finance the $1.5 billion rebuilding of the Tom Bradley International Terminal. The project will expand the terminal and make single-sided concourses double-sided, adding nine new gates that will be able to accommodate the newest Airbus A380 super-jumbo jets.

“International traffic is incredibly important to us, and the terminal was built in the early 1980s for the Olympics,” said Ryan Yakubik, director of capital development and budget at the Department of Airports.

International traffic accounted for more than a quarter of the airport’s passenger enplanements fiscal 2009. International traffic has been hard hit by the recession, falling 12% in fiscal 2009.

LAX is beginning to regain traffic as the economy recovers. Overall passenger traffic rose 1.1% in the first seven months of fiscal 2010 after dropping 9% in fiscal 2009. January’s traffic was up 8% from the same month last year.

Airport officials expect long-term passenger growth of just under 2% a year and is well ahead of projections for this year.

“We look like we’ve seen the last of the declines,” Yakubik said.

The airport’s ratings have come under some pressure from the combination of the major capital program and the recession. Fitch Ratings assigned a negative outlook to its AA senior-lien bond rating last fall and reaffirmed it this month.

“The negative rating outlook reflects the potential stresses to the airport’s cost and financial profile in conjunction with the $5.6 billion 2009-2016 CIP,” according to a report by Fitch analysts Seth Lehman and Emari Wydick.

Standard & Poor’s rates the bonds AA and Moody’s Investors Service rates them Aa3, both with stable outlooks. All three agencies rate LAX’s subordinate-lien revenue bonds one notch lower than the senior-lien debt.

“We believe the airport’s strong

underlying demand characteristics and low debt burden prior to the beginning of the capital plan allow for additional debt while maintaining strong credit quality,” said Standard & Poor’s analyst Robert Hannay.

Until it began issuing debt for the current capital program in 2008, LAX had an extraordinarily low debt burden. It currently has $993 million of senior revenue bonds and $619 million of subordinate obligations outstanding.

Its total fiscal 2009 debt service coverage ratio — net revenues divided by debt service expense — was 4.99 times. Its senior-lien coverage ratio was 9.26.

Standard & Poor’s estimates that the airport’s increasing debt burden will cut the senior-lien coverage ratio to 1.9 times by 2014, while the overall ratio is forecast to decrease to 1.39 times.

Fitch forecast that the combined ratio will decline to a “still healthy” 1.5 to 2.4 times by 2016.

While registering varying degrees of concern about LAX’s increase in debt, the rating agencies all cited offsetting credit strengths, such as the airport’s strong liquidity, dominant position in the nation’s second-largest metropolitan area, and diverse stable of air carriers.

All three agencies noted the airport’s big cash cushion in particular. It had $574 million of accumulated passenger facility charges and $655 million unrestricted cash reserves at the end of February. At the end of 2009, it had 454 days cash on hand.

The Airports Department plans to hold a retail order period on Tuesday, followed by institutional pricing on Wednesday. Siebert Brandford Shank & Co. is the senior manager of a syndicate that also includes Barclays Capital, Morgan Stanley and De La Rosa & Co.

Frasca & Associates LLC and Public Resources Advisory Group are the Department of Airport’s financial advisers. Kutak Rock LLP is bond counsel, and Quateman LLP is disclosure counsel.

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