DALLAS — Amid ambitious expansion plans, Denver International Airport will price up to $400 million of refunding revenue bonds on Thursday.
The negotiated deal, led by Citi, comes with a warning from Moody’s Investors Service that Denver may be overreaching with plans to build an airport hotel as part of a $500 million South Terminal that will also include a train station for a rail link to downtown.
While maintaining its A1 rating, Moody’s shifted its outlook to negative. Analysts cited DIA’s debt load of nearly $4 billion as almost double the rating agency’s hub airport median of $2.1 billion.
Long-delayed plans to add a Westin Hotel to the terminal are of particular concern because the hotel business is unpredictable and would not be supported by airline revenues, according to Moody’s.
“These projects introduce substantial new operational risks to the enterprise, which already has an above-average debt burden,” Moody’s analyst Kurt Krummenacker noted.
Airport officials dispute the notion that the 500-room Westin would be a non-core asset, citing competing facilities such as Dallas-Fort Worth International Airport and others that are served by major hotels. While some hotels have been built near DIA in the 16 years since it opened, the airport is still relatively remote from the rest of Denver and the nearest suburb of Aurora.
“Our opinion is that the hotel is an essential service to travelers,” said DIA spokesman Jeff Green.
Green said the hotel is also part of the airport’s efforts to boost non-airline revenue, which includes income from merchants and royalties from oil drilling on its 53-square-mile property.
The airport will own the hotel, which will be built over the rail depot, and has contracted with Starwood Hotels to operate the hotel as a Westin. Westin will receive a management fee and the airport will absorb the financial risk associated with the hotel’s performance.
Standard & Poor’s and Fitch Ratings expressed less concern about the airport’s plan to issue an additional $900 million of new debt under the current capital improvement program, but also added cautionary notes about the hotel.
Both agencies assign their A-plus ratings, with stable outlook, to DIA’s revenue bonds.
“The high debt level is partially mitigated by growing enplanement levels which produce a debt per total enplanement ratio of $152,” Fitch analyst Scott Zuchorski wrote in his ratings report. “Fitch notes that the South Terminal projects may not be financially accretive to the airport’s net margins and could result in ratings pressure should actual performance not meet expected cash-flow projections.”
Standard & Poor’s analyst Mary Ellen Wriedt said that traffic patterns and DIA’s status as the major hub of the Rocky Mountain region added a level of comfort to the debt load.
“The ratings reflect our view of the airport’s stable passenger traffic despite the economic downturn, strategic location for the east-west flow of domestic traffic and no major competing facilities within 500 miles, and excellent airfield efficiency and significant capacity for future growth,” Wriedt wrote.
Airport officials last year unveiled plans for the South Terminal Redevelopment Program, which will transform the airport into an intermodal transportation hub. The Westin Hotel is one of three elements in the project, along with a 24-mile commuter rail link to Denver’s Union Station and an outdoor plaza.
The rail line, financed through a bond issue from the Regional Transportation District and a public-private partnership, is expected to begin operations in 2016. The hotel is expected to open in 2015.
DIA manager Kim Day last month briefed the Denver City Council on the project, saying that the airport had cut $150 million from its original estimate for the South Terminal, bringing the projected cost to $500 million.
“By the time we celebrate our 20th anniversary in 2015, we will have a great foundation for our future: a robust network of flights, a spectacularly functional and beautiful facility with a mass-transit link, financial stability along with a competitive cost structure, and a redesigned airspace that supports our projected growth,” Day said.
To lay the groundwork for future new-money issues, DIA is refunding, Subseries 2008A3 airport system revenue bonds with outstanding principal of $122.06 million, Subseries 2008A4 with outstanding principal of $72.35 million, and all or a portion of the outstanding Series 2000A, with outstanding principal of $173.1 million.
Proceeds will also be used to fund an increase in the bond reserve fund equal to the minimum reserve requirement.
This week’s deal will refund $194 million of put bonds and provide a lower interest rate on others for savings, Green said.
The refunding bonds will be priced Thursday in the name of the City and County of Denver. The city delegates management of the airport to the aviation department headed by Day.
After the issuance of the Series 2011A bonds, the airport’s capital structure will include $904.7 million in variable-rate exposure that translates to about 23% of the nearly $4 billion in total revenue debt. A large share of the variable-rate bonds include interest-rate swaps.
“Fitch notes that the debt restructuring actions taken by the airport since 2008 to address weakening counterparty credit have provided greater stability with regards to interest rate resets for the outstanding debt,” Zuchorski wrote. “Still, the large balance of variable-rate exposure and swaps agreements could lead to future rate volatility and ongoing risks to counterparty performance. Thus, management of the debt portfolio will remain an important consideration to the airport’s credit.”
DIA served a record 26.1 million enplaned passengers in 2010, up 4% from 2009.
Two of the airport’s largest carriers, United Airlines and Frontier Airlines, both emerged from bankruptcy in the past two years. United, which merged with Continental, now ranks as the largest airline in the world.
As the airline that agreed to help pay for building DIA after years of negotiation, United remains the its largest carrier, although its share of enplaned passengers fell to 44% in 2010 from 59% in 2004.
Denver-based Frontier has increased its share of passengers at DIA to over 21% in 2010, up from 16.7% in 2004.
Frontier was acquired by Republic Airways Holdings in October 2009 following Frontier’s Chapter 11 bankruptcy filing in 2008.
Pressuring both Frontier and United is the airport’s third-largest carrier, Southwest Airlines, which continues to aggressively grow its market share. Southwest began flying from DIA in 2006 after years of avoiding the airport because of its high operating costs.
