CHICAGO — Chicago enters the market this week with $251 million of second-lien Midway International Airport bonds to refund outstanding commercial paper and wrap up financing for a new consolidated rental car facility.
The city will take retail orders on Wednesday and open sales to institutional buyers on Thursday, two weeks after the announcement that Southwest Airlines — Midway’s dominant airline — will purchase rival AirTran Airways. Southwest accounts for 83.9% of the airport’s passenger volume by itself; the two airlines account for a combined 89.6%.
All three rating agencies affirmed Midway’s second-lien credit but Moody’s Investors Service last week warned it is one of a handful of airports most at risk for a potential reduction in overall service as the two carriers merge operations. While Moody’s said the proposed union doesn’t immediately threaten the credit stability of any airport, the high concentration of Southwest at Midway makes it “highly susceptible to any route changes Southwest may undertake.”
The issue this week includes an $88 million series of taxable Build America Bonds and three other series of taxable bonds for $66.7 million, $82 million, and $15 million. JPMorgan is the senior manager on the deal with Ramirez & Co. serving as co-senior manager. Peralta Garcia Solutions is financial adviser. Mayer Brown LLP is bond counsel and Pugh Jones Johnson & Quandt PC is co-bond counsel.
Proceeds will complete the funding needed for the new consolidated rental car facility, pay for residential noise mitigation, refund outstanding commercial paper, and fund existing debt-service reserves that were previously funded through surety policies.
The airport’s overall $1.2 billion of first- and second-lien bonds are secured by a pledge of net airport revenues. The city will repay the $66.7 million series with revenues generated by consolidated rental car facility charges. Construction is expected to be completed on the $90 million project in mid-2012. It will free up area in the airport’s terminal.
Moody’s affirmed its A3 rating on the second lien and took it off its watch list. Moody’s rates Midway’s first-lien bonds A2. After downgrading the credit earlier this year, Fitch Ratings affirmed its rating, as did Standard & Poor’s. They rate the second lien’s $439 million of debt A-minus and assign an A to $783.6 million of first-lien debt. Both rating agencies assign a stable outlook to the credits.
Moody’s called the deal’s structure a credit weakness because of mandatory tenders on a large portion, which adds refinancing risk. The city will pay interest only through 2015 to minimize the near-term impact of the new debt on airline costs.
The structure is also designed to leave the city flexibility should it resurrect its failed plan to privatize the airport. Mayor Richard Daley was poised last year to lease the airport for an up-front $2.52 billion payment to a private consortium under a federal pilot program that permits the privatization of up to five airports. The deal fell through when the group could not raise financing.
Chicago retains its slot with the Federal Aviation Administration and Daley has said he wants to resurrect the deal when market conditions improve. The decision, however, likely will rest with a new mayor as Daley announced he is not seeking re-election in February. Whether privatizing city assets is sound practice will likely be debated by mayoral candidates.
“The ratings reflect our opinion of an airport with historically good demand and an ability to raise rates and charges as necessary under a fully residual airline use and lease agreement,” said Standard & Poor’s analyst Adam Torres.
After an 11% decline in 2008, passenger volume grew by 2.9% in 2009, making Midway one of the rare airports in the country to see an increase last year. Passenger levels have further increased by 4.8% for the first six months of the year compared to the same period last year.
Midway maintains a good competitive position with originations and destinations representing 65% of volume. Analysts warned the rating could be stressed by Southwest route changes, a dramatic increase in cost-per-enplanements, or if debt plans for the airport grow. Airport revenues last year provided 1.33 times debt-service coverage.