CHICAGO — The Wayne County Airport Authority will begin refunding more than $1 billion of senior-lien general airport revenue bonds Monday to achieve interest-rate savings and take advantage of the federal alternative-minimum tax holiday.
The refunding program features five series and will be held over two weeks. The Airport Authority’s service area includes Detroit, which is Michigan’s largest city and the Wayne County seat.
The finance team originally estimated that the deal would save the airport $58 million over the life of the debt. That figure has since fallen to around $35 million amid a glut of supply in the market.
The airport’s savings will be generated largely from lower interest rates and shifting bonds into debt not subject to the AMT. Some of the bonds currently yield around 5.25%.
The transaction will allow the airport to shed its remaining interest-rate swaps, privately place a chunk of variable-rate bonds, and restructure its overall debt portfolio to reflect 80% fixed-rate debt and 20% variable-rate debt.
“Detroit doesn’t come to the market that often,” said J. Chester Johnson, chair of Government Finance Associates Inc., the airport’s long-time financial adviser. “This is a very favorable refunding program that’s going to provide substantial cash-flow savings to the airport.”
The federal stimulus program’s provision allowing issuers to refinance bonds subject to the alternative-minimum tax, and issued from 2004 to 2008, into non-AMT debt will likely save the airport around 75 basis points, according to Johnson.
The authority will not have to pay a fee to terminate its interest-rate swaps with Goldman, Sachs & Co. because the original swaps featured a seven-year call.
“A lot of entities are paying millions to get out of swaps these days,” Johnson said. “But because the authority had the foresight to do a call option — and it didn’t cost much, about 11 to 15 basis points — we can now get out of those swaps at zero cost.”
The authority runs Detroit Metropolitan Wayne County Airport and the nearby non-commercial Willow Run Airport. Detroit Metro is considered a large hub and features two new terminals.
The Airport Authority has $2.1 billion of outstanding senior- and junior-lien bonds. In August, Fitch Ratings dropped its rating to A-minus from A on all the Detroit airport’s debt.
Moody’s Investors Service last week revised its outlook to negative while affirming its A2 rating on the senior debt and A3 on the subordinate debt.
Rating agencies have expressed concerns about risks posed by Detroit Metropolitan’s reliance on Delta Airlines, which recently merged with Northwest Airlines and dominates enplanements there.
Moody’s also cited Detroit’s weak regional economy, and Fitch said the airport’s future financial flexibility could be pressured by debt.
Standard & Poor’s rates the airport’s senior-lien debt A and junior-lien A-minus. It maintains a stable outlook on the credit.
The authority will launch its refunding program Monday, bringing to market roughly $658 million of fixed-rate debt. The issue is divided into four series. The first two series total $307.4 million of bonds that were originally issued in 1998 and mature in 2020 and 2021.
The second two series total $350.6 million of bonds, which were originally issued as variable-rate debt in 2008. The transaction will shift the debt into fixed-rate, non-AMT debt.
Siebert Brandford Shank & Co. is senior manager on the sale of the Series A and B. JPMorgan is senior manager on the sale of Series C and D.
Citi, Loop Capital Markets LLC, and Wells Fargo make up the balance of the underwriting team for both sales. Miller, Canfield, Paddock and Stone PLC is the Airport Authority’s bond counsel.
The agency will offer $390 million of variable-rate bonds that make up the remainder of its Series 1998 bond issue during the week beginning Dec. 13. The debt matures from 2021 to 2028.
Citi is the lead manager.
JPMorgan and PNC Capital Markets are tentatively expected to provide three-year letters of credit that will back $275 million of the variable-rate bonds. The authority is paying JPMorgan and PNC roughly 105 basis points for the credit support.
The remaining roughly $116 million will likely be privately placed with Wells Fargo Bank NA, according to Terry Teifer, the authority’s senior vice president of treasury and business development.
Wells Fargo suggested the private placement as an alternative to a letter of credit, Tiefer said, noting that the authority likes the move because it eliminates remarketing costs and larger market risk.
“When you have LOC support, you have a potential problem with your own credit and the bank that is supplying the LOC,” he said.
Teifer estimated the private placement would be about 20 basis points cheaper than a letter of credit.
He said the authority is keeping a wary eye on the market but currently expects to achieve around 3.5% net present-value savings. That’s down from original expectations of 5.5%, he said, but still represents strong savings.
“If the market doesn’t fall apart, we will have relatively low long-term rates that are really low in a historical perspective,” Teifer said. “Plus, we have this opportunity to solidify our LOC support for the next three years.”
He said the question is whether the authority is still going to achieve $58 million in savings, adding: “I wouldn’t bet the ranch on that.”
The finance team hopes investors are attracted to the short maturities featured in the Series A and B bonds, as well as the non-AMT debt, and the airport’s relatively strong reputation.
“We’re in a very good position going forward,” said Tom Naughton, the authority’s executive vice president and chief financial officer. “We’ve got most of our significant capital program behind us and have two brand-new terminals.”
He noted that the regional economy has been through tough times, but seems to be recovering.
The unadjusted unemployment rate in Detroit improved to 22.6% in September, down from 26% a year ago, according to the federal Bureau of Labor Statistics. That compares with the most recent unadjusted jobless data at the state and national level in October, which featured a 12.3% unemployment rate for Michigan and a 9% national rate.
“The region I think is going to be better off for the restructuring of GM and Chrysler,” Naughton said. “And as an airport, through this entire period, our [origin-and-destination] demand has remained fairly strong relative to other airports.”
Analysts praise the airport for its new terminals, modest future capital needs, and 30-year leases with airlines. Another strength is post-merger Delta’s apparent commitment to using the airport to serve Asian markets.
But the airport has experienced several years of enplanement declines, which totaled 10.6% in 2009. Enplanements appear to have stabilized in 2010, with passenger traffic up 2.4% during the first nine months of this year from the same period of 2009, according to Moody’s.
Future enplanement trends are crucial to the airport’s ability to keep down costs and maintain a competitive position among similar airports, analysts said.
Fitch and Moody’s noted that under certain stress scenarios — based largely on a decrease in Delta traffic — the airport’s cost-per-enplanement would peak at more than $21 in 2015. By contrast, cost-per-enplanement is expected to be $9.88 in fiscal 2011.
“It is a concern that we’re paying attention to,” CFO Naughton said. “Across the country you’ve seen increases at all airports.”
He said Detroit Metropolitan Wayne County Airport passenger growth estimates, which envision a 2.3% increase in enplanements going forward, are more conservative than FAA estimates.
“It’s critically important that all of our airlines have signed 30-year leases,” Naughton said. “They’re not going anywhere. Historically we’ve been very, very low and competitive, and we’re still competitive with other airports, especially Midwest hub airports.”
