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Deal in Focus

O’Hare Expansion Gets Lift

CHICAGO — The Chicago City Council’s Finance Committee Tuesday advanced the sale of up to $1 billion of new-money and refunding O’Hare International Airport revenue bonds and debt backed by passenger facility charges to raise funds for the second phase of an $8 billion expansion that has yet to win airline approval.

Citi is the senior manager on the transaction slated for sale late this year or in January. Siebert Brandford Shank & Co. is co-senior manager with another 10 firms serving as co-managers. About 40 % of the transaction will be awarded to minority- or women-owned firms.

Scott Balice Strategies is the financial adviser. Katten Muchin Rosenman LLP is bond counsel and Chico & Nunes PC is co-bond counsel. Burke Warren MacKay & Serritella PC is underwriters’ counsel and Hardwick Law Firm LLC is co-underwriters counsel.

“The bonds will allow the city to continue on with the O’Hare Modernization Program which is improving the airport’s efficiency, reducing delays, and increasing capacity,” said Gene Saffold, the city’s chief financial officer.

The final size and structure of the deal will depend on a mix of factors, including the transaction’s timing, interest rates, and whether Chicago can strike a final agreement with the airlines.

The city is considering issuing some taxable Build America Bonds and qualified energy conservation bonds but that also will depend on the timing of the deals since those programs expire at the end of the year in their current form.

The ordinance allows the city to issue new-money third-lien general airport revenue bonds and stand-alone or double-barrelled PFC bonds. Those decisions will depend on whether the city has airline approval before the bonds are sold.

The existing agreement between the city and carriers requires the airlines to sign off on the use of some revenues pledged to the GARB credit, such as landing fees and terminal rents.

The city could instead issue PFC bonds or bonds backed by its federal grant funding to raise new money. It could also consider issuing GARBs that are not repaid until after the expiration of the current use agreement with the airlines in 2018.

The full City Council is expected to approve the measure at its meeting today. The committee approved the ordinance originally submitted in May by Mayor Richard Daley only after administration officials fielded questions over the status of negotiations with the airport’s major airlines and the risk posed by undertaking the next phase without their support.

United Airlines and American Airlines have resisted city pressure to fund the second phase of the O’Hare Modernization Program. They support runway expansion but are opposed to plans for a new $2.2 billion terminal while they are still struggling financially. They also oppose the city’s refinancing of some debt.

Officials acknowledged they could face a lawsuit from the airlines if the city moves forward with the deal.

“We are still negotiating with our airline partners. … Ultimately, we believe we will come to a resolution,” said Rosemarie Andolino, head of the OMP program and aviation commissioner. Though the city and airlines remain at odds, city officials have softened their stance on the timing of terminal construction.

Andolino and Saffold pressed committee members to approve the bond issue, warning that a delay could hurt the city’s ability to capitalize on the spring construction season.

“Time is of the essence in putting this deal together” in order to have proceeds in hand to allow the city to enter construction contracts for spring work, Saffold said.

Approval came after a brief interruption when Finance Committee chairman Edward Burke read a news report that the mayor, three floors above, had just announced he would not seek re-election. The news stunned council members in attendance and the deal’s bankers who traditionally attend the finance committee.

Chicago had already begun cobbling together pieces of the financing needed for next phase of the project. The U.S. Department of Transportation in April announced a $410 million federal letter-of-intent grant and the city is seeking federal approval to use about $1.4 billion in PFCs collected between 2028 and 2038 to help finance the program.

The city will use the new LOI funding to help cover the costs of two new runways and a runway extension. Chicago received $337 million in LOI funding for the first phase and the city was always counting on additional federal support for the remaining projects.

Chicago had previously won approval to use about $200 million in PFCs for second-phase design work. The city is also lobbying Congress to support an increase in the fee, which is now capped at $4.50 per flight.

Chicago wrapped up financing for the first, $3.3 billion phase in its April sale of $1 billion new-money and refunding issue. That deal included a mix of securities, some secured by PFCs and some secured by the airport’s third-lien GARB pledge. The new money covered both OMP costs and O’Hare’s ongoing routine capital improvement program.

Ahead of the April sale, all three rating agencies affirmed O’Hare’s first-, second-, and third-lien GARB credit, but two downgraded the PFC ratings due to declining debt-service coverage ratios.

Moody’s Investors Service affirmed the A1 it assigns to $4.2 billion of third-lien GARBs and nearly $500 million of second-lien bonds, and the Aa3 on $73 million of first-lien bonds. Moody’s downgraded $709 million of PFC-backed bonds to A2 from A1.

Coverage previously stood at more than two times but the ratio is expected to fall to 1.52 times in 2011 and remain below 1.75 times through 2015 due to a drop in passenger levels. Congress is considering a boost in the federal cap of $4.50 to the passenger facility charge rate. A hike to more than $5.50 would restore the O’Hare coverage ratios to more than two times.

The first and second GARB liens are closed and bonds in each mature in 2016 and 2018, respectively. Chicago’s use agreement with its airlines expires in 2018. Third-lien bonds are secured by a pledge of net airport revenue subordinate to the first and second liens and the city’s PFC credit is a stand-alone pledge of those fees collected at the airport.

Standard & Poor’s in April affirmed its A-minus on the third lien, the AA-minus on the second lien, and the AA on the first lien. It downgraded the PFC debt to A-minus from A. Fitch Ratings affirmed its A rating on the third lien, the AA on the second lien, the AA-plus on the first lien, and the A-plus on the PFC pledge.

The airport’s credit is supported by its strong originations and destinations base, high demand for service, and unique dual hub status. Both United and Airlines operate hubs at O’Hare, with United accounting for 48% of travelers and American for 35%. Another positive credit factor is that the first phase of the runway expansion is on schedule and within budget, with roughly 75% of projects completed.

O’Hare’s challenges include the impact of the expansion on airline costs, and the airport’s exposure to United and American cutbacks and financial strength.

The airport also has seen a weakening in its passenger levels, which declined by more than 15% between 2007 and 2009, when 32 million passengers used the airport.

Under the $8 billion runway plan, Chicago is shifting the airport’s runways to a parallel configuration from an intersecting design that leads to runway closures during poor weather conditions and negatively affects the national air traffic grid. The plan, unveiled by Daley in 2001, is also designed to expand capacity to a yearly 1.2 million flights from the roughly one million it can now handle.

The city last year opened the first new runway. It has provided some flight-delay relief, though more significant relief is not expected until an additional runway opens.

A runway extension and new traffic control tower have also been completed. Construction of a runway set to open in 2013 has been hampered by litigation that delayed the city’s acquisition of land and a cemetery in an adjacent suburb.

Chicago has won a spate of recent court rulings, allowing it to take ownership of St. Johannes Cemetery, but the relocation of burial sites is still pending.

The city last year also struck an agreement with the suburb of Bensenville, ending the village’s long-standing challenge to the project and clearing the way for its acquisition and demolition of properties.

Officials  hope to complete the overall plan by 2014. It also includes a new automated people-mover system and construction of two more additional runways and extension of a third runway.

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