Houston Aims High for Airports

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DALLAS - Houston is planning to price nearly $1 billion of debt before the end of the month in a deal that could include Build America Bonds.

The issue will come in two tranches in consecutive trading days, according to city officials.

The first $500 million of general obligation bonds are expected to price through negotiation July 29 with Loop Capital Markets as book-runner and RBC Capital Markets, Southwest Securities and Morgan Stanley as senior managers.

Co-managers will include Fidelity Capital Markets, Jefferies & Co,, Siebert Brandford Shank & Co., Goldman, Sachs & Co., Ramirez & Co. and Stifel Nicolaus & Co..

The city has not announced how much of the GO issue will be BABs, but the preliminary official statement is expected this week.

"There may be a Build America Bond component," said Janice Evans, spokesperson for the Houston controller's office. "The Finance Department is trying to see what qualifies."

A $450 million tranche of senior-lien airport revenue bonds will likely price July 30 with JPMorgan as book-runner and senior manager. Co-managers will include Citi, Merrill Lynch & Co., Jeffries, Loop, Ramirez, Southwest Securities and Stifel.

While ratings on the general obligation bonds are pending, Standard & Poor's has already conferred its AA-minus on the airport debt, while Moody's Investors Service has maintained its equivalent Aa3.

In the process of rating the upcoming issue, both agencies downgraded the airport system's subordinate-lien revenue bonds.

Standard & Poor's dropped the rating to A from A-plus, while Moody's downgraded the bonds to A2 from A1. Both agencies cited the weakening of debt service coverage as Houston proceeds with its capital improvement program,

"The rating action reflects what we consider to be significantly increased leverage in conjunction with the issuance of the Series 2009A bonds, as well as a capital plan that includes additional debt in 2010," said Standard & Poor's credit analyst Adam Torres.

Moody's analyst Laura Barrientos noted that forecasts with reasonable growth assumptions show that the addition of the upcoming debt and an anticipated $217 million issue next year lowers coverage to 1.36 times in 2011 and about 1.5 times thereafter. That scenario is based on the use of allowable passenger facility charge revenues to offset debt service.

"Moody's views the application of PFC revenues for payment of debt service as reasonably certain given the tight criteria and use rules surrounding them, but the lack of a pledge of PFC revenues drives us to also consider debt service coverage without the offset from these funds, which results in coverage levels which are not consistent with that of similarly rated peers in the A1 category," Barrientos wrote.

The airport bonds will be issued under the name of the Houston Airport System, while the GO bonds will list the city as issuer.

The Houston Airport System includes George Bush Intercontinental Airport, William P. Hobby Airport and Ellington Airport. Bush Intercontinental is by far the largest airport, with domestic and international service. Houston Hobby serves the domestic market and Ellington Airport is operated as a joint military-civilian airfield and has no commercial passenger traffic.

In evaluating the airports, analysts considered the health of their major carriers. Continental Airlines, together with Continental Express and Continental Connection, accounted for 87% of passenger activity at Bush Intercontinental in 2008. Southwest Airlines is the main carrier at Hobby, representing 89% of all activity there.

Combined losses for the major carriers, including Continental and Southwest, are expected to hit $1 billion for the second quarter, according to analysts.

Revenues have fallen with the loss of corporate travelers, while the H1N1 flu dampened demand for business and leisure trips. After falling in the past year, jet fuel prices climbed 32% in the quarter.

Continental said revenue for each seat flown fell at least 20% in May and June, worse than the 12% drop in April. The nation's fourth-largest carrier filled more seats in June but discounting and declining business traffic left revenue weak against rising fuel prices.

Domestic revenue-passenger miles fell 6.5% from June 2008, less than the drop seen in May. The fall in international traffic was also less pronounced in June as Continental, among the worst-hit by the impact on travel of the H1N1 virus, cut capacity on overseas routes by 6.2%.

Southwest reported that June traffic fell 2.1% from a year ago to 6.7 billion revenue passenger miles. Total June capacity fell 3.8% to 8.5 billion available seat-miles from a year ago. Load factor, or the percentage of available seats filled with passengers, in June rose to 79.5% from 78.2% last year.

In light of the recession and falling airline revenues, Houston Airport System has cut its original 2010-2014 capital improvement program by almost half to $526 million. Major projects include the $108 million renovation of the terminal at Hobby and the $228 million renovation and expansion of Terminal D and $134 million extension to Terminal A at Bush Intercontinental.

Continental is expected to renovate and expand Terminal B in the next couple of years using special facility revenue bonds, with $63 million for associated apron and infrastructure work coming from airport system funds.

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