DALLAS — With new competition fast approaching, Dallas-Fort Worth International Airport is returning to the debt market to price $367 million of revenue bonds for its terminal remodeling project.
The upcoming issue, expected to price May 16, is part of an accelerated debt schedule designed to capture historically low interest rate savings. If current plans come to fruition, DFW expects to have eight issues this year. The airport was the largest issuer in the Southwest in 2013.
“That number could be less if we feel that interest rates are not going to rise over the next year and that Congress will take no action affecting the tax exempt status of municipal bonds,” said Mike Phemister, vice president for treasury management at DFW. “The point being that buyers sitting on the sideline hoping for better yields, in a future bond issue, could be disappointed if we delay some issues to next year. This a deal by deal evaluation, which can change as to the timing and amount of each issue.”
The upcoming deal follows a similarly sized issue in April that achieved yields to maturities from 3.7% in 2026 to 4.7% in 2045.
While those bonds were subject to the alternative minimum tax provisions of the Internal Revenue Service, the upcoming bonds are not.
“We were happy with the success of the April AMT transaction,” Phemister said. “We had 40 buyers, so there was a wide and diverse interest in the bonds. One new buyer purchased $150 million on the long end. Overall the transaction was two-times oversubscribed.”
Co-senior managers on the May 16 negotiated deal will be Morgan Stanley and Cabrera Capital Markets. Loop Capital Markets and Stifel Nicolaus & Co. are co-managers.
First Southwest Co. and Estrada Hinojosa & Co. are the airport’s financial advisors. Three firms provide bond counsel: Bracewell & Giuliani; McCall, Parkhurst & Horton; and Newby Davis.
Maturities on the non-AMT bonds will run from 2026 to 2050.
Standard & Poor’s rates the bonds A-plus, with ratings of A2 from Moody’s Investors Service and A from Fitch Ratings.
Moody’s and Fitch lowered DFW revenue bonds one notch to A2 from A1 ahead of last month’s deal. The Moody’s A1 fell to A2, and Fitch’s A-plus dropped to A. The previously negative outlook was changed to stable.
Both agencies cited the new debt needed for the $2 billion Terminal Renewal and Improvement Program (TRIP) as the major factor in the downgrade.
“In Fitch’s view, the rising debt burden over the next 12-24 months will result in high leverage, estimated at 13 times to 15 times net debt to cash flow,” wrote Fitch analyst Reed Singer. “The mounting debt presents a higher degree of risk with regard to financial flexibility and cost competitiveness.”
In affirming its A-plus rating Friday, Standard & Poor’s analyst Todd Spence cited DFW’s “solid business position, strong service area economy, and long record of good liquidity.”
With the new issue he airport will have about $5.7 billion in principal debt outstanding, according to S&P.
All airport debt is fixed rate with no derivative exposure.
One of the most significant risk factors is the planned merger of hometown American Airlines with Tempe, Ariz.-based U.S. Airways. American, currently in bankruptcy, is the dominant carrier at DFW and expects to keep its headquarters just southwest of the airport entrance after the merger.
“Any change in strategy by American Airlines that impacts traffic negatively at DFW could have negative rating implications and may lead us to lower the airport’s rating,” S&P’s Spence noted.
On July 18, 2012, American assumed all of its unexpired leases for nonresidential property at DFW, including the use agreement, and paid about $11 million to the airport to cure defaults and pre-petition obligations under the leases.
DFW is also facing new competition from Dallas Love Field Airport beginning next year as the restrictive Wright Amendment is lifted. The restrictions, imposed under congressional action sponsored by former U.S. House Speaker Jim Wright, D-Texas, limited Love Field flights to Texas and adjoining states.
The Wright Amendment was designed to allow DFW time to establish itself between the cities of Dallas and Fort Worth with minimal competition from Love Field and its primary tenant Southwest Airlines. As DFW flourished, so did Southwest, growing to become one the nation’s largest and most profitable airlines.
Under a compromise to repeal the Wright Amendment, Love Field was restricted to 20 gates in exchange for allowing Southwest – or any other carrier – to fly to any destination in the U.S. Under that plan, Southwest is financing a complete remodeling of the Love Field terminal as DFW is remodeling its four original terminals opened in 1974.
U.S. Airways chief executive Doug Parker has been designated as CEO of the merged airline and is expected to bring a more open corporate culture to the world’s largest airline. Parker has competed successfully with Southwest at Phoenix’s Sky Harbor Airport and other hubs while fostering strong growth in the airline’s market value. Parker has said that he modeled his management style along the lines of Southwest founder Herb Kelleher’s.
The merger creates a 3.5% ownership stake in the combined airline for shareholders in AMR Corp., the parent of American Airlines.
“It is unusual in Chapter 11 cases – and unprecedented in recent airline restructurings – for shareholders to receive meaningful recoveries,” AMR Chairman Tom Horton noted.
For DFW, the American bankruptcy has caused minimal disruptions as the terminal remodeling project has made steady progress amid a growing economy, officials said.
“We are on target to have the best year in the history of the airport this year and see no reason why DFW won’t continue to grow and be successful into the future,” Phemister said.