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Chicago Sets O'Hare New-Money and Refunding Issue

CHICAGO — Chicago plans to enter the market later this year with up to $900 million of O’Hare International Airport revenue debt to refund outstanding bonds and raise new-money for the airport’s capital improvement program and ongoing $8 billion runway expansion program.

The city intends to refund up to $500 million of existing airport debt depending on market conditions. The new-money piece would provide $100 million for the relocation of parking under the $8 billion O’Hare Modernization Program, or OMP.  The remainder would cover issuance costs, capitalized interest, fund reserves, and finance capital improvement program projects, according to Kathleen Strand, a spokeswoman for Mayor Rahm Emanuel.

“Issuance of the GARBs [general airport revenue bonds] will ensure the continued economic viability of O’Hare and the economic benefits it brings to Chicago and the surrounding area,” the city said in a statement. Chicago officials anticipate entering the market during the third quarter.

An ordinance authorizing the sale of senior-lien GARBs was expected to be introduced to the City Council as soon as its Wednesday meeting, according to Strand. The city last August sold $1.2 billion of O’Hare debt in a refunding that generated double-digit savings and streamlined the facility’s GARB-lien structure under one new senior lien.

The sale came after a Moody’s Investors Service downgrade and amid uncertainty over the future operations of one of the airport’s hub carriers, American Airlines, which is in bankruptcy. American is wrapping up its Chapter 11 reorganization — filed Nov. 29, 2011 — and the announcement of a bankruptcy exit through a merger with US Airways could come as soon as Thursday.

The impact of a merger with US Airways could be cushioned at O’Hare as the airline has just a small presence there with little overlap between the two carriers’ routes. However, there would remain some uncertainty as the two fold their routes together.

“In Fitch’s opinion, the central risk for the incumbent American hubs would be a major loss in connecting traffic, exacerbating the debt burden and airline cost profile,” Fitch Ratings wrote in a special report on the potential merger published Wednesday. Based on past airline mergers, some hub airports have been strengthened while others weakened.

Combined, the two would operate six hubs. “It is still fair to ask whether maintaining as many as six hub airports at the same level of operations will be necessary to maintain an efficient single network,” Fitch said.

Moody’s rates the airport’s $6.5 billion of GARBs at A2. Fitch assigns its A-minus rating and a negative outlook. Standard & Poor’s also rates the bonds A-minus, but with a stable outlook.

The airport’s debt portfolio includes another $800 million of bonds backed by passenger facility charges levied on passenger travel. They are rated A2 by Moody’s, A-minus by Standard & Poor’s and A by Fitch.

Moody’s downgrade of the GARBs stemmed from O’Hare’s high leverage, narrow financial margins, and economic and construction risks tied to the magnitude and complexity of OMP projects. Its challenges are heightened by weak economic growth and American’s bankruptcy.

The city counters that the positive benefits of the OMP, including reduced delays and increased capacity, are well worth the strain. The credit benefits from the region’s large economy and the airport’s strong origination and destination market, its unique dual hub status with American and United Airlines accounting for 80% of flights, and the on-time and on cost completion of the $3.28 billion first phase of OMP.

Fitch warned in its last report that sustained high leverage, rising costs and a contraction in traffic figures could drive a downgrade. Annual debt-service requirements are projected to rise from $276 million in 2011 to over $600 million by 2017, Fitch said. Debt service coverage on GARBs remains at the required 1.1 times.

Standard & Poor’s attributed its outlook change in part to uncertainty over financing for $2.3 billion worth of future O’Hare projects. A settlement reached in 2011 that provided airline support for the next batch of OMP projects anticipated talks beginning this March on future projects. Emanuel last year pressed the airlines to jumpstart negotiations, but they have resisted.

American has been distracted by its bankruptcy and a spokeswoman said Wednesday she did not know when talks might resume.

“We will continue to work with the city and are supportive of demand-driven projects at the airport,” said United spokesman David Christen. “We are in continuous discussions with the city about developments at O’Hare.”

The Chicago Aviation Department said in a statement regarding talks on future OMP projects: “The agreement reached with the airlines in the spring of 2011 calls for negotiations to fund the remaining airfield elements of the OMP to begin no later than March 1st of this year.  The CDA and airlines continuously discuss infrastructure developments at O'Hare, including the OMP.”

Former Mayor Richard Daley unveiled the expansion plan in 2001 and had wanted it completed by 2014, but that date has been pushed off and plans for a new $2 billion terminal are on hold.

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