DALLAS — As George Bush Intercontinental Airport’s $1 billion redevelopment gets under way, Houston will issue $520 million of refunding bonds for the facility Tuesday, the largest deal of the year so far in Texas.
The subordinate-lien revenue bond issue includes $280 million of Series A bonds subject to the alternative minimum tax, $220 million of non-AMT Series B bonds, and $20 million of taxable Series C bonds.
The city is looking for savings of about $40 million as rates remain near record lows, according to Kirk Rummel, chief financial officer of the Houston Airport System.
“We’re trying to take advantage of the low rates,” Rummel said. “The timing looks great right now. I don’t see any other airports out there ready to issue this week.”
Morgan Stanley leads the underwriting team, with Ramirez & Co., RBC Capital Markets, Blaylock Robert Van LLC, Jefferies & Co. and Wells Fargo Securities as co-managers.
First Southwest Co. shares financial advisory duties with TKG & Associates.
Bracewell & Giuliani is co-bond counsel with Bates & Coleman.
Airports have taken a leading role in the refunding spree in the early part of this year. Dallas-Fort Worth International refunded $450 million last month, as Cleveland Hopkins International issued $241 million. Chicago is developing a plan to refund up to $1.75 billion of O’Hare International Airport bonds for savings as it moves forward with an $8 billion runway project.
Like other airports, Houston is affected by consolidation in the industry and the threat of higher fuel prices. Fitch Ratings revised its outlook to negative ahead of the upcoming deal, warning that it could lower the A-plus airport subordinate-lien bond rating.
“The negative outlook reflects concerns that coverage ratio trends may continue to weaken as a result of a combination of increasing operating costs, stagnating revenues in a slowing enplanement environment, and expected reductions in debt service offsets from federal grants,” Fitch analyst Emma Griffith wrote.
“Absent successful budgetary actions or traffic-induced revenue improvements, Fitch believes that the airport system could face erosion in its operating margins and debt-service coverage ratios that are below historic averages,” she said.
Standard & Poor’s affirmed its A rating and stable outlook on the credit. Moody’s Investors Service does not rate the issue.
As the former hub and home of Continental Airlines, Houston’s airport is losing a headquarters but gaining flights from the merger of Continental and United Airlines.
The $3 billion merger of the two formerly bankrupt carriers was approved in 2010 and symbolically completed Saturday with the integration of the carriers’ computer systems and the removal of Continental signs from major airports.
Rummel, a former employee of Continental, said he’s sorry to see the airline’s name disappear but happy about the airport’s rising status as a major hub for United.
“They’ve actually added more destinations from Houston than anywhere,” he said. “While downtown’s upset about losing the headquarters, it’s actually good for the city. Net jobs are expected to grow.”
United will continue the $1 billion redevelopment that is already under way at Bush Intercontinental’s Terminal B, Rummel said. The city’s share of the entire $1 billion project is only about $288 million, he said, with United covering the remainder.
Bush Intercontinental also has the flexibility to move flights to unused gates while construction is in progress, Rummel said.
As Terminal B renovation is under way, work is also beginning at Terminal D to accommodate the 525-passenger Airbus A380, a double-decker that will require a second level of passenger bridges. Some of the taxiways and runways will also need reinforcement for the super-heavy jet.
“Lufthansa’s already selling seats on that, so we’d better be ready,” Rummel said of the German carrier’s scheduled first A380 flight in July.
The terminal redevelopment project is designed to unfold in three phases, the first of which is expected to be completed in 2013.
The $160 million south concourse project at Terminal B will replace the existing south side flight stations with a new 225,000-square-foot facility for United’s regional aircraft.
At nearly four times the size of the existing space, the new concourse will feature modern and expanded gate lounge areas, concessions and rest room facilities.
Travelers will reach the new concourse from the terminal via a 95-foot-wide bridge with 13,000 square feet of food, beverage and retail concessions — five times more than the current facility. The concourse will feature 28-foot-high, floor-to-ceiling glass windows.
“Houston is our largest hub and a vital international gateway in United’s network,” said Pete McDonald, United’s executive vice president and chief operations officer.
“This investment in the Houston hub will allow us to accommodate more customers and more aircraft types, provide new amenities for travelers, and improve efficiencies for the new United,” McDonald said.
The Houston Airport System, which includes the smaller Hobby Airport and former Ellington Air Force Base, serves about 50 million passengers per year.
Ellington Airport operates as a joint military-civilian airfield. Bush Intercontinental ranks as the seventh busiest in the nation.
The airport system has $1.9 billion of subordinate-lien debt outstanding and $450 million of 2009A senior-lien bonds, according to Fitch.
After average growth rates of 3.2% through the decade leading up to the 2008 recession, both Bush Intercontinental and Hobby lost passengers at the rate of 8.2% and 8.8%, respectively.
For fiscal 2010, the system overall saw 2.1% growth in enplanements, with Bush Intercontinental increasing by 1.3% and Hobby enjoying a more robust recovery of 5.7%. Fiscal 2011 brought 1.7% growth overall.
While Bush Intercontinental serves as the major hub for United, Hobby serves Southwest Airlines, which is also growing through the acquisition of AirTran Airlines.
The airport system’s unrestricted cash reserves of $523 million equals 749 days of cash on hand, according to Fitch.
Some of the airport’s internal liquidity will be drawn down for capital spending in upcoming years, analysts noted.
In terms of new money for terminal redevelopment, Houston will probably not have to issue bonds for a year or two, Rummel said.
