CHICAGO — Any credit with Detroit in its name can expect to take a hit in the market, but for the Detroit Metropolitan Airport, the so-called Michigan penalty is nothing new.
"It is the Detroit Metropolitan Airport and we don't run from that; we're proud of it," said Terry Teifer, chief financial officer of the Wayne County Airport Authority, which runs the airport.
The authority is a separate entity owned by neither the city nor the county, so it is not directly impacted by the city's momentous July 18 decision to file for Chapter 9 bankruptcy protection.
Despite the legal separation, the authority has come to expect higher borrowing costs from its association with the long-suffering Motor City and its location in southeast Michigan.
"We've always known the spread between bond index rates and what we pay is more than it ought to be; it's Michigan penalty, and the bankers all say it's real," Teifer said, estimating the penalty ranges from 20 to 40 basis points.
At one investor webinar, he said, a potential buyer even asked why anyone would want to fly into Detroit, "as if Detroit is some horrible place," he said.
Despite the contagion, savvy investors realize the credit separation, and yield-hungry buyers are often quick to snap up the airport's debt.
The authority's last deal, for $290 million in August 2012, was oversubscribed and the authority saw the tightest spread in its recent history, Teifer said.
"The bond world is funny — the more astute people are looking for value anyway," he said. "Public perception is worse, but savvy investors know what the truth is." Teifer said the authority also holds meetings with its largest bondholders, which include Vanguard and Fidelity, as well as with the ratings firms, to emphasize the authority's separation from the city.
The airport authority is also fortunate in that it wrapped up most its major capital campaign last year, ahead of the city's bankruptcy. The Delta Air Lines hub, rated in the low single-A category by the three major rating companies, now has two relatively new terminals.
Retail investors would likely have more of a problem with the credit than institutional buyers, said Howard Cure, director of municipal credit research for Evercore Wealth Management LLC.
"The market is still driven by a heavily retail presence, so to the extent that the name Detroit or anything associated with it is simply in the name could put off a portion of the market," Cure said. "I think more sophisticated investors would buy it."
A piece of the airport's debt with a 2015 maturity and 5.25% coupon was yielding 2.35% on Monday, according to the Municipal Securities Rulemaking Board web site. Bonds maturing in 2034 with a 5% coupon yielded 5.1% on the same day. A piece of the airport's debt with a 2022 maturity and 5.25% coupon yielded 3.38% in trading last week.
Besides Detroit Metro, the authority also operates the smaller Willow Run Airport. The city itself owns and operates the Coleman Young Airport, a two-runway facility that has only corporate and private jet traffic.
City officials from Detroit Mayor Dave Bing's office met with the airport authority to gauge interest in the airport taking over Coleman Young, but the authority is not interested, Teifer said.
Detroit emergency manager Kevyn Orr's restructuring plan notes that the city subsidizes the Coleman Young airport from its general fund, and says that its "revitalization" will be addressed at a later date.
Detroit Metro is currently planning to privately place $400 million of variable-rate debt in December, a move prompted by expiring letters of credit and the desire to eliminate some of the market risk of holding variable-rate debt, Teifer said.
While the city's bankruptcy is a big deal, the bankruptcy of GM and Chrysler had more of an impact on the airport and the region, Teifer said.
Southeast Michigan is enjoying one of the strongest economic recoveries in the nation due to the auto industry, according to Teifer.
"They have a way bigger impact on the region than what the city will have," he said.
Detroit's bankruptcy would be the largest municipal bankruptcy in the U.S., but its potential ramifications are more serious for governments than enterprises like the airport.
"Where the bankruptcy court takes Detroit could have interesting ramifications around the country for a lot of places, but it may have more of an effect on cities around the country than it would on this airport," said Teifer.