CHICAGO Chicago plans to enter the market Thursday with $326 million of Midway International Airport second lien refunding bonds in a long planned restructuring that had been on hold as the city pursued a privatization deal.
Any lease privatization deal would have required that the city pay off Midway’s $1.4 billion of first and second lien revenue bonds making moot a restructuring. The city’s decision to drop the privatization effort moved the long-planned restructuring back to the front burner.
Chicago Mayor Rahm Emanuel grounded the privatization effort in September when the number of bidding parties dropped to one, raising concerns that the lack of competition might undercut the deal’s value.
Former Mayor Richard Daley had come close to such a deal five years ago but it fell apart when the winning bidder couldn’t raise the financing as the credit markets tightened in 2009. The city resurrected its privatization efforts late last year under a federal pilot program, before it eventually came to naught.
The city’s chief financial officer, Lois Scott, in a municipal roadshow presentation, said the sale offers three series of bonds.
They include an A series for $122.8 million that matures in 2035 and is subject to the alternative minimum tax, a B series for $141 million that matures in 2035 and is not subject to the AMT, and a C series for $61.7 million that matures in 2020 and is taxable.
The deal accomplishes a series of city goals.
“Primarily we are looking to restructure debt to smooth out bumps in the early years” most notably from a bullet maturity on outstanding floating rate bonds, deputy comptroller Jeremy Fine said in the roadshow presentation. By shifting more of its debt to a fixed rate, the deal also eases market risks.
Chicago also wants to better match debt service with revenue projections and it will cash fund reserves along with refunding some commercial paper.
The city expects to return to the market early next year with the next stage of the restructuring in a $600 million issue that includes $190 million of new money and $470 million of refunding bonds.
“Collectively, the two sets of transactions will enhance the capital structure risk by the reduction of variable rate debt to approximately 17% from the current 25% level, the elimination of both put bonds” with mandatory tenders in 2015 and 2016 “and a reduction to the maximum annual debt service spike,” Fitch Ratings said.
Fitch affirmed the A-minus assigned to the second lien and its A assigned to the first lien.
Moody’s Investors Service rates the second lien A3 and the first lien A2.
Standard & Poor’s affirmed the Midway second lien rating of A-minus and the first lien rating of A.
The airport has about $744 million of first lien debt and $640 million of second lien bonds.
JPMorgan is senior manager with Bank of America Merrill Lynch and Cabrera Capital Markets LLC serving as co-seniors and another seven firms serving as co-managers. Mayer Brown LLP and Sanchez, Daniels & Hoffman LLP are bond counsel. Acacia Financial Group Inc. is advisor and Ricondo & Associates Inc. is a consultant.
The city is stressing is its roadshow Midway’s solid growth, its limited capital needs, and its new 15-year lease agreement with the airport’s airlines that underscore their commitment.
The airport handled nearly 9.7 million passengers last year, up 3.4% from 2011, which exceeded the airport’s previous peak in 2004. Airport consultants have projected conservative growth rates of 1.95 % to 2.6% over the next decade, in line with national projections.
Southwest Airlines Inc. accounts for 92% of service at the airport, located southwest of downtown Chicago.
Fitch considers the airport well-positioned with its growing low-cost, point-to-point domestic services benefitting from a favorable service area.
Its traffic growth has climbed annually since 2008 outstripping its big sister O’Hare International Airport and national levels. Southwest’ domination, however, poses concentration risk.
The credit’s challenges include above average leverage compared to its peers and below-average liquidity.
Midway’s five year capital program totals $379 million and is focused on maintenance and noise mitigation. When cash reserves and non-pledged revenue sources such as passenger facility charges are counted, total debt service was 1.27 times last year.
Midway’s stable market demand and strong growth led by Southwest’s expansion there and its new use and lease agreement are primary credit strengths, Moody’s said.
The reliance on Southwest and competition from O’Hare pose challenges. Rising per-passenger enplanement costs expected to rise to $10 this year from $8 last year -- also could undercut airline interest in serving the airport. Exposure to variable-rate risk also is a challenge although it is being reduced with the restructuring.
