Denver Airport Hotel Rising With $700M Deal

DALLAS — Denver will issue $700 million of revenue bonds to build an airport hotel next to a commuter-rail station that will link passengers to downtown’s Union Station later this decade.

The negotiated deal, which could increase to as much as $860 million depending on refunding opportunities, is expected to price Wednesday through negotiation with senior managers Barclays and Citi.

“We are still assessing the final size and that will depend on the rates we see in the market early next week,” said Patrick Heck, Denver International Airport’s deputy manager of aviation for finance and administration. “We’re expecting strong demand based on the market dynamics we have seen recently.”

The city’s financial advisor is Jefferies & Co. Hogan Lovells and Bookhardt & O’Toole are bond counsel.

The bonds will be issued in three series, with Series A subject to the alternative minimum tax, Series B as non-AMT tax-exempts and $1 million of Series C as taxable.

In addition to funding the 2013-2018 capital plan, the deal will also refund approximately $301 million of the Series 1999B, 2002E and 2003A bonds, as well as $56 million of commercial paper and reimburse $8.2 million of the airport’s equity.

DIA officials anticipate a present-value savings of around $25.9 million through the life of the refunding bonds. The airport may also choose to refund additional bonds, depending upon market conditions.

The taxable Series 2012C bonds may be issued in lieu of the Series 2012A bonds depending upon market conditions, officials indicated.

The bonds carry ratings of A-plus from Standard & Poor’s and Fitch Ratings with a stable outlook. Moody’s Investors Service affirmed its equivalent A1 rating and maintained its negative outlook on the credit.

Denver’s decision to finance a 500-room hotel at the airport using general airport revenue was a key factor in Moody’s decision to lower the issuer’s credit outlook last year.

The airport’s capital plan “includes major elements that are not core airport revenue producing projects,” Moody’s analyst Earl Heffintrayer wrote.

Before this week’s deal, Denver International Airport had about $3.73 billion of debt outstanding.

“DIA has a relatively high debt burden with aggregate debt outstanding, including the 2012A-C new issuance, of approximately $4.2 billion which is among the highest for a U.S. airport,” noted Fitch analyst Scott Zuchorsky.

“The significant debt burden is partially mitigated by high enplanement levels that produce a debt per enplanement ratio of $159 and cash reserves providing a net-debt to cash flow available for debt service ratio of 9.81, both of which are consistent with a large hub airport in this rating category,” he added.

Of the $390 million in expected new money proceeds, around $290 million is for the South Terminal Project with $180 million for the hotel and $110 million for other projects.

The remainder of the new-money debt will be spent on the airfield and other projects.

The cost of the South Terminal Redevelopment Program was originally estimated at $650 million, but it has since been reduced to $500 million.

Airport officials expect to enter into a fixed price contract with Mortensen-Hunt-Saunders as an integrated tri-venture for construction of the hotel and train station.

The airport is responsible for any cost overruns related to the construction of the hotel project and any revenue shortfalls from the operation of the hotel, which is an added level of risk for an airport to assume, Fitch noted.

“The risk associated with the hotel project is partially mitigated by the ‘safety net’ features of DIA’s airline use-and-lease agreement,” Zuchorsky wrote.

“In addition, the amount of debt tied to the hotel project represents less than 5% of DIA’s aggregate outstanding debt and DIA has strong enough financial matrices to absorb the added risk,” he wrote. “However, the airport’s credit could be pressured should the hotel project not perform as planned, either in construction or operations, resulting in a financial drain on DIA.”

According to Airports Council International, Denver International ranks as the fifth largest airport in the United States, with 16 passenger airlines providing more than 1,600 daily flights to 180 destinations.

Passenger traffic at DIA has survived the recession, with enplanements increasing 2.8% in 2008, falling only 2.0% in 2009, rising by 4% in 2010 to a historic high of 26.1 million, and then increasing 1.7% in 2011 to 26.5 million. For the first six months of 2012, enplanements were up 2.5% over the same period in 2011.

To date, capacity cuts and passenger declines from United Airlines in 2010 and 2011 have been offset by increases in service by Southwest Airlines and Frontier Airlines.

Enplanements are forecast by the airport to remain flat in 2012 at 26.5 million and then grow at an average annual rate of 1.8% to a total of 30.5 million in 2020, according to Standard & Poor’s.

In August, Denver Mayor Michael B. Hancock and other officials held a ceremony to mark the construction of the South Terminal, which features a design by architecture firm Gensler.  The South Terminal was designed to blend with DIA’s signature tent-roof terminal.

“On the face of it, ‘building’ can appear simple: a hotel, a train station,” Hancock said. “But ‘building’ also means opportunities and jobs for local and diverse businesses, spurring a new frontier of economic growth for the entire region.”

The South Terminal Redevelopment Program will complete the original plan for the airport, which opened in 1995.

A public transit center will house the Regional Transportation District’s East Rail Line connecting DIA to downtown Denver, according to the RTD. The airport line is being constructed through a public-private partnership.

The airport commuter line is part of RTD’s $4.7 billion FasTracks system of rail and bus lines, with a redeveloped Union Station in Lower Downtown as the central hub. Voters in the Denver area approved the original 0.4% sales tax increase to finance the $4.7 billion FasTracks system in 2004.

FasTracks was designed to add 122 miles of commuter rail and light rail, 18 miles of bus rapid transit service, and 21,000 parking spaces to RTD’s existing system.

The South Terminal Redevelopment Program and the East Rail Line are about connectivity,” said RTD board member John Tayer. “We are connecting people between downtown and the airport, as well as connecting people to jobs.”