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Chicago Ready for Takeoff

CHICAGO — With an airline lawsuit behind it and structural tinkering completed, Chicago will enter the market this week with $1.1 billion of mostly new-money revenue bonds to finance the next phase of projects under an $8 billion expansion program at O'Hare International Airport.

Chicago will accept retail orders Tuesday and hold institutional pricing Wednesday. Citi is book-runner and Siebert, Brandford, Shank & Co. is co-senior manager. Another 10 firms round out the underwriting syndicate.

Scott Balice Strategies LLC is financial adviser and Ricondo & Associates Inc. is the city's airport consultant. Katten Muchin Rosenman LLP and Charity & Associates are co-bond counsel.

The deal offers $51 million of bonds backed by passenger facility charges that will refund outstanding PFC obligations. The new-money bonds are divided into three series with a mix of serial maturities and terms. Series A series totals $415 million, Series B is $295 million, and Series C is $290 million.

None of the new-money series are subject to the alternative minimum tax due to the nature of the projects being funded with the bond proceeds. A third-lien pledge of general airport revenues secures the new-money bonds. The city also has pledged a portion of PFCs collected at the airport to repayment of the Series A bonds and a portion of federal letter of intent grants to Series B. Those backup pledges reduce the repayment costs imposed on the airlines through fees and charges.

With just $3 billion of supply on this week's calendar, the deal "will definitely get attention," said Thomas Spalding, senior investment officer at Nuveen Investments, who noted the city could save about 15 basis points over earlier pricing scales due to the scant supply.

Ahead of the sale, Fitch Ratings raised O'Hare's PFC rating one notch to A and affirmed its third-lien general airport revenue bond rating of A-minus. Fitch rates the second-lien GARBs AA and the first-lien bonds AA-plus.

Moody's Investors Service affirmed its A1 rating on the third-lien bonds and A2 on O'Hare PFCs. The agency rates O'Hare's second-lien bonds A1 and its first-lien bonds Aa3. Moody's carries a negative outlook on the third-lien debt.

Standard & Poor's affirmed the PFC bonds' A-minus rating. It rates the third-lien GARBs A-minus, the second-lien GARBs AA-minus, and the first-lien GARBs AA. The agency revised its outlook on the third-lien and PFC bonds to positive from stable.

City officials said they believe the rating reports support their position that the O'Hare Modernization Project is crucial to the airport's future. "Chicago's airports are our connection to the rest of the world. O'Hare's efficient operation is essential to Chicago's ability to compete, continue to provide jobs and add to the region's economy," Department of Aviation commissioner Rosemarie Andolino said.

The city originally planned in January to sell $1.1 billion of bonds backed by PFCs, a structure officials devised because it did not require airline approval under the current use agreement with O'Hare's carriers that expires in 2018. Officials moved the sale to February after American Airlines and United Airlines — which operate dual hubs and handle 80% of flights at O'Hare combined — filed a lawsuit.

The complaint challenged the city's ability to start work on $3.36 billion of the completion phase without their approval. The airlines also sought to block the city from issuing $2.5 billion of GARBs in the coming years.

The suit eventually forced the city to put the PFC bonds in a holding pattern and federal authorities stepped in to mediate settlement talks. Officials last month announced a pact that allows the city to begin work on $1.17 billion of remaining projects. Chicago agreed to put off some projects and the airlines dropped their suit.

The airlines will provide nearly $398 million in funding by supporting GARBs. Another $365 million would come from passenger facility charges, and $517 million would come from Federal Aviation Administration grants. Federal authorities increased their level of grant support by $155 million to help cinch the deal. An agreement on funding remaining projects faces a March 2013 deadline.

The city has $5.1 billion of outstanding third-lien GARBs, $369 million of second-lien GARBs, and $73 million of first-lien GARBs. It has another $816 million of outstanding PFC-backed bonds. The airport served 33.2 million passengers last year. Those levels grew by 3.7% last year after falling 5.8% a year earlier.

Moody's attributes its negative outlook on the primary GARB lien now used to finance O'Hare projects to concerns that the "current plan of finance may bring negative pressure on the A1 rating due to the expected lower debt service coverage, higher cost per enplanement, and the risks associated with completing and financing [remaining projects]."

The airport credit's strengths include its large and diverse service base, American and United's hub status, and the on-time and on-budget completion of the $3.3 billion first phase of O'Hare projects.

Challenges include the risk associated with financing and completing remaining projects, a high dependence on airline revenues, and weaker-than-projected passenger levels. Debt service coverage on the third-lien bonds will drop to 1.12 times this year and cost per enplanement will increase from $16.10 in 2013 to a peak of $22.41 in 2020 based on projected annual passenger growth of 2.3%.

Mayor Richard Daley, who did not seek re-election last November, unveiled the original runway expansion plan in 2001. Mayor-elect Rahm Emanuel has said he is committed to the project.

Chicago had wanted to complete the OMP by 2014, but that date has been pushed back to at least 2016. Plans for a new $2 billion terminal that is part of the overall program remain on hold.

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