CHICAGO — The Detroit Metropolitan Wayne County Airport is heading to market next week with $107 million of airport revenue bonds, hoping it doesn't take too much of a beating for carrying what is one of the most tainted names in the municipal bond world.
It's the airport's first sale since Detroit declared the largest municipal bankruptcy in the U.S. last summer.
The Wayne County Airport Authority, which runs the airport, operates independently of the city as well as junk-rated Wayne County, which is struggling with its own problems. All three rating agencies affirmed its single A-rating ahead of the deal, citing the airport's large service area and fiscal stability, among other factors.
But in the market, perception can be reality, says Terry Teifer, the authority's chief financial officer.
"The elephant in the room for us, being the Detroit Metro Airport, is all about the Detroit bankruptcy," Teifer said. "But it's a perception concern. The reality is that Detroit has nothing to do with this airport. There's no ties of any nature: no financial ties, no legal ties, no nothing ties."
Airport officials and their finance team have geared up for the sale by touting the credit's independence and strength to investors in an online road show and in person. The authority already meets annually with its top institutional investors as well as credit analysts and touts its credit at conferences like J.P. Morgan's annual transportation conference.
"It's a lot of work," Teifer said. "Our last bond issue we did a full court press to make sure people understood the story of the airport. The truth of the matter is that Michigan and Detroit have a lot of negative connotations for our bonds, and they were trading way more expensive than an A-rated airport should trade at."
The team worked to tighten the spread in the last public bond offering, in 2012, and managed to bring it down roughly 20 basis points, Teifer said.
"We've done a lot of work over the last few years to minimize what would be called the Michigan penalty, and we have tightened that up," he said.
A piece of the airport's debt that sold in 2012 with a 5% coupon and a 2037 maturity saw yields ranging from 4.3% to 4.9% in June trading, according to the Municipal Securities Rulemaking Board web site. In comparison, bonds from the Denver, Colo. airport system also sold in 2012 with a 5% coupon and a 2032 maturity were yielding 3.6% in June trading. Both bonds are not subject to the AMT. The Denver airport carries A-plus ratings from Standard & Poor's compared to Wayne County airport's A rating.
Debt from the AA-minus rated Minneapolis-St. Paul Metro Airport Commission with a 4.1% coupon and a 2030 maturity was yielding 2.9% in July trading, according to EMMA.
The new borrowing is set for Aug. 6. It will be the authority's first public offering since Detroit filed Chapter 9 on July 18, 2013. Last year, when some of the airport's letters of credits on its variable-rate bonds came due, airport officials opted to privately place the debt with a trio of banks rather than taking on the market just months after Detroit's filing. The airport is located 20 miles outside Detroit in Wayne County. The county appoints five of the authority's seven board members, and formally holds the title to the land. It began as a department of the county, but in 2002 became a separate legal entity.
"It's important we make the point that the airport authority is an independent authority," Teifer told investors during the road show. "We're not with the city of Detroit ... and the county has no say whatsoever in the operation of this airport."
Teifer said in a later interview that some of the bond buyers he talks to have said they like the headline risk the credit carries in the market.
"Some of them have told us they like it, because the perception gives a better yield than our credit deserves," he said.
Moody's Investors Service rates the airport's senior-lien bonds A2. Standard & Poor's rates them A, and Fitch Ratings A-minus. All three maintain a stable outlook.
Detroit Metro Airport has $420 million of privately placed variable-rate debt and $1.6 billion of fixed-rate debt. The authority recently completed its fourth private placement, a $30 million 2014A variable-rate debt with Bank of America Merrill Lynch. The private placements, all variable rate debt, make up about 20% of the authority's debt portfolio, in keeping with an informal 80%-20% fixed- to variable-rate ratio.
The bonds are set to price Aug. 6. The deal features $72.5 million of bonds that are not subject to the alternative minimum tax, and $34.8 million of bonds that are subject to the AMT. The debt matures from 2017 through 2044.
They are senior-lien bonds payable from the net revenues of the airport.
The airport serves a 10-county area, making it one of the largest airports in the region, and is a major connecting hub for Delta, second only to Atlanta, Ga.
With both of its terminals relatively new, the airport's capital improvement plan totals only about $595 million, which ratings analysts also consider a positive.
Most of capital spending, and proceeds from next week's deal, will go toward the airfield and infrastructure projects. The authority expects to issue another $134 million in 2015 or 2016 to finance the rest.
Delta accounts for just under 80% of all enplanements, a dominance that ratings analysts warn could mean problems for the airport if the airline decides to scale back.
Delta has a lease agreement through 2032, which offsets the risk, analysts said. Ratings analysts also said Delta officials have confirmed they are committed to Detroit.
"Given the airport's position within the Delta system, and strategic shifts at other Delta hub airports, Moody's acknowledges the potential for sizable seat cutbacks at WCAA is unlikely in the short-term, though remain a risk in the medium to long-term," Moody's said in its ratings report.
Enplanements have been either slightly up or flat since 2011, ending a three-year trend of decline. Reflecting some challenges, a recent airport consultant's report scaled back expected growth rates to 1% growth through 2022.
The airport's lease agreements with its airlines all last through 2032, which should bring stability, analysts said.
Debt-service coverage on the senior-lien bond averages 1.5 times or higher starting in 2015, according to the authority.
Standard & Poor's noted that bond provisions allow passenger facility charges, available cash, other deposits and federal grants to be included in the rate covenant calculation. That "lets the airport maintain a lower cost structure but also may not allow the airport to meet its debt service requirements on a net revenue basis alone," S&P said.
JPMorgan is the senior book-running manager. Citigroup, Bank of America-Merrill Lynch, PNC Capital Markets, and Wells Fargo Securities round out the team. Public Financial Management Inc. and D+G Consulting Group LLC are co-financial advisors. Miller, Canfield, Paddock and Stone PLC is bond counsel.