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LAWA Sees Receptive Market for LAX's $269M Bond Pricing

LOS ANGELES — With demonstrated success in managing a multibillion expansion project, the stars are aligning as Los Angeles International Airport prepares to price $279.8 million in senior revenue bonds Wednesday.

The airport, known by the moniker LAX, which has not issued bonds since 2010, will follow up with two other like-sized issuances next year for a total of $1 billion in issuance through mid-2013.

"The market tends to be receptive to credits you don't see regularly that have a high and stable rating," because mutual funds are wary of being overweight in one credit, according to Craig Brothers, the managing director and portfolio manager for Los Angeles-based Bel Air Investment Advisors.

He anticipates tight spreads for the credit with interest rates not hitting 2% until maturities reach 2024-25 and less than 3% out to 2018.

The bonds are split into three series of tax-exempt bonds with two tranches of private-activity bonds, one for $84.9 million and one for $152.3 million, and a $32.5 million governmental series that is a refunding.

Bond maturities will range from 2014 to 2029 for the Series A bonds, 2014 to 2037 for the Series B bonds, and 2015 to 2019 for the Series C bonds.

A light bond calendar and strong investor interest in municipal bonds are expected to continue into next week, creating the environment for a strong reception for the bonds.

"This year, in 47 out of 49 weeks, there has been a net increase for muni mutual funds," Brothers said. "There is no shortage of money."

Talk of California's bonds being upgraded based on the passage of Proposition 30 — a tax measure expected to generate $6 billion annually for four years — could also help, according to Peyton Studebaker, director of trading at Richmond, Va.-based Caprin Asset Management.

"We have seen California spreads tighten," Studebaker continued. "Having a little bit of momentum on the state level might help a large name like LAX in the market."

Despite its status as the world's sixth largest airport, the road to market was not so smooth when LAX officials priced $900 million in bonds in 2010 to help fund its multi-billion dollar capital improvement project.

Los Angeles World Airports —which also owns LA-Ontario, LA-Palmdale and Van Nuys Regional Airport — had not executed a major capital improvement plan since Los Angeles hosted the Olympics in 1984, and analysts questioned the ability of airport officials to manage $4.2 billion in projects.

The multi-billion capital program significantly increased debt levels, the airport's traffic was declining and multiple lawsuits from airlines raised questions about the airport's relationship with the airlines, according Seth Lehman, a senior director at Fitch Ratings.

Based on those concerns, Fitch maintained the airport's AA rating, but gave it a negative outlook in 2009.

Fitch analysts revised that outlook to stable on Nov. 15 and affirmed the AA rating even though the airport has amassed $3.5 billion in debt and has added projects to a capital improvement plan that has ballooned to $6.9 billion.

"Since that time, the airport has been able to demonstrate it could execute on its capital program," Lehman said.

Lehman credited LAWA for the successful management of its capital improvement projects including the $1.2 billion Tom Bradley International terminal project which has stayed on schedule and on budget.

The project will add over 1.2 million square feet of shops, restaurants, and passenger lounges, as well as new security screening, customs and immigration, and baggage claim facilities.

The terminal's existing two concourses with nine gates are being demolished and replaced with dual concourses sporting 18 gates, nine of which will be able to accommodate the larger Airbus A380 jumbo jet. The terminal began opening in phases in September and is expected to be completed in 2014.

"We laid out a plan to the rating agencies and investors and we met that plan," said Ryan Yakubik, LAWA's director of capital development and budget.

"You have to manage your contractors and the schedule and all of the components," he said. "We had not done a great deal of capital projects in the past, which raised concerns for Fitch, but we exhibited control and management on those projects without letting those things get out of hand."

The jump in the capital improvement budget from $4.2 billion to $6.9 billion is not the result of cost overruns, but will go to fund renovations to concessions in terminals 5 and 6 and to provide the mid-field terminal with new gates, according to Yakubik.

It's the next set of projects planned for the next four to five years, he said.

"The airport and the airlines have also agreed to a new rate-setting approach, which we think will provide financial stability in the long term," Lehman said.

The airlines agreed to a uniform 10-year agreement that also includes payment for maintaining the terminal walkways, lobby areas and security checkpoints, Yakubik said.

"We are employing airline-wide rates as opposed to rates for individual terminals," Yakubik continued. "The reason the rating agencies like it, is that we have a long history of litigation over rates. Getting the airlines on to a new rate structure without a lot of litigation is considered a positive thing."

The rate agreements signed recently came after nearly two years of negotiations, he said.

The airport has also experienced traffic growth in the 4% range in both fiscal 2011 and fiscal 2012 enabling LAWA to build its reserve fund and resulting in high overall debt-service coverage levels, Lehman said.

The airport's strong metrics ameliorated concerns about the $3.5 billion in debt LAX amassed executing its capital improvement plan, he said.

On Nov. 16, Moody's Investors Service affirmed its Aa3 rating on the airport's senior-lien debt and A1 rating on outstanding subordinate-lien debt.

Moody's analysts also gave the airport a stable outlook, but cautioned that the modified capital expansion plan will require significant increases in debt, including a substantial amount related to projects that must be completed regardless of traffic levels.

LAWA officials still haven't made a decision on whether some of the bonds it plans to issue in the next year will be privately placed, because they are basing the decision on market conditions, Yakubik said.

Citi is the lead underwriter.

Co-managers include Cabrera Capital Markets, Siebert, Brandford, Shank & Co. and Wells Fargo Securities. Bond counsel is Kutak Rock. Co-financial advisors are Public Resources Advisory Group and Public Financial Management Inc.

"It has been two years since we have been to market," said LAWA's Yakubik. "I think there will be strong demand for the bonds."

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