DALLAS — Dallas Fort-Worth International Airport begins a series of refundings this week that is expected to total nearly $1 billion.
This week’s $290 million deal follows a $475 million new-money issue in July that was the second for the airport’s $2 billion Terminal Renewal and Improvement Program, or TRIP.
“We hope to do as well as we did last time, but that was an amazing transaction,” said Michael Phemister, vice president for treasury management at DFW. “We got such a good response on the last [alternative minimum tax] deal that we decided to come back and do an AMT refunding.”
The July issue was the airport’s first in more than a year in which the interest on the otherwise tax-exempt bonds is subject to the AMT.
Investor interest for AMT bonds is more limited than for fully tax-exempt bonds, and before the deal, Phemister said he was unsure how the market would react.
In the end, the issue was three times oversubscribed, providing a true interest cost of 4.75% with final maturities of 30 years.
The July response was so strong that DFW decided to add nearly $100 million to the July issue, raising it to $475 million from the previously anticipated $380 million.
As DFW anticipates more debt issuance for its terminal renewal program, airport leaders are also planning to capture the historically low interest rates in today’s market through refundings.
After this week’s transaction, two $300 million issues are planned in September and October, Phemister said. The September issue will be subject to the AMT, while the October issue will not, he said.
The refunding activity is the most that Phemister can remember in his 13 years at DFW, which he attributes to the large amount of outstanding debt for the construction of the airport’s Terminal D and its SkyLink system that links the terminals.
“We never had enough bonds outstanding to do anything of this magnitude before,” Phemister said.
The refundings also come as American Airlines parent AMR Corp. develops its plan to emerge from bankruptcy protection, possibly with US Airways as a merger partner.
Officials for both carriers have said that if a merger were to occur, the combined headquarters would be at American’s base in Fort Worth, just outside DFW International. US Airways is currently based in Tempe, Ariz.
The negotiated deal expected to price Thursday is led by Ramirez & Co.
Citi, JPMorgan and Cabrera Capital Markets will be co-managers.
McCall Parkhurst & Horton and Newby Davis are co-bond counsel.
First Southwest Co. and Estrada Hinojosa & Co. share financial advisory duties.
The bonds have ratings of A-plus from Standard & Poor’s and Fitch Ratings and A1 from Moody’s Investors Service. All three agencies give them a negative outlook.
“The negative outlook is based on the airport’s high leverage position and its revenue concentration risk in American Airlines, whose future operational structure is uncertain in light of its parent company AMR, Corp. (ratings withdrawn) filing for Chapter 11 bankruptcy on November 29, 2011,” wrote Moody’s analyst Kurt Krummenacker.
“Resolution of the negative outlook will be closely aligned with future announcements from American about their plans for operating at the airport, as well as the airport’s ability to meet its projections,” Krummenacker said.
The Series 2012E bonds coming this week will refund for interest rate savings certain maturities of the Series 2000A, Series 2002C, Series 2003A and Series 2004B bonds currently outstanding.
The bonds are issued jointly by the cities of Dallas and Fort Worth, which collaborated to construct the airport.
The airport, designed to serve both cities and split evenly between the two, was completed in 1973, and began operating the next year.
The airport’s ongoing TRIP capital program is the first major renovation of the original terminals since then.
Fitch noted that since the American bankruptcy filing, the airline has essentially maintained a relatively stable level of operations at DFW.
While new domestic and international destinations have been announced for DFW, the airport is likely to experience flat to slightly negative growth for fiscal 2012.
Though enplaned passenger traffic levels declined by 2.7% and 3.8% in fiscal 2008 and 2009, respectively, those decreases have been less severe than those seen at other airports due largely to smaller reductions in connecting passengers, according to Standard & Poor’s.
Traffic rebounded in fiscal 2010, by 1%, and increased by 2.4% in fiscal 2011.
An airport consultant’s report forecasts that enplanements will rise to 31 million in 2020 from 29 million in 2011, or by an average annual rate of less than 1%.
“We consider the forecast to be reasonable assuming American Airlines does not change its strategy,” analysts at Standard & Poor’s wrote. “The airport is American Airlines’ largest hub and represents approximately 40% of American’s total traffic. American has a dominant market share of 85% of traffic at DFW.”
Industry analysts see US Airways, the fifth-largest airline in the United States, as the only remaining viable merger candidate among the major carriers, following the combinations of United Airlines with Continental Airlines, and Delta Air Lines with Northwest Airlines.
However, AMR has said it is also considering other merger partners, including JetBlue Airways Corp., Alaska Air Group Inc., Virgin America and Republic Airways Holdings Inc., operator of Frontier Airlines.
DFW’s $3.8 billion capital improvement program will result in peak outstanding debt of $6.1 billion, according to Standard & Poor’s analyst Todd Spence.
The largest component of the capital improvement program is TRIP, which is estimated to cost $1.9 billion between 2010 and 2018. TRIP currently has $468 million under contract, and DFW expects the project to continue on schedule and within budget.
“We view the overall program, which includes other infrastructure and maintenance projects, as achievable, but there is exposure to increases in both cost and scope, as well as inflation,” Spence noted, citing debt of $200 per enplaned passenger by 2015, up from $135 in 2011.
“While we view debt per enplaned passenger as high, we consider the amount manageable for the airport,” Spence wrote. “Coverage during the forecast period from 2012 to 2020 from current revenues excluding coverage account and transfers ranges from 1.11 times to 1.17 times, which we consider adequate.”