DALLAS – Concerned about the muni market's ability to absorb a flood of tax-exempt AMT bonds from U.S. airports, Dallas Fort Worth International Airport may turn to taxable debt for the next major phase of its development.
"We have begun looking at the taxable market, how we will be able to sell bonds on a taxable basis as a corporate issuer," said Mike Phemister, vice president for treasury management at DFW. "We are looking at how to sell them, not only in the U.S., but also in Europe and Asia. We understand there is a huge demand for U.S. infrastructure – money just sitting on the sidelines."
Phemister spoke about the issues facing major airport hubs Thursday at The Bond Buyer's Transportation Finance/P3 Conference in Dallas.
As DFW awaits signals from primary tenant American Airlines on how it might want to proceed on a new terminal that might also involve a new baggage system, airport officials are moving toward an estimated $3 billion of work on a 40-year-old system of runways and taxiways.
While bonds for the DFW airfield would qualify as exempt from the federal alternative minimum tax under current law, interest on bonds for a new terminal or baggage system would likely be subject to the alternative minimum tax because the beneficiaries are corporations, primarily American Airlines.
Airports are among the largest issuers of AMT debt, because the nature of the business means many of their facilities benefit private parties, particularly airlines.
A new DFW terminal could be built as a public-private partnership, though Phemister sees problems with that approach under DFW's governance.
"We have done a lot of meetings with P3s," Phemister said. "But we have also been taking a real serious look at the AMT market under the current tax structure and whether we can continue to issue AMT bonds or whether we should issue AMT bonds for terminal improvements."
With multi-billion-dollar projects coming from Los Angeles International Airport, Chicago's O'Hare, Atlanta's Hartsfield, and New York's LaGuardia and JFK, among others, "we have concerns about the ability of the AMT market to absorb that much debt," Phemister said.
The future of the AMT itself remains murky – President-elect Trump and Congressional Republicans have proposed repealing the alternative minimum tax as part of tax reform, although it is unclear how or when that would be done.
Another panelist, Mark Malveaux, partner at McCall Parkhurst & Horton, called the current environment "one of the most fascinating times in airport finance with the pent up demand for infrastructure changes combined with the decreased amount of federal funding."
Adding to the uncertainty is the direction the Republican Congress will take under Trump, who promised changes to the tax code while also vowing to launch a major infrastructure program.
While officials at the Port Authority of New York and New Jersey shared Phemister's concern about the AMT market prior to its recent issuance, a $2.4 billion issue of AMT bonds in May for LaGuardia International Airport's redevelopment project were 10 times oversubscribed, said panelist Larry Belinsky, managing director at advisory firm Frasca & Associates. Belinsky was financial advisor on the LaGuardia deal.
Port Authority officials "were very concerned about the ability to absorb that much debt in one deal," Belinsky said. "As it turned out, Citibank did a very good job and that was 10 times oversubscribed. Think about that: 10 times oversubscribed on a $2.4 billion deal and the all-in was 4.1 something for 35-year debt."
However, Phemister questioned the 10-times oversubscription, pointing out that institutions commonly place much larger orders than they actually want, knowing that the order size will be scaled down by the underwriters.
"If you want $10 million, you submit an order for $50 million to get your $10 million," Phemister said of the bond-buying process. "I also don't believe anyone really understands the extent of the AMT market. You talk about LAX. Chicago talking $10 billion, Atlanta talking $10 billion. We're talking some number probably approaching that. So, how much can we really sell?"
DFW issued $6 billion between 2010 and 2014 for two capital programs, Phemister said. The first was the addition of international Terminal D and construction of the Sky Link transportation system linking the airport's five terminals. The second was the $2.6 billion terminal renewal program, a redevelopment of three of the airport's original terminals.
"We were going to the market basically once a month during that period," Phemister said.
In its last deal this year, DFW bypassed the bond market with a private placement of $300 million of debt for the terminal renewal program. With the airport still in discussions with American on how to proceed with the project, DFW knew that it needed the money but did not have a specific use for it. Therefore, a private placement made more sense, Phemister said.
The airport received three proposals for the private placement, but the banks' unfamiliarity with the municipal market meant Phemister had to explain how the transaction should proceed. The bankers expected to issue a traditional loan, but DFW wanted the debt to be issued in the form of serial bonds maturing over five years.
"It was my intent to pull all of the interest-rate risk off of the purchaser," Phemister said. "In the proposal, I asked them to quote an interest rate that would be good until closing. Nobody could do that, with the volatility of interest rates."
Citibank prevailed, offering DFW a spread linked to the Municipal Market Data yield curve. Ultimately, DFW scored an all-in true interest cost of 1%, Phemister said.
"People have asked me: Was it easier to do? No, I don't think so," he said. It took a lot of negotiation. It took a lot of educating the banking folks about how municipal bonds work. But in the end, it was a very successful transaction."
Going forward, DFW is willing to consider the P3 model, but "I don't know if a P3 has ever been done for one airline," Phemister said.
"It sounds like a great idea, but the devil is in the details," he said. "When you really get talking to the guys (at American), particularly at DFW, where we will be looking at them possibly building one terminal, with us having four or five terminals, how will they compete against our terminals? Would they take parking and build a parking garage? If so, would they be taking our customers to their parking garage?"
With the airport jointly owned by the cities of Dallas and Fort Worth, the issues become more complex, Phemister said.
"It would seem to us the only solution, if we were committed to a P3, would be to privatize the whole airport, which I promise you will never happen."
