CHICAGO — Attorneys for Chicago and O’Hare International Airport’s two largest carriers will return to court next month as a standoff over the final phase of an $8 billion expansion plan continues.

Airline executives were set to meet Illinois’ U.S. senators later this week to try and broker a deal. Meanwhile, the city remains on course to sell $1.1 billion of airport bonds next week. The debt would provide funds to finance the completion of what’s called the O’Hare Modernization Program.

The deal includes a mix of bonds, some backed solely by passenger facility charges and others by both PFCs and federal grants. Chicago officials plan to take retail orders on Feb. 1 and hold an institutional pricing the next day. Citi is the book-running senior manager and Siebert Brandford Shank & Co. is co-senior.

Several investors said they would be surprised if the city moved forward with the bond sale before some type of agreement was reached with the airlines or the lawsuit was settled.

On Friday, attorneys for American Airlines and United Airlines and the city appeared before Cook County Circuit Court Judge Richard J. Billik Jr. for the first time since the airlines filed a lawsuit early last week challenging Chicago’s ability to undertake remaining projects without their consent. The two airlines handle about 80% of passenger traffic at O’Hare.

Both sides pressed for a quick decision in the case and will return to court for hearings on Feb. 22 and 23. The airlines want to halt financing plans for the projects they have not yet approved and the city wants to begin construction in time for the spring season.

In an attempt to broker a resolution, Sens. Richard Durbin, D-Ill., and Mark Kirk, R-Ill., will meet with American and United executives on Thursday, according to the senators’ representatives.

Standard & Poor’s Monday in a special report said the lawsuit won’t impact current ratings but that could change if the city’s relationship with the airlines worsens.

“What could pressure the ratings … is an escalation in the situation such that O’Hare’s relationship with the airlines deteriorates to the point that they do not abide by the airline agreements or reduce capacity materially, pressuring the airport’s financial margins,” analysts Joseph Pezzimenti and Kurt Forsgren wrote.

The agency’s current ratings take into account the upcoming sale of $1.1 billion of bonds secured by PFCs and federal grants, assume no material changes in revenues under current lease and use agreements, and assume that current passenger levels remain stable.

The ratings do not incorporate most of the $2.5 billion in future general airport revenue bonding planned by the city to fund the completion phase. Without airline approval Chicago is planning to sell GARBs with a delayed amortization schedule that doesn’t call for debt service to begin until after current lease agreements expire in 2018. Airline rates and charges that go to finance capital projects and repay general-airport revenue borrowing are incorporated into those pacts.

Fitch Ratings recently downgraded O’Hare’s PFC and third-lien GARB ratings, and Moody’s Investors Service shifted its outlook on the third-lien GARBs to negative. The actions came prior to news of the lawsuit.

“The city is coming into an iffy market, the rating has been downgraded, and now there’s the lawsuit. That’s three things going against the deal,” said one institutional investor.

Investors recently have pulled record levels from municipal bond mutual funds amid concerns over potential defaults.

The dispute between the airlines and Chicago centers on whether the current use agreements require airline approval for the remaining projects, even though the city won’t try to pass along costs to airlines until a new use agreement is in place.

The city has wrapped up financing for the first $3.3 billion phase of the OMP. The airlines oppose a $2 billion western terminal but remain behind $3.36 billion of proposed runway projects. However, they want to slow the construction timetable down until certain traffic levels are reached. The city wants to remain on track to complete the expansion plan by 2014.

“The city believes that the airlines have no contractual right to require that a majority in interest of the airline parties approve additional bonds, including the third-lien bonds, the debt service on which will not begin until after the current airport-use agreements have expired and the city has so advised American, United and the other airline parties,” according to the offering statement on the upcoming sale.

Katten Muchin Rosenman LLP and Charity & Associates PC are co-bond counsel.

While the airlines are not directly challenging Chicago’s ability to sell the PFC and federal letter-of-intent grant bonds, they believe the issue is “inextricably” linked to future GARB borrowing because the funds go to pay for the completion phase projects.

 “The projects will move forward at exorbitant expense financed by massive, unauthorized bond offerings. In the meantime, the airlines’ fundamental voting and approval rights with respect to the completion phase and its financing will be lost forever,” the lawsuit reads. It seeks an injunction against funding any completion phase projects without their approval and bars any GARB issuance to fund unapproved projects.

Chicago Mayor Richard Daley unveiled the expansion program in 2001 and the federal government approved it in 2005.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.