CHICAGO — While the market’s attention is focused on Chicago’s sale of more than $1 billion of new-money and refunding debt for O’Hare International Airport this week, the city is also preparing to refund and reoffer pieces of its Midway Airport debt it had hoped to retire with its now-stalled plan to privatize the facility.
Ahead of the $85 million refunding of second-lien Midway airport revenue bonds later this month or early next month, Fitch Ratings downgraded the outstanding $703 million of first-lien bonds to A from A-plus and the $419 million of second-lien bonds to A-minus from A.
Moody’s Investors Service affirmed its A3 rating assigned to the second lien and A2 to the first lien but put the second-lien rating on review for a possible downgrade. Standard & Poor’s has not issued a new report. It rates the first lien A and the second lien A-minus.
The city will use proceeds of the upcoming sale to refund debt sold in 2002 and to repay commercial paper notes issued to cover the accelerated amortization payments due to the letter-of-credit bank on floating-rate bonds sold in 1998 and 2004.
The bank bonds are in term payment mode because their liquidity facilities expired. The city will also reoffer the remaining bonds outstanding from its 1998 A and B series and its 2004 C and D series. Morgan Stanley and JPMorgan Chase NA are providing LOCs for the refunding bonds and the reoffered bonds. JPMorgan is the underwriter on the refunding bonds.
While most issuers have wrapped up any needed restructuring of their failed auction-rate and other floating-rate series hurt by the credit crunch and insurer and bank downgrades, Chicago put off any long-term action on Midway debt as its proposed lease of the airport was pending. As part of any lease deal, the city would have retired all of Midway’s $1.1 billion of debt.
Chicago was poised last spring to enter into a $2.52 billion groundbreaking agreement to lease the airport to a private consortium under a federal pilot program that permits the privatization of up to five airports, but it was canceled one year ago over the group’s inability to raise financing for the 99-year lease. The city kept $126 million in earnest money posted by the group.
The city is expected to ask the Federal Aviation Administration to retain the large hub slot in the pilot airport privatization program. Mayor Richard Daley has said he hopes to resurrect the lease eventually. The city is due to file an updated notice by the end of the month. The city is sticking with a floating-rate mode on the refunding and reoffered bonds to preserve flexibility should the leasing plan be resurrected.
Fitch attributed its downgrade to the risks posed by the domination of one airline — Southwest Airlines — at the airport on Chicago’s south side, Midway’s expanded connected traffic utilization, a slightly high debt burden, and the competitive environment with O’Hare nearby.
Southwest handles nearly 85% of passengers at the airport, more than double its position of just five years ago. “This level of dependence on a single carrier … may lead to greater volatility in Midway’s future operational and financial performance,” Fitch wrote.
Midway experienced an 11.2% decline in passengers in 2008, but the positive trend returned last year with a 2.6% increase and for the first two months of 2010 passenger traffic has increased at a clip of 10%. Coverage of debt service, with reserves included, was about 1.58 times last year. The credit benefits from the airport’s favorable mid-continent geographic location and its niche domestic market.
Moody’s placed the second lien on review for a downgrade because of risks associated with the debt-service reserve on a portion of the airport’s 2004 bonds that is funded by a surety from Ambac Assurance Corp. Cross-default provisions in the indenture impact the entire second-lien portfolio.
“Moody’s believes Ambac’s ability to honor its commitment to these policies is highly questionable,” the agency wrote.