DALLAS – Austin plans to sell at least $50 million of bonds to resolve a long-standing default on airport hotel debt issued in 1999.
After years of negotiation, the current holders of the 1999 debt will receive proceeds from the 2017 bonds, which will carry investment-grade ratings and a reserve fund backed by airport revenues.
The original $43 million of bonds were backed only by hotel revenues, which began to falter after the 2001 terrorist attacks on New York and Washington. By 2004, the bonds were in default. The global economic crisis of 2008 and the discovery of non-toxic mold after roof damage in 2014 made things worse, according to officials.
Last year the airport used $3 million in unrestricted cash as an advance to start repairs, and those costs will be reimbursed with bond proceeds.
The new deal was originally expected to go to market in May, but the pricing has been delayed by ongoing negotiations with the operator of the Hilton-brand hotel, according to Austin Treasurer Art Alfaro. Even getting the bonds to market in June now seems unlikely, he said.
“It’s been pushed back,” Alfaro said. “They’re still going through negotiations. From our perspective the sooner we can get to market the better.”
The negotiations will also determine whether any of the new bonds will have to be taxable, he said. The city wants to protect the tax-exempt status.
The original bond issuer, Austin-Bergstrom Landhost Enterprises, Inc., is a nonprofit created by the city and controlled by a board made up of city officials, including Alfaro. However, the city is not obligated for the bonds.
The original $38.8 million of unrated senior bonds priced at par in 1999 with a 6.75% coupon. They most recently traded in November at 49 cents on the dollar, according to trade date posted on the Municipal Securities Rulemaking Board's EMMA website. A $28.2 million chunk of the debt traded in August 2013 at 55 cents.
Kayne Saybrook Municipal Opportunity Fund LP is the investor group that owns the majority of the outstanding debt, Alfaro said.
At the end of 2016, according to financial statements posted on EMMA, $39.9 million of principal was outstanding on the senior bonds, including $5.2million of accrued, unpaid principal.
There are also $3.7 million of subordinate Series 1999B bonds that matured in 2016 with no payment made. As long as any senior bonds remain outstanding, no event of default may be declared with respect to the subordinate bonds, according to the ABLE financial statements.
The 1999 bonds were used to convert a building at the former Bergstrom Air Force Base into a hotel for the new airport that opened in 1999 on the site of the base, closed in the 1995 Base Realignment and Closure process.
On or before the bond closing, the city and Landhost will sign a grant agreement to refinance outstanding airport hotel revenue bonds. The city and airport last year agreed to back the new bonds as a subordinate lien to its senior bonds.
Unlike the original 1999 unrated issue, the upcoming bonds carry a credit rating of A3 from Moody’s Investors Service and A-minus from S&P Global Ratings. Outlooks are stable.
“The restructuring provides for more favorable sizing of debt service requirements, funding of key capital improvements, and non-toxic mold remediation, and creates a framework under which airport management anticipates risks associated with cost overruns or lower than projected revenue performance will be mitigated,” according to S&P analyst Anita Pancholy.
With traffic at ABIA growing at a healthy rate and additional business arriving from the nearby Circuit of the Americas Formula 1 racetrack, the ABIA Hilton has seen improvements in occupancy rates in recent years, Alfaro said.
The Hilton now has competition from a neighboring Hyatt hotel that opened this year. The 139-room Hyatt is a privately developed and owned project built on land leased from the airport.
Alongside the hotel is a recently opened retail center that includes a restaurant, convenience store and service station. The development includes a playground, public restrooms, electric car recharge stations and additional parking for drivers waiting to pick up passengers.
The retail center is a public/private development with the City of Austin Department of Aviation and is being developed and managed by ABIA Retail, LLC on leased airport land. Financing was provided by American Bank of Commerce.
While the new Hyatt provides competition for the Hilton, Alfaro said the proximity of the two hotels and access to the Retail Center should make bookings easier for both, especially during events such as the Formula 1 races.
The airport last month opened a 30,000 square-foot South Terminal built at a cost of $12 million. Lone Star Airport Holdings holds a 30-year lease on the terminal, with payments to the airport.
The new terminal, connected to the recently expanded main terminal by shuttles and serving only Allegiant Air has reportedly caused some confusion for travelers trying to find their gates.
The South Terminal occupies space once held by a rundown National Guard motor pool left over from the Air Force days. The circular Hilton Hotel was once the headquarters of the 12th Air Force in the days when B-52s landed at Bergstrom AFB.
When new terms are reached for future operations of the Hilton, Alfaro expects hotel revenues to be adequate for debt service. Airport revenues would replenish the reserve funds only if needed, he said.
“We’re hoping never to do that,” he said. “We’ve done studies and stress-tested it a little.”
Moody’s analyst Earl Heffintrayer noted the hotel’s “stable operating history, competitive occupancy and average daily rates, improved cost structure following the current [bond] sale, and proximity to the airport.”
The airport’s debt service coverage ratio has improved to 2.31 times in fiscal year 2016 from 2.08 times the previous year, per Moody’s.
“Based on the 2017 budget, we expect net revenue and bond ordinance debt service coverage ratios to decline to around 1.60x and 2.07x, respectively due to an increase in debt service,” Heffintrayer said.
Aircraft boardings have grown at a 6.4% annual rate since 2012 to 6.2 million passengers in 2016, according to Moody’s.
“The enplanement growth is among the strongest seen at airports classified as medium hub airports by the FAA,” Heffintrayer said. “The airport's growth versus its main competitor, San Antonio International Airport has been impressive.”
To keep up with growth, ABIA is adding seven gates to its main terminal, a project financed in part through a $275 million 2014 bond issue. The airport also added a new parking facility with 2,000 covered parking spots and valet service.
Anchored by the state government and the University of Texas, Austin has a robust and stable economy that is generally unaffected by dramatic swings in the energy market.
“While the exposure to tech does provide some risk due to the industry's boom-bust cycles, the local economy is still well diversified with the large presence of health care companies, universities and state government,” Heffintrayer said. “Moody's Analytics expects the area to outperform the nation in the long term due to its abundance of talent and technology businesses and fast population growth.”