CHICAGO - The Gary/Chicago International Airport Authority this week is pricing $30 million of tax increment-backed bonds in a deal that marks the authority's first trip to the bond market.
The airport in struggling Gary, Ind. is in the midst of a major privatization launched earlier this year. The public-private partnership calls for private operation of the airport and the development of a large swath of land surrounding the airport.
Proceeds from the bonds will finance completion of a 10-year-old runway expansion project that officials said "would result in economic and financial benefits to the airport and the entire region."
In a road show promoting the deal, officials touted the facility as "the Chicago region's third airport." Gary, which considers the airport one of its premiere assets, has worked for years with Chicago aviation officials on a regional transportation plan.
The city itself made a rare appearance in the bond market last April in a bid to help rebuild its own battered credit.
In another first for the long-struggling airport, President Barack Obama flew into and out of the facility several weeks ago for a Chicago event, followed a few weeks later by former Secretary of State Hillary Clinton.
The sale of $30.6 million airport development zone revenue bonds is tentatively set for Thursday. The deal includes a mix of serial and term bonds that are rated BBB-plus by Standard & Poor's and BBB by Fitch Ratings.
Citi and Loop Capital Markets are the underwriters. Faegre Baker Daniels LLP and Deirdre Monroe are co-bond counsel. Sycamore Advisors LLC is financial advisor. Cender & Company LLC is the TIF consultant. SB Friedman Development Advisors is the development consultant.
When considering various pledges to back the debt for its inaugural issue, the airport team quickly opted for a pledge of revenue from the roughly 10-year-old tax increment financing district, said B.R. Lane, executive director of the airport and deputy executive director of the airport authority.
The 6,742-acre tax increment district, which features a mix of industrial, commercial and residential uses with some open land, is dubbed the Airport Development Zone.
"I knew what we had in the ADV and I knew the strength of the base," said Lane, who came to the airport a year ago after serving as Gary Mayor Karen Freeman-Wilson's chief of staff. "I knew it would probably be easier for us to get this done, and that once investors started to hear about what we were doing with the airport and this ADV being the cornerstone, that it wasn't going to be a difficult sell."
The bond team also considered the TIF pledge "cleaner" than a general airport pledge at a time when the airport is being revamped through privatization, said financial advisor Melanie Shaker of Sycamore Advisors.
"We wanted investors not to worry about construction risk, completion risk, or have any of those concerns," Shaker said. "There's a very solid historical revenue base and we had some good projections even with no growth."
Proceeds will also fund a debt service reserve fund and a supplemental reserve fund that will build over three years starting in 2016.
The expansion project will bring the airport's main runway up to federal standards and allow for wider jets.
The airport's current primary service is cargo, charter and light general aviation. The new private operator, Washington DC-based AvPorts, is finalizing a proposal that will lay out a yet-to-be-announced service mix designed to make the airport profitable within five years.
A separate private team, called AFCO Gary LLC, which includes Guggenheim Securities and Loop Capital, is developing land surrounding the area for industrial use. The team is required to invest $25 million over the next three years and $100 million over the 40-year life of the agreement.
"[The runway expansion] in fact part of a larger economic development plan for the city of Gary, and not just the city, but also regionally and particularly working with the city of Chicago aviation system," Lane said. "When you add the stakeholders at the state level and the new administration at Gary, who saw this as an asset we can build on through a P3, you can see how we're trying to position the airport as a catalyst for economic development."
Financial projections assume no growth of the tax increment revenue, with the revenue declining slightly from 2015 through 2019 due to state legislation regarding general obligation bonds issued before 2008, the finance team said during the road show.
Growth in the assessed value and incremental revenue will likely grow over the next several years due to new development and a recovery economy, officials said. But no assumptions from new development were built into the projections. "We wanted to be as absolutely conservative as possible," Shaker said.
During the road show, officials cited SB Friedman Development Advisors' report that said the ADV has a "strong industrial economic base that's linked to the Chicago regional economy," and that the economic performance and jobs have recovered to pre-recession levels. That recovery, however, has not yet translated into "positive assessed value growth," according to the report.
Despite the flat growth and slight declines, ratings analysts said they expect revenue to provide adequate coverage through the life of the debt. Debt-service coverage is expected to be at 1.67 times over the 20-year amortization of the debt, according to the ratings agencies. TIF revenues could decline by 40% before coverage would fall below 1.0 times, according to Fitch.
In assigning the investment-grade ratings, analysts said they took into account historical coverage levels, as well as the fluctuations in collections, the weak regional economy, and the ties to the Chicago economy and the Chicago aviation system.
"The stable outlook reflects Standard & Poor's expectation that tax-increment revenues will remain at levels sufficient to provide at least adequate MADS coverage," S&P said in its ratings report. "This is supported by the heavy residential makeup of the [airport development zone] and the lack of individual taxpayer concentration, as well as by an adequate 1.5 times [additional bonds test]. The moderating effects of Indiana's TIF neutralization legislation provide additional stability to the rating. Rating improvement is possible, and may not require improved MADS coverage, but is likely dependent on more steady performance of incremental AV and more steady tax collections."
Like S&P, Fitch analysts emphasized the importance of the state's so-called TIF neutralization policy. The legislation adjusts base assessments to preserve the captured incremental revenue if the assessed value declines. The legislative protection is "an important factor in maintaining the current rating level," said Fitch analyst Eric Friedman wrote in the ratings report.
The issue features serial bonds maturing from 2016 through 2024 and three sets of term bonds maturing in 2029, 2034, and 2039. Interest on the bonds is subject to the alternative minimum tax.