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San Antonio Taps Assured to Back $101M Airport Revenue Bond Sale

DALLAS — San Antonio this week plans to price $101 million of airport revenue bonds with an increasingly unusual feature — bond insurance.

The city's three series of taxable and tax-exempt bonds are backed by Assured Guaranty Municipal Corp., which along with sister company Assured Guaranty form the only bond insurance firm with ratings high enough to enhance an investment-grade deal.

The bonds are coming in three series — $41 million of tax-exempt Series A revenue bonds, $22.5 million of taxable Series B bonds, and $38 million of tax-exempt bonds backed by passenger facility charges and a subordinate lien.

Series B is taxable because they are refunding some non-callable bonds for structuring, said Jorge Rodriguez, managing director at financial adviser Coastal Securities.

The deal is expected to price through negotiation Tuesday. JPMorgan is senior manager and Morgan Keegan, First Southwest Co., Siebert Brandford Shank & Co., and Ramirez & Co. are co-managers.

McCall Parkhurst & Horton shares bond counsel duties with West & Associates. Fulbright & Jaworski is underwriter's counsel with Shelton & Valadez, both of San Antonio.

Proceeds of the bonds will be used for refunding notes and previous revenue bonds, as well as providing new money for San Antonio International Airport's capital improvement program.

By coming to market in the last month of the year, San Antonio joins a flood of issuers seeking to avoid the uncertainties of 2011, including the possible expiration of the Build America Bond program that has provided federal support for long-term debt. The upsurge in supply has prompted yields to rise sharply since November.

Insurance has also added a thin layer of market appeal, since investors tend to consider the underlying strength of the issuer.

With the implosion of ratings for the major insurance firms since 2008, fewer than 10% of deals this year carry insurance. On Nov. 8, Ambac, the first bond insurance company, which began doing business in 1971, filed for Chapter 11 bankruptcy protection.

The San Antonio airport deal at $101 million will be the 36th largest insured transaction of 2010, according to data from Thomson Reuters.

Assured Guaranty, which acquired Financial Security Assurance Inc. into its Assured Guaranty Municipal credit in 2009, has not been left unscathed. Both Assured and FSA lost their triple-A ratings last year, and Fitch Ratings withdrew its AA rating and negative outlook last February. While Standard & Poor's retains a stable outlook on its AA-plus, Moody's Investors Service has a negative outlook on its Aa3 rating.

Those insurer ratings are high enough to enhance the appeal of San Antonio's airport bonds, city officials believe. The taxable and tax-exempt revenue bonds carry underlying ratings of A-plus from Standard & Poor's and Fitch. Moody's provides an A1. The PFC-backed bonds are rated A-minus by Standard & Poor's, A by Fitch, and A2 by Moody's. Only Moody's has a negative outlook on both ratings, while the others are stable.

"The negative outlook reflects the increasing costs at the airport over the next couple of years at a time when no permanent use and lease agreements are in place making revenue projections less certain, and a weakening of its cash position," said Moody's analyst Laura Barrientos.

"The ratings continue to reflect the airport's very large and economically diverse service area, a diverse mix of airlines, and the completion of a major capital improvement program that should handle capacity for a number of years and hence limit the additional debt in the foreseeable future," she said.

San Antonio International ranked as the 50th busiest airport in North America for 2009, based on statistics from Airports Council International North America, having served approximately 7.8 million total passengers for the year. Enplanements declined 5.6% in fiscal 2009 to 3.93 million, driven largely by the national recession. Enplanements are estimated to increase 1.4% in the current fiscal year, bringing the airport closer to the enplanement levels of 2006 and 2007.

The airport is at the end of its major capital improvement plan, culminating with the opening of its new Terminal B last month. The terminal replaces the former Terminal 2, expected to be demolished in the first quarter of 2011.

The airport now has 24 gates available. Terminal B consists of an eight-gate concourse with concessions, services, and amenities. The construction of a potential Terminal C has been deferred beyond 2016 and will be built as demand warrants, officials said.

Other major projects in the airport's 2010 plan included the planning and initial construction of a consolidated operations facility designed to add efficiency. The airport also completed other infrastructure improvements and modifications, including an in-line baggage system to be used by Terminals A and B, a new central utilities plant, passenger loading bridges, a new long-term parking garage with an additional 2,128 parking spaces, and other improvements. Airfield projects in that budget include the extension of two runways, development of taxiways, and upgrades to navigational aids.

The airport is preparing a new master plan with an eye toward short-term, intermediate, and long-term projects, officials said.

"City management made a prudent decision to delay construction of Terminal C until demand warrants," noted Fitch analyst Scott Zuchorski.

Southwest Airlines is San Antonio's dominant carrier with 37% of enplanements, followed by American Airlines with 18%, Delta Air Lines with 14%, Continental Airlines with 11%, and United Airlines with 8%. Airport officials do not expect any impact on service due to the United/Continental merger or Southwest's acquisition of AirTran.

An operating agreement with the airlines ended on Sept. 30, and the city is operating on an interim basis until a new agreement is expected to go into effect next spring or summer.

Due to its location on the north side of the city, San Antonio International competes for passengers in the suburbs with Austin, 60 miles to the north. However, analysts say the competitive pressures are not severe.

As a tourism-oriented city, San Antonio is affected by downturns in convention and leisure travel. Future room night bookings for meetings and conventions in San Antonio are currently above target through 2017.

Ranked as seventh largest city in the United States with an estimated population of 1.4 million, San Antonio has seen an average annual increase in population over the last decade of 2.3%. That exceeds the state of Texas' rate of 1.9% and the nation's 1%.

The armed services have contributed to the growth with the expansion of Fort Sam Houston and other military bases under the Base Realignment and Closure process.

BRAC growth continues with an increase of approximately 12,500 personnel coming into the San Antonio area, the bulk of whom are stated to arrive by 2012. About $2.2 billion in new construction related to BRAC is expected to expand medic training, double the size of trauma care at Brooke Army Medical Center, establish a teaching and research hospital, and increase installation management support functions for the military.

San Antonio's education resources are also expanding, with growth of the University of Texas at San Antonio and the UT Health and Science Center.

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