DALLAS Dallas-Fort Worth International Airport continues its record-setting pace for bond issuance Tuesday with a $259 million refunding.
The issue comes amid uncertainty about the future of DFW’s major tenant American Airlines and rising costs for the airport’s $2.3 billion Terminal Renewal and Improvement Program.
American’s proposed merger with US Airways has been delayed by the U.S. Justice Department’s lawsuit claiming violations of the federal antitrust law. The federal lawsuit is scheduled for trial Nov. 25 in Washington, D.C.
Though DFW is American’s largest hub and the site of its headquarters, the delayed merger is not expected to have any impact on this week’s bond sale, said Mike Phemister, vice president for treasury services at the airport.
Phemister speaks from experience, as DFW’s record pace of debt issuance has come during the American merger upheavals this year.
“We believe our issues have been well received,” Phemister said, “particularly in light of the current higher rates.”
An Aug. 15 issue of $225 million earned yields of 5.37% on maturities of 2033 with 5.25% coupons.
Interest rates have risen, but Phemister said that opportunities still exist for refunding outstanding debt.
“As in any rate environment, we are looking at saving levels of at least 3% NPV (net present value) savings,” he said.
“We don’t anticipate rates going down anytime soon, so we are taking savings that meet our parameters, which are available,” Phemister said.
The airport will use this week’s 2013F bond proceeds to refund all or a portion of the 2003A bonds, to fund reserves, and to pay the costs of issuance.
The improving economy is also manifesting itself in higher construction costs.
Airport trustees learned Sept. 4 that $221 million would be added to the cost of renovations to three of the airport’s oldest terminals. Work on a fourth terminal, mainly used by American Airlines, was halted by the carrier’s bankruptcy and merger plan.
DFW Airport issued $367 million of revenue bonds in June to fund the terminal renewal project, bringing outstanding debt to more than $6 billion.
The bonds coming this week are not subject to the alternative minimum tax provisions of the Internal Revenue Service. Airports keep a keen eye on opportunities to issue non-AMT bonds.
The senior managers on the DFW deal are Ramirez & Co. and Morgan Stanley, with Ramirez as the book runner. Ramirez directors Robin Redford and Lorraine Palacios are lead bankers.
RBC Capital Markets and Stifel, Nicolaus & Co. are co-managers.
First Southwest directors Michael Bartalotta, Ron Davis and Rick Fox shared financial advisor duties with Estrada Hinojosa’s Bob Estrada and Dave Gordon.
Bond counsel duties are shared by McCall, Parkhurst & Horton, Bracewell & Giuliani, and Newby Davis.
With final maturities in 2033, the serial bonds carry ratings of A-plus from Standard & Poor’s, A2 from Moody’s Investors Service and A from Fitch Ratings. Outlooks are stable.
In March, Moody’s downgraded DFW to A2 from A1. Analysts reiterated in their report for this week’s deal that the debt ratios required the lower rating.
“Total debt outstanding, already among the highest in the nation for airports, is expected to become the highest during 2013,” wrote Moody’s analyst Kurt Krummenacker.
“This will bring debt per enplanement to over $200 and debt per origin and destination enplanement to over $400 for an extended period of time,” he wrote.
The A2 rating also reflects risk factors of high concentration in a single airline, construction risk and increasing competition from Dallas Love Field as the federal Wright Amendment restrictions are fully removed in 2014, allowing flights from Love to and any U.S. destination. Currently such flights are limited to specific states.
American’s emergence from Chapter 11 was expected to coincide with the closing of its merger with US Airways in an $11 billion, all-stock deal. Only federal regulatory approval was still needed.
The airline entered bankruptcy with about $3.3 billion of tax-exempt revenue debt issued to fund projects at its hub airports, maintenance bases and other facilities, or to refund debt. About $1.5 billion was unsecured. The other $1.8 billion of municipal bonds was secured by some form of collateral. Under the reorganization plan now threatened by the federal antitrust action, even unsecured creditors are to be made whole.
In previous airline bankruptcies in which unsecured municipal bond received between 20 cents to 60 cents on the dollar. With the federal rejection of the American-US Airways merger, the status of debt holders could change.
DFW was the largest bond issuer in the Southwest region for the first half of 2013, with more than $1 billion, according to data from Thomson Reuters.
While ratings analysts maintained stable outlooks on DFW’s debt before the Justice Department decision, Standard & Poor’s warned that “any change in strategy by American Airlines that affects traffic negatively at DFW could have negative rating implications and may lead us to lower the rating on the airport.”
Fitch Ratings last month issued a report saying the Justice Department’s action would not have any short-term impact on its airport ratings.
“As a solid franchise, operational performance would likely remain intact even if American’s operations should contract,” Fitch analyst Seth Lehman wrote about DFW.
“The central risk for the American hubs would be a major loss in connecting traffic, exacerbating the debt burden and airline cost profile since all three hubs have in place or will be facing high leverage metrics driven by large capital programs,” he wrote.
DFW decided in 2012 to move up plans to issue $2 billion of debt for the Terminal Renewal Improvement Program by one year to capture low interest rates.