DALLAS – Cleveland plans as soon as Tuesday to refund $150 million of airport debt buoyed by a boosted rating outlook for its airport, which has grappled with the loss of its hub status.
Ahead of the deal, Standard & Poor's affirmed Cleveland Hopkins International Airport's A-minus rating while revising its outlook to stable from negative.
"The stable outlook reflects our view that management's initiatives to mitigate the impact of United Airlines' decision to cease operating a regional hub at the airport and to attract new service have resulted in operational and financial metrics consistent with the current rating level and that demand is stabilizing," Standard & Poor's analyst Mary Ellen Wriedt said in a report.
The airport benefits from solid liquidity and good air trade area market but challenges include a high debt burden and high airline cost structure.
Moody's Investors Service affirmed the airport's Baa1 rating and Fitch Ratings affirmed its BBB-plus rating. Both assign a stable outlook.
The city expects the sale to generate $17 million in net present value savings. The deal offers an A series for $112.9 million that matures in 2031 to refund 2000 debt. The B series matures in 2024 and refunds 2006 bonds. Neither issue is subject to the alternative minimum tax. The B series is a forward delivery as the first optional call occurs in January on the existing bonds.
Stifel, Nicolaus & Co. is running the books with another six firms rounding out the underwriting syndicate. Government Capital Management LLC is advising on the deal and Squire Patton Boggs is bond counsel.
The bonds are secured by airport revenues and special pledged funds.
In February 2014, Fitch downgraded the city's $789.9 million of airport revenue bonds to BBB-plus from A-minus following United Airlines' decision to end its Cleveland hub. United cut daily departures by 64% from 200 to 72 and reduced non-stop markets served from 59 to 20.
Fitch revised the airport's outlook to stable in November 2015.
Passenger levels are rebounding and were up 6.5% through November 30, 2015, according to Moody's, but remain below their 2007 peak.
The reversal is largely due to the entrance of new air carriers Frontier, Spirit and Jet Blue, adding routes and lowering average ticket prices, Fitch said in its rating report. United Airlines now comprises just 34% of enplaned passengers versus 68% in 2013.
Per passenger debt in 2014 was significant at approximately $215 on a total enplanement basis and $244 on an origin and destination passenger basis. In contrast, the median value for debt per enplanement and debt per O&D enplanement at U.S. airports in Standard & Poor's A category were approximately $78 and $92, respectively, analysts said.
Another negative is the still unsettled nature of the expired airline agreement.
The master lease agreement between the airport and operating airlines expired on Dec. 31, 2015 and won't be signed until renegotiations of two of United's long term operating leases are completed. In the meantime airlines are operating on a month-to-month basis.
United remains on the hook for principal and interest payments on the special facility leases at the airport, through 2019 and 2027 because the leases are unconditionally guaranteed by the airline. They are not part of the city's outstanding airport system revenue bonds.
The airport has $748 million in bonds outstanding and has a three-year capital improvement program estimated at $94 million that would be funded with existing bond proceeds, airport discretionary funds, and federal grants, according to an investor presentation. The city does not anticipate issuing additional new money debt for the airport in the near-term.