Kansas City airport financing moves toward takeoff
Kansas City, Missouri, is nearing the final action needed to pave the way for the sale of roughly $1.8 billion of special obligation bonds to develop the new single-terminal project at Kansas City International Airport under a public-private partnership.
The council Thursday approved in an 11-1 vote an ordinance that authorizes the city manager to execute the KCI Airport Terminal Modernization Project Development Agreement with Edgemoor Infrastructure & Real Estate LLC, the private investor group that will lead the design and construction and helped craft the financing.
“I’m pleased that we are continuing to move forward to get this done because at the end of the day that’s what’s important for our residents and the future of our city,” Mayor Sly James said in a statement after last week’s vote.
Ordinances laying out an interim and long-term financing deal could be presented and considered as soon as Thursday when the airport committee meets, followed by the full council.
“At the moment, the plan of finance has not been finalized,” John Green, chief financial officer at the city’s Department of Aviation, said in an email. “We are currently reviewing a few options for initial funding” and will wait for council review before releasing further details.
The bond ordinance seeks up to $2 billion of issuance authority but “the number is now closer to $1.85 billion in total borrowing,” Green said. “The timing will likely be late spring, early summer.” The security will be in the form of a residual agreement with the airlines.
The new terminal is being constructed on the site of the terminal airport’s shuttered Terminal A and is expected to begin later this month. New parking facilities are included in the project. The terminal will initially feature 39 gates with room to grow and could open as soon as 2023, when the two terminals now in operation will close down allowing the airport to operate as a single-terminal facility.
The design is a reaction to the present terminal setup, which requires multiple security checkpoints in each terminal, making the airport a difficult place to connect flights and limiting options for post-security dining and shopping.
The city is to retain ownership and operational control of the new terminal. The airport is operated as an enterprise department of the city, which also runs Charles B. Wheeler Downtown Airport, a general aviation facility.
Approval of the agreements last week came after various fits and starts that have played out since the city began exploring the use of a P3 to manage the project in early 2017. The city scrapped an original plan to use the hometown firm that pitched the idea in favor of a competitive selection process.
Edgemoor was chosen in September 2017 and voters then approved the project two months later.
The ground was laid for the ordinances to be approved last week after seven airlines representing 95.5% of airline volume signed off on the final terms including the cost — which was lowered to $1.5 billion from $1.65 billion — earlier in the week. Airlines had resisted covering the growing price tag for the project.
The Federal Aviation Administration also recently approved an environmental assessment the project needed to proceed.
The proposed long-term financing ordinance authorizes the sale of up to $2 billion of senior appropriation obligation bonds by the Kansas City Industrial Development Authority. The city will make debt service and additional payments to the authority under an amended master bond ordinance “for the purpose of providing funds to finance the terminal.”
“The annual appropriation of net revenues of the city's airport system will serve as the revenue source for the repayment of obligations” incurred through the execution of a financing agreement between the city and authority, city documents say.
The bonds’ true interest cost is capped initially at up to 5.75% for a series expected to be subject to the alternative minimum tax, a TIC of 5.50% for a non-AMT series, and a TIC of 6.00% for any taxable series. Debt service will be set at level annual principal and interest levels, according to term sheet on the airline lease agreement.
Under the airlines’ term sheet that lays out its obligations, the city agrees to apply for the highest level of passenger facility charges and will pursue federal airport improvement program and security grants. The PFC is currently set at $4.50 per passenger but airports are lobbying Congress for an increase. The various agreements also outline how the airlines’ annual costs tied to the project will be set and their rights to approve certain future projects or costs that exceed the agreed-to price tag.
The cost to complete the project “will not exceed $1.5 billion unless the increase is permitted by the development agreement and approved by the signatory airlines,” documents say. The developer agreement lays out work and performance guarantees and penalties for violations.
Morgan Stanley is lead underwriter. Hilltop Securities, Inc. and Moody Reid Financial Advisors are advising the city. Kutak Rock LLP, the Hardwick Law Firm LLC, and Martha E. Schach, owner of Attorney at Law LLC, are co-bond counsel. Lewis Rice LLC and Fields & Brown LLC and Schach are co-disclosure counsel.
The city may also seek approval this week for an interim financing deal to cover immediate costs as it awaits the long-term financing sale. The city may issue up to $90 million of taxable airport special obligation bond anticipation notes. That funding is needed now to cover about $23 million in payments owed to Edgemoor and $48 million for initial construction costs and repayment would be wrapped into the long-term financing.
The city initially considered an internal borrowing from the general fund or the water revenue fund but the council pushed back over concerns that the public would view that as a use of public funds for a project promoted as one that would not fall on the backs of taxpayers.
Morgan Stanley would directly purchase the notes and the same team would advise on that deal and provide legal services based on a proposed ordinance that may be considered Thursday.
The option of using a more traditional debt financing over private equity dollars was a highlight of Edgemoor’s proposal that beat out four vying for the project.
The team led by Maryland-based Edgemoor won the nod over local firm Burns & McDonnell, which was initially considered a favorite after first pitching the idea of a P3 to the city. AECOM and Jones Lang LaSalle also were vying for the project.
The Edgemoor team includes Meridiam, which is a member of the LaGuardia Gateway Partners that is leading the private partnership on the on LaGuardia Central Terminal B Redevelopment Project. Other Edgemoor participants include Clark Construction Group, the Weitz Company, and Clarkson Construction.
A special mayoral advisory group appointed by James in 2016 recommended in 2017 that a new central terminal was needed. A city fact sheet said the existing terminals “do not make sense financially or environmentally and cannot accommodate needed modernization for passenger convenience, airline expansion, baggage and security requirements."
KCI operates three runways with 180 daily departures to more than 50 markets and is 18 miles north of downtown Kansas City. It opened in 1972. The two terminals in operation have 41 gates and the airport has 25,471 parking spaces.
Moody’s Investors Service earlier this year affirmed its A1 rating and stable outlook on $147.5 million of outstanding debt.
“The rating affirmation considers the airport's planned terminal development which will elevate leverage in the coming years, high debt service coverage ratio that Moody's expects to remain above 2 times during the construction of the city's planned replacement terminal, and adequate liquidity,” analysts wrote.
“The city does not currently plan to issue senior lien revenue bonds to fund the project, which is supportive of the credit profile of the existing senior lien general airport revenue bonds,” Moody’s added. Factors that could lead to a downgrade include issuance of senior lien revenue bonds to fund the terminal project and debt service coverage below 1.75 times on senior lien general airport revenue bonds.