Denver Selling $456M to Refund Airport Auction Rates

DALLAS - Denver next week will join the parade of issuers refunding auction-rate securities as the Mile High City offers $456 million of fixed- and variable-rate airport revenue bonds.

The new bonds will be issued in three series that will defease debt issued in 2001, 2002 and 2005, long before the ARS market began to collapse late last year.

Underwriters include Goldman, Sachs & Co., Citi, Harveston Securities, Loop Capital, and Morgan Stanley.

Depfa-First Albany Securities LLC and Estrada Hinojosa & Co. serve as co-financial advisers.

The refunding will include about $100 million of fixed-rate bonds, said chief financial officer Stan Koniz.

The negotiated deal follows a month in which major airports issued more than $2 billion of bonds to convert auction-rate debt or insured issues whose ratings had fallen.

"A lot has been issued, but we're told we're in the first quartile of this, so we think there should be plenty of demand left," Koniz said.

After this deal, DIA will still need to refund about $200 million of auction-rate debt issued last November, just before the problems arose. The airport is also taking out about $200 million of ARS with commercial paper.

In Colorado, Denver is one of several issuers seeking to convert about $4 billion of auction-rate debt. Among the largest are the E-470 Public Highway Authority in Aurora, Children's Hospital and the CollegeInvest student loan program in Denver, Memorial Health System in Colorado Springs, the Poudre Valley Health System in Fort Collins, and the Colorado School of Mines in Golden.

Despite the flood of refinancings, officials expect strong demand for the bonds as Denver International Airport continues a major capital improvement program amid record passenger loads and a healthy side business from oil and gas production.

Denver's auction-rate refunding comes about a month after Dallas-Fort Worth International Airport remarketed $337.1 million of auction-rate bonds as fixed-rate debt. The deal required keeping XL Capital Assurance Inc. as the insurer on about $56 million of the bonds, despite the company's falling credit ratings.

"We closed the deal at 3 p.m., and at 4:30 p.m. Fitch [Ratings] downgraded XL from A to BB," said Michael Phemister, DFW's vice president of treasury management. "So we got lucky with our timing."

The bulk of the remarketed bonds are insured by MBIA Insurance Corp., which recently saw its triple-A ratings affirmed but with a negative outlook. Another complicating factor was the turmoil surrounding Bear, Stearns & Co., a senior manager of the remarketing. JPMorgan Chase & Co., which earlier this month acquired Bear Stearns at a fire-sale price of $10 per share, was co-manager, along with M.R. Beal & Co.

Although the true interest cost of the remarketed bonds came to 6.02%, the highest in DFW's portfolio, Phemister said the airport was satisfied with the rate because the deal had to be done quickly to outrun the stampede, and an 18-month call provision probably accounted for about 30 basis points.

Those call provisions fit with DFW's plans to restructure about half of its $3.8 billion of outstanding debt next year, said chief financial officer Christopher A. Poinsatte. The airport's debt portfolio carries average rates of 5.25%, he said.

Under the remarketing, the average maturity of the bonds could not change and they could not be sold as premium or discount bonds, Poinsatte said. Nonetheless, the new structure shortened the yield curve to 2028 versus the original 2035, he said.

Auction-rate debt worked well for airports until the recent failures, Phemister said. Since 2002, DFW saved about $40 million in interest cost using auction-rate securities, he said.

Other airports shedding auction-rate debt include McCarran International in Las Vegas, the nation's sixth busiest, with $600 million of refunding. Orlando International Airport in Florida yesterday issued $310 million to refund auction rate securities insured by Financial Guaranty Insurance Co. The 2008A issue will carry insurance from Financial Security Assurance. Bonds due in 2018 drew coupon rates of 5.25% and yields of 5%, according to pricing data. The refinancing gained urgency with the downgrade of FGIC and rising interest costs. A series B of $40 million will also be insured by FSA.

Miami-Dade County remarketed $139 million of variable-rate airport debt on March 12 with a top coupon rate of 5.375% due in 2018.

Another refunding deal insured by FSA will be coming from Memphis-Shelby County Airport in a $90 million refunding.

Also last month, the San Francisco International Airport Commission issued $579 million of fixed-rate revenue bonds to restructure its outstanding auction-rate securities.

Cleveland decided to restructure its auction-rate debt with nearly $440 million of variable-rate demand bonds. The restructured debt includes $281.5 million of airport revenue bonds.

The Metropolitan Washington Airports Authority last month converted $141 million of auction-rate securities to variable-rate demand obligations. The Houston City Council last month approved issuing $250 million in fixed-rate airport system revenue bonds as the first step in converting its $1.9 billion ofARS.

While the refinancing costs can run in the millions, good credit ratings are vital in escaping the drag of falling insurance ratings.

Denver's airport bonds carry ratings of A-plus from Fitch and A1 by Moody's Investors Service. Both provided stable outlooks. Ratings from Standard & Poor's are pending.

Moody's cited strong growth in enplanements, "particularly by low cost carriers and Southwest Airlines, which initiated service in 2006."

DIA's net revenues ran 1.89 times annual debt service in 2006, a level that Fitch rated as "strong." The airport's forecast shows coverage of annual debt service declining to 1.65 times debt service in 2013, as debt service for the new airport projects is included.

Outside of United Airlines' base at Chicago O'Hare International Airport, DIA is the carrier's second-largest hub, and the most efficient. A possible merger with Continental Airlines, which closed its own Denver hub with the opening of DIA in 1995, could reduce employment but should not have a significant impact on Denver operations, according to aviation consultant Mike Boyd.

The airport served a record 25 million passengers in 2007 with January 2008 year-to-date results up 1.6% over that same period prior year. Originating passengers accounted for approximately 57% of total enplanements, representing an adequate local component of overall traffic for a major connecting hub facility, according to Fitch.

Record passenger growth in 2007 bolstered non-airline revenues while increased costs were largely associated with snow removal, overtime pay, guard services, janitorial services and repair and maintenance costs.

"Management has historically worked to manage its finances and control costs, as reflected by a 1.8% average annual growth rate in operating and maintenances expenses between fiscal 2002 and 2006," Fitch noted. "The airport's favorable economic model drove operating revenues to grow at a 3.1% average annual growth rate, over that same period, producing a strong operating ratio of 49% in fiscal 2006. The airport has consistently produced a strong liquidity position and has had an average of 415 days cash on hand, between 2002 and 2006, providing enough financial flexibility to cash fund projects."

The airport's capital program includes $987 million in projects through 2013. The largest portion of the program includes terminal and concourse improvements at $465 million and airfield improvements at $177 million. The airport plans to finance the program through federal grants, passenger facility charge receipts, and future bond issuance that will fund an estimated $722 million in projects.

 

For reprint and licensing requests for this article, click here.
MORE FROM BOND BUYER