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Deal in Focus

DFW Sets Big Refunding With AMT Out of the Picture

DALLAS — With its major tenant, American Airlines, in bankruptcy, Dallas-Fort Worth International Airport is taking advantage of low interest rates and a favorable tax ruling in a $450 million refunding next week.

The new bonds will not be subject to the federal alternative minimum tax, thanks to a recent private-letter ruling by the Internal Revenue Service.

The IRS issued its ruling on a $1 million deal that DFW privately placed with book-runner JPMorgan as 2012A bonds last week. Using that ruling as a test case, the airport’s bond counsel determined that the $450 million of 2012B bonds will also be AMT-exempt, said Michael Phemister, vice president for treasury management at DFW.

The airport’s bond counsel is made up of three firms: Bracewell & Giuliani, McCall, Parkhurst & Horton LLP, and Newby Davis PLLC. The question of whether the bonds would be subject to the AMT needed to be determined as call dates neared for bonds issued in 2002, 2003, and 2008, Phemister said.

“This went on for about two years,” he said of the airport’s pursuit of the ruling. “Because we obtained a favorable ruling, we can do non-AMT refunding of bonds that were used to finance the SkyLink transportation system.”

The tax question was whether the $868 million SkyLink automated people-mover system that opened in 2005 was primarily for the benefit of the airlines or the general public. Since the system was built on the secure side of the airport, it served only ticketed passengers and employees who had cleared security.

“Our position was that it was like an elevator in a public building,” Phemister said.

AMT bonds have historically traded at 20 to 30 basis points above other tax-exempt non-AMT bonds of similar credit, according to Phemister.

When Phemister made presentations to the City Councils of Dallas and Fort Worth in March 2010, AMT bonds were trading at 90 to 100 basis points over non-AMT tax-exempts. Thus, the airport wanted the owner cities’ approval to seek the IRS ruling that the refunding bonds for SkyLink would be non-AMT bonds under the airport’s new financial model.

The IRS ruling applies to about 32% of DFW’s outstanding debt, according to the airport. Bonds used to finance the airport’s terminals retain their AMT status under the 1986 tax law.

The non-AMT status is expected to save the airport $207 million through refunding. On the upcoming issue through negotiation with co-senior managers JPMorgan and Bank of America Merrill Lynch, net present-value savings of about $50 million are likely, Phemister said.

First Southwest Co. and Estrada Hinojosa & Co. are the co-financial advisors on the deal, expected to price Feb. 16. The bonds will have final maturities of 2035, he said.

While Phemister expects a receptive market to DFW’s debt, caveats have come from rating analysts in the form of negative outlooks based on the bankruptcy of American Airlines’ parent, AMR Corp.

“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,” wrote Moody’s Investors Service analyst Kurt Krummenacker in assigning an A1 rating to the upcoming deal.

Fitch Ratings also applied a negative outlook to its A-plus rating, while Standard & Poor’s maintained a stable outlook on its A-plus rating.

American Airlines, which filed for Chapter 11 reorganization on Nov. 29, accounts for about 85% of DFW’s market share. American is the only major hub operator at the airport, which once included a Delta Airlines hub that shut down in 2005. In the wake of the AMR bankruptcy, Delta is now considered a possible suitor for American, as is US Airways, based in Tempe, Ariz.

AMR staved off bankruptcy for years, while most of its major rivals filed for Chapter 11 and entered into mergers. US Airways emerged from bankruptcy in a 2005 merger with America West Holdings Corp. Delta bought Northwest Airlines Corp. in 2008. In 2010, United Airlines combined with Houston-based Continental Airlines Inc.

Closer to home, Dallas-based Southwest Airlines Co. agreed to acquire AirTran Holdings Inc. The combined United Continental Holdings Inc. and Delta rank ahead of American by traffic.

AMR finally followed its rivals into Chapter 11 in November, sparking speculation about its potential as a merger partner. In its plan to emerge from its own Chapter 11 reorganization, AMR has already announced plans to cut about $2 billion in spending, including abandoning its pension program and eliminating thousands of employees.

If American reduces flights by 10% or more at DFW, the airport could see a downgrade, according to Moody’s. Other risks include a reduction in debt service coverage below 1.2 times, or a significant decline in the airport’s liquidity position.

Phemister said that airport officials believe the negative outlooks will have “very little effect, if any,” when the bonds are priced. “We feel our credit is still strong regardless of what American is doing.”

American’s bankruptcy comes as DFW is in the early stages of a $1.9 billion remodeling of its four original terminals.

Last year, DFW issued its first $310 million of bonds for its terminal renewal and improvement program, or TRIP.

In March, the airport will seek the Dallas and Fort Worth City Councils’ approval for $250 million of new-money AMT bonds for terminal improvements, Phemister said. All airlines that operate at DFW agreed to the current $2.1 billion capital program.

“Should non-airline revenues remain flat after the terminal improvements are completed and the additional borrowing has occurred, DFW’s finances could be negatively pressured,” Fitch analysts said.

Another stress factor could be competition from Dallas Love Field Airport, where Southwest Airlines operates. After the gradual repeal of the Wright Amendment that only allows flights from Love to serve nearby states, Southwest will be able to offer flights to any destination in the United States from Love Field beginning in 2014. On a much smaller scale than DFW, Love Field is also undergoing a complete terminal redevelopment that is expected to be completed by 2014.

The same year, DFW is scheduled to receive light-rail service from the Dallas Area Rapid Transit Orange Line that is moving northward from the suburb of Irving.

Also working in DFW’s favor is the continued growth of the economy in the Dallas-Fort Worth area, increasing cargo operations, and the airport’s rank as the nation’s third busiest in terms of operations, S&P noted.

“The rating reflects our view of DFW’s strong service area economy, solid business position, and generally good financial performance,” said analyst Todd Spence. “Further supporting the rating is our view of the airport’s experienced and proactive management team.”

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