DALLAS — Denver will price one of its largest issues of airport bonds Wednesday, offering $736 million of subordinate-lien debt that will include long-term financing for its South Terminal hotel and commuter rail station.

The negotiated deal is led by Citi, with Bank of America Merrill Lynch, BMO Capital Markets, Estrada Hinojosa & Co., Morgan Stanley and Siebert Brandford Shank & Co. as co-managers.

Jefferies and Frasca & Associates serve as financial consultants. Bond counsel is provided by Hogan Lovells and Bookhardt & O’Toole.

Despite the size of the deal and recent cancellations of pricings due to rising rates, the market Tuesday appeared ready to absorb the Denver bonds, one trader said.

“Governments and munis seem to be doing well,” he said. “The market appears to be operating normally.”

Patrick Heck, chief financial officer for Denver International Airport said, “certainly we will monitor the market given the event volatility. However, we believe the area we can get will be within the range we need to meet our financial targets.”

The Denver deal comes the same week as Dallas-Fort Worth International Airport prices $409 million sale of joint airport revenue refunding bonds.

Those bonds are rated A2 by Moody’s Investors Service, A-plus by Standard & Poor’s, and A by Fitch Ratings.

The Denver bonds will be issued in two series. The $339 million Series A will be subject to the alternative minimum tax provisions of the income tax code while the $397 million Series B will not.

Standard & Poor’s and Fitch Ratings confer A ratings on the bonds with a stable outlook. Moody’s Investors Service rates the bonds A2 with a negative outlook. Moody’s has taken issue with the decision to build a 519-room Westin Hotel at Denver International Airport.

The $544 million South Terminal, which includes the hotel, is the largest component of a $1.4 billion capital construction program that runs through 2018.

“The negative outlook is based on the construction risk of the airport’s capital plan,” wrote Moody’s analyst Earl Heffintrayer. “The plan includes major elements that are not core airport revenue producing projects that have yet to reach 100% design documents.”

Cautionary comments about the capital program also came from Denver Auditor Dennis Gallagher, who warned that the program is vulnerable to fraud.

After a six-month review of the DIA Planning and Development Division, an audit committee headed by Gallagher found that the change-order practices on construction projects created a “substantive risk.”

“The loose controls surrounding the change order practices of the division provide an opportunity for fraud to occur, necessitating that the division strengthen its control environment,” the report found. “While this risk for such fraud is exacerbated by this lax control environment, audit work did not identify any instances of fraud.”

Denver director of aviation Kim Day said the audit would help the airport in its plans to tighten controls on construction funding.

Although Denver has issued subordinate lien debt before this week’s deal, it has no outstanding subordinate bonds. Under its senior lien, the airport has about $3.9 billion outstanding.

Moody’s noted that “the long-term expectation for capital expenditures remains high as the terminal facilities age and require additional maintenance expenditures.”

The airport is planning to add five temporary gates for Southwest Airlines.

The estimated cost of the capital program has risen about to $1.38 billion from the $1.06 billion reported at the time Denver issued its Series 2012 bonds, Moody’s pointed out, with most of the increase due to cost overruns on the South Terminal Redevelopment Program.

The South Terminal project includes a commuter rail station that will link DIA to downtown Denver’s Union Station 24 miles to the southwest. As part of that project, metro Denver’s Regional Transportation District is redeveloping Union Station as a hub for its FasTracks light-rail and commuter rail system.

The airport is using “fast-track” design and contracting methods to accelerate the foundation and steel design of the South Terminal while non-critical path items are in design.

“Moody’s notes the significant progress in letting contracts and achieving fixed price, but notes that risk of delay or cost-overruns are still existent in the project,” Heffintrayer wrote.

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