CHICAGO - Chicago will remarket about $300 million of variable-rate third-lien general airport revenue bonds today, shedding the downgraded insurance from the 2005 floating-rate deal that had prompted investors to drop the bonds.
The bonds, issued for projects at O'Hare International Airport, carried insurance from CIFG Assurance NA, which lost its triple-A earlier this year along with the majority of monoline insurers. Dexia Credit Local, which provides a liquidity facility on the current issue and currently holds the bonds, will provide a letter of credit for the D tranche of $100 million. The C series, for $200 million, will carry an LOC from Landesbank Baden-Wurttemberg. Citi is serving as the remarketing agent.
The city had just limited exposure in its Midway Airport bond portfolio of auction-rate securities. Although that market has collapsed due to the credit crunch and insurer downgrades, the city will leave its $150 million of ARS in place because it hopes to pay off all of Midway's $1.2 billion of debt by early next year in a lease of the airport.
Chicago has limited variable-rate exposure but has faced higher rates on several tranches of bonds that carry downgraded insurance. In addition to the O'Hare debt, the city has refinanced $215 million of variable-rate demand general obligation bonds that were insured by Financial Guaranty Insurance Co.
The city's floating-rate exposure includes $2.7 billion of variable-rate demand bonds and $150 million of auction-rate securities in an overall general obligation and revenue-backed bond portfolio of about $15 billion. The city had paid rates between 5% and 7% on the airport bonds after CIFG's downgrades.
"Fortunately, the city has a diverse debt portfolio with more than 80% in a fixed-rate structure. We are very comfortable where we are at but that doesn't mean we are not watching the market very closely," Chicago chief financial officer Paul Volpe said in an interview when the bonds were up for City Council approval.
In its latest review of the O'Hare credit, Standard & Poor's upgraded to AA-minus from A-plus bonds issued under O'Hare's second lien. The agency affirmed the AA assigned to first-lien bonds and the A-minus assigned to the third lien and the A assigned to the city's bonds backed by passenger facility charges. The city issues new GARBs to finance routine capital projects and its $7.5 billion expansion of O'Hare's runways.
Standard & Poor's attributed the upgrade in the second lien to strong debt service coverage of 2.67 times in fiscal 2007, the ongoing gradual reduction in combined first- and second-lien debt levels of about $730 million, and a final maturity limit of 2018 for the closed second-lien GARBs. The first-lien GARBs mature in 2016.
"The stable outlook reflects our expectation that air travel demand will remain generally sound despite potentially modest service reductions by United Airlines Inc. and American Airlines Inc. and other carriers or potential disruptions from reconfiguring the airport's airfield," analyst Joseph Pezzimenti wrote.
"An outlook revision or rating adjustment could occur if the airport is unsuccessful in containing project costs, the O'Hare Modernization Program (OMP) causes significant disruptions to operations, or if drastic service reductions by United or American occur or become likely," Pezzimenti wrote. The first phase of the runway project is currently about $400 million over budget.
The relatively weak legal provisions for the third-lien GARBs limit the potential to upgrade that lien's $4.28 billion of outstanding debt.