CHICAGO - Chicago hits the market this week with $784 million of new-money and refunding Midway Airport bonds that will nearly wrap up a restructuring aimed at strengthening the airport's debt portfolio.
The second lien fixed-rate revenue and refunding bonds are slated to price on Thursday. The $480 million Series A matures in 2042 and is subject to the alternative minimum tax and the $304 million B series matures in 2039 and is not subject to the AMT.
A floating rate Series C for $125 million that will sell on June 10 and mature in 2044 will complete the Midway borrowing plan.
Barclays is the senior manager with Citi and Morgan Stanley as co-senior managers and another eight firms rounding out the syndicate as co-managers. The city launched the restructuring late last year with a $326 million refunding.
It had previously been on hold as the city pursued efforts to privatize the airport under a federal program. Chicago Mayor Rahm Emanuel grounded the P3 efforts in September when the number of bidding parties dropped to one, raising concerns that the lack of competition might undercut the deal's value.
The city is stressing with investors the airport's solid growth with record passenger levels last year, and its efforts to reduce risk in the credit portfolio. Chicago's chief financial officer, Lois Scott, outlined what the city considers Midway's "strong credit fundamentals" in a roadshow presentation attached to the deal's offering statement.
The deal includes $125 million of new money for the airport's ongoing capital program that is mostly focused on maintenance following the earlier completion of bigger capital projects that included a new terminal.
The sale will refund at maturity $60 million of outstanding commercial paper with the remainder refunding existing first and second lien airport revenue bonds, and funding reserves. After the sale, the airport will have all of its $150 million authorized CP capacity open. About $78 million of put bonds will be converted to a fixed rate.
The sale will continue to smooth out the airport's debt service schedule to better match repayment with revenues and anticipated growth for the benefit of the airlines. Midway's floating-rate debt will fall to 17% from 24% with about half of the floating rate synthetically fixed. No put bonds will remain, reducing some credit risks.
"Overall, we are trying to de-leverage the portfolio and looking to strengthen the credit with such actions," the city's deputy chief financial officer Jeremy Fine told investors.
The refunding last year also smoothed out debt service in the early years, most notably from a bullet maturity on outstanding floating rate bonds.
Thomas Spalding, senior investment officer at Nuveen Investments, said he expects the sale should do well and should not see a penalty for the Chicago name, as there is for city general obligation debt. That's because of the segregation of the airport and its revenues as an enterprise system.
Spalding, however, countered the city's portrayal of Midway as an improving credit, saying "I wouldn't say improving. I'd say stable."
Frasca & Associates LLC is advising the city and Ricondo & Associates Inc. is airport feasibility consultant. Mayer Brown LLP and Sanchez Daniels & Hoffman LLP are bond counsel.
Airport officials say the focus is now on cyclical maintenance of existing infrastructure, with remaining capital projects, like parking and concession improvements being revenue generating.
An additional $81 million in borrowing will be needed to support the $275 million program through 2020. The airport has a total of $1.5 billion of outstanding first and second lien bonds backed by Midway revenues.
"While leverage is slightly elevated, this is the result of Midway's recent terminal and airfield improvements, so capital needs should be minimal going forward. Additionally, the airport's solid cost recovery framework should provide for continued stable financial performance," Fitch Ratings wrote in its new rating review.
Ahead of the sale, the rating agencies affirmed Midway's ratings.
Fitch and Standard & Poor's rate the airport's second lien bonds A-minus with a stable outlook. The first lien bonds are rated A by both.
Moody's Investors Service rates the first and second lien bonds A2 and A3, respectively, both with a stable outlook.
The airport saw a record 10.2 million passengers in 2013 representing 5% growth over the previous year and 21.2% growth since 2009. The 2014 projections have been lowered due to cancellations resulting from the extreme wintery conditions earlier this year.
A 1.1 % increase in passenger levels is expected this year, followed by a 3.3% increase in 2015 and a 2.4% rise in 2016.
"The ratings reflect our opinion of MDW's operational strength, good market position, and service area," Standard & Poor's said. "We believe that thin cash flow coverage, above-average debt burden, and a concentration in Southwest Airlines Co. offset this."
Southwest is the largest carrier at the airport representing both a credit strength and a weakness. The airport serves as Southwest's largest hub airport, a strength, but it opens the airport to concentration risks as it serves 90% of travelers.
Chicago levies a $4.50 passenger facility charge per enplaned passenger that is not legally pledged but is used with letter-of-intent money and airport improvement program entitlement grants from the Federal Aviation Administration to offset debt service before calculating annual rates and charges.
The city also levies a $3.75 customer facility charge related to car rental activity at MDW. These CFC revenues, although not legally pledged, are used to cover some debt service.
The airport use agreement and facilities lease with its carriers took effect Jan. 1, 2013 and expires at the end of 2027. The residual rate-setting model requires revenue sharing between the airport and airlines, continual investment in airport infrastructure, and increased gate usage.
"The rating reflects Midway International Airport's resilient and growing traffic base within the strong Chicago air service area. While significant carrier concentration exists, it is partially mitigated by Southwest Airlines' long-term commitment to serving the airport," Fitch wrote.
Though narrow, the city anticipates total coverage to remain above its 1.1 times rate covenant through the projection period. Final audited fiscal 2013 figures were not yet available.
Moody's said the credit's strengths include Southwest's growth, a 15-year airline use and lease agreement, and stable origin and destination demand. The credit's challenges include Southwest's concentration, competition from its big sister O'Hare International Airport, floating-rate exposure, and increasing cost per enplanements.
Moody's, which has stung the city's general obligation rating with steep downgrades that left it at the Baa1 level over its pension woes, said its stable outlook "incorporates Moody's view that the airport is largely insulated from the financial distress of the City of Chicago."
Among the airport's risk factors, Standard & Poor's noted that Midway's swaps on its floating rate debt continue to "expose the airport to potential liquidity events" should the agency lower the second lien below the BBB-plus level.
Such a drop would prompt the airport to make a swap termination payment if the swap valuation at the time of the termination is not in Midway's favor.
"The airport's adequate liquidity position, which we expect to remain so, mitigates the contingent liquidity risk from these swaps," analysts said.
The airport faces an additional fiscal burden under Emanuel's plan to stabilize two of the city's four pension funds. The package has passed the General Assembly but Gov. Pat Quinn has not said whether he would sign it.
It dips further into several of the city's enterprise funds to help cover higher contributions for employees. Under the plan, the airport's annual contribution would rise to $10 million from $4 million in 2016 and then an additional $1.5 million annually over the following four years.
The offering statement informs investors of the state's plans to build a third regional airport in the far southwest Chicago suburbs but reports it can't be predicted whether the project is viable, will be constructed, or the impact, if any, it would have on Midway which is located on the city's southwest side.
The offering statement also notes that neither the FAA nor the state currently project that the proposed airport would achieve the status of a third major commercial service airport in foreseeable future.