DFW Airport refunding savings will boost budget amid coronavirus crunch
Dallas-Fort Worth International expects a bond market boost as it lowers costs to cope with the worst economic downturn in its 46-year history.
A pair of tax-exempt refunding deals adding up to $875 million is expected to lower the airport’s interest expenses.
“We reduced our debt service budget by $25 million, and we expect to achieve that with refundings this summer,” Chief Financial Officer Christopher Poinsatte said in a pre-sale roadshow for the $400.3 million Series 2020A-exempt revenue refunding bonds expected the week of July 13.
Siebert Williams Shank & Co. is senior manager for the July deal. Hilltop Securities and Estrada Hinojosa are financial advisors.
The next $475 million of revenue refunding bonds are expected in August. Interest on neither series will be subject to the Alternative Minimum Tax, according to the presentation.
The new debt is expected to refund 2011C, 2011D, 2012B and 2012G bonds for a net present value savings of 19.9%, or $195 million.
The deals will arrive after a downgrade from S&P Global Ratings to A from A-plus, with a negative outlook.
"The rating action and negative outlook are based on the severe drop in enplanements and the significant negative impacts of the COVID-19 pandemic that, in our view, is likely to depress passenger levels and financial performance over the intermediate term and could increase volatility of activity," said S&P Global Ratings credit analyst Todd Spence.
Moody’s rates the bonds A1. Fitch maintains an A-plus rating with a negative outlook, while Kroll Bond Rating Agency rates the bonds AA.
“The outbreak of the coronavirus and related government containment measures worldwide create an uncertain global environment for the airport sector,” said Fitch analyst Seth Lehman. “Material changes in revenue and cost profile are occurring across the sector and will continue to evolve as economic activity and government restrictions respond to the ongoing situation.”
Moody’s maintained a stable outlook on its rating based on “expectations that DFW will see stronger than average recovery among U.S. airports that limits the need to make significant draws on liquidity.
“Increases in leverage caused by debt issuance will be delayed until travel demand forecasts are more stable,” Moody’s analyst Earl Heffintrayer noted. “And internal liquidity will remain strong enough to address slower recovery scenarios.”
Poinsatte's presentation cited two scenarios for recovery that he called the optimistic and the base. Under the optimistic scenario, the airport would regain 2019-level revenues in fiscal year 2022. The base case takes that out late fiscal year 2023.
“We bottomed out on April 16 at a little more than 14,000 passengers, and have been steadily recovering up to almost 80,000 passengers on June 23,” Poinsatte said. “I will point out that we built this forecast in May, and in at the end of that month we were a little bit better than our baseline forecast.”
As at other airports around the nation, revenues fell from a peak to an unprecedented abyss.
“Upon entering the pandemic on Feb. 29, DFW was beginning from a position of strength,” he said. “Every one of our key metrics was better than budget and better than the prior year.
“We are estimating we will see revenue losses of $231 million under the optimistic passenger forecast to $248 million on the baseline passenger forecast,” he said. “To put that in context, our FY 2020 budget is $1.1 billion and the expenditure budget is $1 billion. And about half of the budget is operating expense and half is debt service.”
After budget cutting, the airport net revenue losses are expected to range between $154 million to $170 million.
DFW was allotted $299 million under the $2.2 trillion federal Coronavirus Aid, Relief and Economic Security (CARES) Act signed into law March 27, Poinsatte said.
“We drew down $144 million in May,” he said. “We expect we will draw down $154 million by the end of the fiscal year. We intend to use this money to pay debt service. The CARES Act funding is gross revenue from a bond indenture standpoint.”
DFW’s goal is to keep operating costs stable for its airlines, particularly fortress-hub carrier American Airlines.
“What we want to get from this is that we would have no airline rate increases for this year,” Poinsatte said.
American accounts for more than 85% of DFW's passenger traffic.
“While the carrier is facing financial and operational stresses from the pandemic, American continues to demonstrate a strong commitment to the Dallas-Ft. Worth market and is expected to remain a vital hub for its global network,” said Fitch’s Lehman. “As American's operations have adjusted under the pandemic environment, DFW's position within the carrier's network has improved on a relative basis when compared to other American hubs and focus city markets.”
S&P rates American Airlines B-minus with a negative outlook.
DFW's $2.1 billion capital program has been extended from its current 10-years to a new timeline of 15 years, Poinsatte said. Plans to build a new Terminal D is on hold.
The airport is also planning a $1.1 billion taxable refunding in the late July-September time frame, he said.
“These investments will likely tie into a refreshed airline agreement, the current of which expires in 2021,” Lehman said. “Debt borrowings are expected to cover a substantial portion of program costs.”
Lehman called operations under the current airline agreement “healthy,” with “stable debt service coverage levels, competitive airline costs and strong reserve balances.”
Debt service coverage, including rolling coverage accounts, has averaged in the 1.4x-1.5x range over the past several fiscal years, Lehman noted.
“Airport fund balances are robust at more than $900 million of unrestricted cash, translating to a very strong 723 days cash on hand,” Lehman said. “Historical airport leverage was among the highest for a U.S. airport given the debt borrowings since 2010, but has trended downward in the more recent fiscal periods to about 8.5x.”
DFW's peers include major hub airports with similar market and elevated leverage characteristics of 12x or more, such as Chicago O'Hare Airport and Miami International, both of which Fitch rates at A with negative outlook.
“DFW has similar coverage levels to Miami (averaging about 1.5x) but stronger liquidity metrics and lower airline costs,” Lehman said. “Fitch expects Miami's future capital needs to be lower in scale relative to both DFW and Chicago, and therefore airline costs will not face upward pressures over the next decade.