CHICAGO — Cleveland Hopkins International Airport plans to price $75 million of passenger fee-backed revenue bonds Wednesday, its first new-money borrowing in 10 years.
The transaction will also likely be the last for at least five years for the airport, a relatively rare issuer. After the transaction, it will have $890 million of outstanding debt. The city of Cleveland, which owns the airport, is issuing the bonds.
Moody’s Investors Service and Fitch Ratings both hit the airport with downgrades over the last several months. Moody’s cut it to Baa1 from A3. Fitch and Standard & Poor’s both rate it A-minus.
The transaction includes a refunding of $9.2 million of variable-rate bonds, shifting the maturities on the shorter end of the curve into a fixed-rate mode.
The finance team will terminate four interest-rate swaps associated with the refunded debt at a cost of $10 million, paying the termination fees from cash, not bond proceeds. The terminations will rid the airport of swaps associated with its variable-rate debt, which makes up 14% of its overall debt portfolio.
The finance team decided to terminate the swaps following Moody’s downgrade, which came close to triggering a required collateral posting to swap counterparty JPMorgan, according to Cleveland debt manager Elizabeth Hruby.
“We’ve been getting close to having to post collateral, and the airport has cash on hand and we also wanted to fix some of these bonds out,” Hruby said. “We felt this was the best time to take care of it all now.”
The refunding is expected to achieve a net present-value savings of $1.5 million, or 16.5%, primarily from shedding letters of credit and the swaps. With the fixed-to-floating rate swap, the airport is currently paying more than 6% on the bonds, and expects to see a yield of around 3% when they are in a fixed-rate mode, said Hruby.
About $55 million of the proceeds from the deal will be used to finance the airport’s five-year, $164 million capital plan, which includes a variety of runway and terminal projects. Another $8 million will be used to fund a debt reserve. The airport last borrowed new money in 2001.
The bonds are backed by passenger facility charge revenues. JPMorgan and Morgan Stanley are senior managers, with five additional firms acting as co-seniors. Squire, Sanders & Dempsey is bond counsel. Government Capital Management LLC and Phoenix Capital Partners LLP are financial advisors.
Analysts warn that the airport’s biggest challenge comes from its reliance on United Continental Holdings, which accounted for 70% of its flights in 2010.
Hruby noted that all three rating agencies have the airport on a stable outlook, and that the airport has seen some flight gain over the last year compared to all but one of United’s other hubs.
“We feel fairly confident that things are looking up,” she said.