Upgrade Seen Boosting Midway Airport Deal Appeal

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CHICAGO – Chicago heads into the market Wednesday with $350 million of Midway Airport revenue paper bolstered by an upgrade.

The rating boost and record 2015 growth at the city's secondary airport is expected to help tamp down the interest rate penalties usually paid because of the tarnished credits of the city and Illinois.

The deal offers a $125 million series that's due in 2034 with interest subject to the alternative minimum tax, and a second series for $225 million of non-AMT securities that are due in 2046.

Both are being issued under the airport's second lien and will bring the airport's debt up to $1.8 billion mostly issued under the second lien.

Proceeds will refund 2004 debt and raise $308 million of new money for projects, cover capitalized interest, and cash fund the debt service reserve.

While the city's GOs have been trading at between a 250 and 300 basis point spread to the Municipal Market Data top-rated benchmark, its enterprise debt has fared better and the deal should benefit from Midway's performance.

The deal will "take a premium" to get done because of the credit travails of Chicago and Illinois, but it won't be too significant, said Thomas Spalding, a senior vice president and portfolio manager at Nuveen Investments. The capital projects being funded "sound prudent" and "the airport's numbers are strong," he said.

The 10-year on the city's recent water revenue sale sold at a spread of 128 basis points while its wastewater sale fall sold at a 145 spread. The city's last airport deal, a sale for O'Hare International Airport last fall, was snapped up and carried spreads of 90 basis points on the short end to 124 on the long end.

Barclays in the senior manager and another nine firms round out the underwriting syndicate. Acacia Financial Group and Frasca & Associates LLC are advising the city.

Ahead of the sale Fitch Ratings upgraded its Midway rating to A from A-minus.

"The upgrade reflects Midway's enhanced franchise strength which, taken together with the robustness of the underlying Chicago air service market, offsets its currently elevated leverage," Fitch said in its report. "Midway has demonstrated a notably increasing strategic importance to the strong Chicago air service area and emerged as a complementary airport to nearby O'Hare International Airport."

Kroll Bond Rating Agency assigned its A rating to the second lien and Standard & Poor's affirmed its A rating. All assign a stable outlook.

Moody's, which wasn't asked to rate the deal, assigns single-A level ratings to outstanding Midway bonds.

In an investor presentation, the finance team and city Department of Aviation officials highlighted the airport's record 11 million passengers in 2015, which represents 4.8% growth. Growth was at 4% in the first quarter this year.

"Midway plays a critical and distinct role in the Chicago air system," the city's deputy chief financial officer, Kelly Flannery, told potential buyers. Southwest Airlines accounts for the majority of flights and Midway is its top airport.

Proceeds will fund various maintenance projects and an expansion of the airport's parking and security check-in too allow for more concessions. "Projects focus on meeting existing demand and growing non-airline revenue," Erin O'Donnell, the Aviation Department's managing deputy commissioner, told investors.

The airport's non-airline revenues rank low compared to industry averages.

A $458 million capital program through 2022 is primarily being funded through bonds and federal grants.

About 86% of the airport's debt portfolio is fixed rate, with 7% as unhedged floating-rate debt 7% hedged floating rate.

Its floating-rate paper carries four letters of credit, and a fall below an investment grade would trigger defaults. Two are with the Bank of Montreal, one with Wells Fargo, and one with JPMorgan. Swaps on bonds valued at $130 million are with counterparties Goldman Sachs and Well Fargo and are negatively valued at $36 million with triggers at a rating below the Baa1/BBB-plus level.

The enterprise fund has some exposure to the city's pension fund crisis. It contributes about $8 million, which represents 3.1% of expenses, annually for pensions, but faces an increase depending on how the city tackles a court setback in March that voided its reforms to its laborers' and municipal employees' pension funds.

Long security screening lines have created negative headlines ahead of the sale, but the city is getting more screeners from federal authorities and said Monday that a TSA PreCheck enrollment center is now open at Midway.

Midway was the subject of two privatization attempts, one by Mayor Rahm Emanuel and one by his predecessor, Richard Daley. Emanuel made clear last fall that he has no plans to try to resurrect a leasing process allowed under a federal pilot program.

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Transportation industry Illinois
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