CHICAGO – Kansas City, Mo., plans to refund about $200 million in a deal that will streamline the Kansas City International Airport’s debt portfolio in a new master bond ordinance that achieves savings and smooths the path for future issuance.
“We are standardizing and modernizing our covenants,” said Kansas City treasurer Tammy Queen.
The sale will establish a new single bond ordinance with a new general airport revenue bond lien that will encompass most existing bonds and future sales, Queen said.
Currently, the city has five outstanding series of airport revenue bonds all governed by separate ordinances with unique perimeters.
“It complicates debt service coverage calculations and complicates debt portfolio management for us,” Queen said.
The city will sell the deal in two series, one for $148 million of general improvement airport refunding revenue bonds subject to the alternative minimum tax, and a non-AMT series for $53 million. The sale will go before the City Council for approval next week and the city intends to enter the market the week of July 22.
Bank of America Merrill Lynch and Piper Jaffray & Co. are co-senior managers. Backstrom McCarly Berry & Co. and Stern Brothers are co-managers. First Southwest Co. and Valdes & Moreno are co-financial advisers. Kutak Rock LLP and Hardwick Law Firm LLC are serving as co-bond counsel.
Ahead of the sale, Standard & Poor’s assigned an A-plus rating to the refunding bonds and affirmed the A-plus rating on existing senior lien general airport revenue bonds. It also affirmed the A rating assigned to subordinate general airport revenue bonds and stand-alone passenger facility charge bonds. It revised its outlook to stable from negative.
Moody’s Investors Service assigned an A2 rating to the refunding bonds and affirmed the same rating for existing senior lien bonds and the A3 rating on subordinate and PFC bonds. The outlook is stable.
Fitch Ratings recently affirmed its A rating on senior lien bonds and it’s A-minus on subordinate bonds. The outlook is stable.
The deal will refund a 2001 passenger facility charge series and two 2003 bond series. Two existing series will remain outstanding including a 2008 series that will be defeased with cash next year and a 2005 subordinated series that also enjoys a pledge of customer facility charges tied to the airport’s rental car facility. The latter would not generate any savings. A portion of the 2003 bonds being refunded may also be stripped out of the sale depending on interest rates.
The city has long contemplated the restructuring and establishment of a new lien but more favorable interest rates that will generate traditional interest rate savings heightened the city’s interest in getting the overhaul done.
The finance team had projected about 7% in present value savings although the recent rise in interest rates likely will chip away at those levels, Queen said.
The final maturity on the existing bonds is 2028 and that won’t be extended but the city will push out the existing maturity schedule attached to the 2003B bonds being refunded.
“The airport is facing a debt service mountain over the next three years and so we will shave off the top and level it out so debt service is more stable,” Queen said of the extension on the 2003B series.
The city will use savings from the deal to replace existing debt service surety policies and replace them with cash reserves, removing bank risk, considered a positive credit move.
The city’s last airport deal came in 2008 and it has not issued new money for the airport since 2005, instead funding past projects and its $144 million five-year capital program with cash, passenger facility charges, and grants. No new-money issuance is contemplated in the near term although about $240 million in voter approved authority granted in 2000 remains on the books.
The new lien lays the groundwork for simplifying future issuance as the city contemplates a controversial plan to consolidate the airport’s existing terminals into a new single, state-of-the-art facility. The proposal carries a $1.2 billion price tag.
Mayor Sly James in May named a 24-member airport advisory group to hold hearings on the future of the airport and return with recommendations on how the city should proceed by the end of the year.
‘We need to have a conversation about this important bit of infrastructure and economic development that assures that Kansas City remains best and remains a major American city,” James said at the time.
The airport currently operates three terminals. The B terminal is full due to space shifts driven by airline consolidation. The A terminal is slated for closure in fiscal 2014 with airlines housed there being moved to the existing C terminal. The changes will save on airport expenses.
The current terminals were geared towards reducing travel time between parking and airplane gates. It’s a design popular with local travelers and for non-stop flights. For passengers on connecting flights the terminal layout complicates their travels and can sometimes require catching a bus to another terminal and another trip through the security line. The airport was designed in the late 1960s and built in the early 1970s.
Some local travelers are resistant to the consolidated terminal proposal and critics oppose it for the cost, but supporters believe it’s needed to improve the airport’s efficiency by saving money on operations and centralizing security. If the city eventually opted to build the new single terminal, any debt issuance would go to a public vote.
Standard & Poor’s said its rating reflects strong underlying credit fundamentals, including the airport’s solid market position, diverse and stable carrier base, and its good cost per enplaned passenger. “The stable outlook on the GARBs reflects our expectation that coverage levels will remain near current levels,” said analyst Todd Helman.
The Kansas City airport benefits from a debt structure that is all fixed-rate and the airport enjoys a 95% origination and destination passenger base without a competitive airport within a 170-mile range, Fitch said.
After leveling out in fiscal 2011, passenger levels rebounded 5.3% in fiscal 2012 to about 5.2 million. Fiscal 2013 saw a decline of more than 8% to 4.8 million due to reduced service by Frontier Airlines. The drop brings passenger levels to their lowest level over the last decade and poses a challenge for the credit.
The credit is also challenged by uncertainties tied to airline consolidation and limited projected passenger growth.
The airport, managed as an enterprise fund by the city’s aviation department, has liquidity of 418 days cash on hand with senior lien GARB coverage at more than 2 times for the last two years and total GARB coverage at 1.6 times, up from 1.02 times in fiscal 2010, Fitch reported.
Southwest Airlines is the dominant carrier at the airport accounting for about 45% of passengers, which subjects the airport to some concentration risks. Moody’s considers the airline’s presence a plus, contributing to low costs to the airlines, and describes the carrier base as diverse.
The airport’s “increasing, albeit still relatively low cost per enplaned passenger now at $5.37 remains key to airport’s competitive position,” Moody’s wrote.
Operating revenues rebounded 9.6% in fiscal 2011-2012 to $102.2 million, setting a new peak, due in part to parking rate increases, Fitch said. Parking revenue is the leading non-airline revenue source and largest contributor overall at nearly 47% of operating revenues.