SAN FRANCISCO — Orange County, Calif.’s John Wayne Airport is a bit of an oddball among airports. And it’s those differences that have helped it garner a rating upgrade that airport officials hope will portend a successful bond issue next week.
Those differences include an affluent and sizable service area, and legal agreements that constrain the airport’s passenger capacity, tilting the supply-demand equation in the airport’s favor.
“It’s really a boutique credit,” said Doreen Frasca, president and principal of Frasca & Associates LLC, the airport’s financial adviser.
The county-owned airport plans to price $235.7 million of fixed-rate senior lien bonds Tuesday, following a retail order period Monday, said Loan Leblow, the airport’s assistant director.
John Wayne’s operational parameters are dictated by legal settlements resulting from litigation driven by “not-in-my-backyard” neighbors.
“These limitations relieve pressure on the airport to take on more debt for further expansion through the forecast period,” Standard & Poor’s noted in its ratings report this month, when it upgraded the airport’s senior-lien revenue bonds to AA-minus from A-plus. The highest rating it assigns to any U.S. airport is AA.Moody’s Investors Service and Fitch Ratings affirmed their respective Aa3 and AA-minus ratings.
The original 1985 settlement agreement was modified in 2003, with amendments raising the airport’s annual passenger cap to 10.8 million from 8.4 million, and increasing the number of permitted daily departures to 85 flights from 73.
Because of those limits, the airport has four air carriers on its waiting list to provide service, while airlines that are already there want additional capacity, according to Standard & Poor’s.
John Wayne Airport’s convenient access to the wealthy Orange County market allows airlines to set higher fares, making them more interested in serving the facility, Standard & Poor’s said.
The 2003 amendments to the settlement agreement eliminated caps on terminal square footage and parking spaces. Next week’s bond sale is the centerpiece of its capital plan, which will add terminal space, six gates, and parking.
The airport has no new-money bond plans following next week’s bond sale, Leblow said.
“We’re very fiscally conservative,” she said. “We don’t like debt.”
She said the airport is using cash to fund more than one third of its $543 million capital improvement plan.
John Wayne Airport used its ample cash reserves to defease $44 million in outstanding debt, leaving only $37 million in additional outstanding debt beyond than next week’s issue.
The airport’s expansion plans have been in the works for a long time, spurred by the 2003 amendments to the settlement agreement. However, the airport’s project timing has allowed it the good fortune of issuing bonds with interest that isn’t subject to the alternative minimum tax, as many airport bonds are, thanks to a two-year holiday for AMT bond issues that was part of the federal stimulus package.
The deal comes in two series — a $70.5 million Series A to finance purely governmental projects, primarily a new parking garage; and a $165.3 million Series B for private-activity projects that would in ordinary years be subject to AMT.
“The reason we separated them is we just want to be cautious,” said Leblow, who cited the difficulty in predicting what future tax treatments airport bonds may be subject to when it comes time for a possible refunding.
“We’ll know which portion is the private activity,” she said.
While the air transport industry has been hurt by the recession, Leblow said that the affects appear to be softer at John Wayne than at other airports.
Passenger traffic in April was down 7.6% compared to a year earlier, then down 4.1% in May, and is expected to be flat in June, according to Leblow.
“It is going the right way,” she said. “The demand for our airport continues to be strong.”
This year, Virgin America added service from San Francisco, which quickly drew competition from Southwest Airlines, one of the airport’s mainstays.
One of John Wayne’s rating strengths is a diverse group of air carriers, Standard & Poor’s said. The airline with the highest market share, Southwest, has about 27%.
Citi is book-runner for the bond issue, with Morgan Stanley, Banc of America Securities and JPMorgan filling out the team. Sidley Austin LLP is bond counsel and disclosure counsel. Kutak Rock LLP is underwriters’ counsel.