LOS ANGELES — Los Angeles International Airport will point to increasing passenger counts and progress on its expansion plan when it sells bonds next week.
Ahead of the sale, Moody's Investors Service revised its outlook to positive on its Aa3 rating; Fitch Ratings affirmed its AA rating.
The Los Angeles City Department of Airports expects to sell between $300 million and $350 million of senior revenue bonds in two series that will be subject to the alternative minimum tax and up to $175 million in subordinate revenue refunding bonds, said Ryan Yakubik, chief financial officer.
The airport agency's success at managing an $8.6 billion capital plan without overleveraging its balance sheet was key to the outlook boost.
The airport is managing debt in a manner that will retain the airport's sound financial picture even if traffic falls off, said Kurt Krummenacker of Moody's.
"The revision to positive was based on our view that the airport is the strongest among our rated portfolio [of 92 airports]," said Krummenacker, a Moody's vice president and senior credit officer. "We have held it at Aa3, because of our concerns about the size of the capital program, but they have progressed nearly half way through."
LAX officials are at about the $3 billion mark in the development program that extends through 2019. The airport has $3.9 billion in outstanding long-term bonds, Yakubik said.
LAX plans to finance 60% of the $8.6 billion capita program with long-term debt, he said.
The finance team on next week's bond issue includes Morgan Stanley as book running senior manager, Kutak Rock as bond counsel and financial advisor Public Resources Advisory Group.
The sale should generate investor interest as demand for high quality California paper remains strong, said Michael Johnson, co-chief investment officer and managing partner at Gurtin Fixed Income Management, LLC.
"From our perspective, we will look at it," Johnson said. "This is a name we buy — depending on what the yield and spread is."
The airport could receive a ratings bump after Moody's receives more information on its expansion plans at the northern end of the midfield satellite concourse, as it is the largest remaining project planned, Krummenacker said.
The $1.3 billion midfield project, which adds additional gate capacity away from the central terminal area, connected via an underground tunnel, is still in the early stages, he said.
That project will add 10 new gates, which will allow the airport to make improvements at existing gates without impacting passenger service, Yakubik said.
"It will allow an empty chair, for lack of a better word, to move airlines into, while we are doing construction work on their gates," he said. "Right now it is hard to take a gate out of service to do work on it, because we don't have additional gates."
The airport has experienced increasing demand for gates because passenger traffic has grown significantly, he said.
Earlier this month, Mayor Eric Garcetti joined with Councilmembers Herb Wesson, Mike Bonin and Joe Buscaino at a press conference to discuss what they termed "record-breaking" tourism for the city and passenger levels at the airport.
In 2014, 43.4 million visitors made Los Angeles their ultimate destination while an estimated 70.7 million passengers traveled through LAX in 2014, according to airport officials. Enplanements in 2014 were up 6% from the 66.7 million passengers the previous year. Of the 2014 total, an estimated 18.9 million, or 26.8%, were aboard international flights, a 6% increase from 2013.
Moody's will be watching to see, as the project progresses, if the airport continues its conservative financial approach and maintains debt service coverage above 2 times for senior debt and 1.75 times for total debt as expected, he said.
LAX also benefits by not being dependent on a single airline — its leading carrier accounts for 19.1% of enplanements, Krummenacker said. Moody's median level of traffic from a primary carrier is 38.7%.
"When it comes to air carrier diversity, LAX is in a class alone with Boston and Orlando," Krummenacker said.
LAX has a diversity of airlines and markets served that is unmatched by any other U.S. airport, he said.
Moody's rated the subordinate bonds A, while Fitch gave the junior bonds its AA-minus rating. Fitch assigns a stable outlook to LAX bonds. Standard & Poor's had not issued a pre-sale report, but most recently affirmed LAX at AA in November 2013.
The key goals for the airport include completing projects aimed at modernizing the airport's aeronautical standards and developing a long-term plan to improve passenger access to LAX, Yakubik said.
The airport board in December approved a $4 billion ground transportation plan that includes a $1.5 billion monorail line from LAX to a Los Angeles County Metropolitan Transportation Authority light rail station a mile and a half from the central terminal area.
The modernization began in 2007 with $1.9 billion in improvements to Tom Bradley International Terminal that were completed in September 2013.
Considered the most significant piece of the $4.1 billion first phase of planned capital improvements, that project enabled 30 foreign carriers to move operations to five new gates on the west side of the new terminal's south concourse. Those gates along with three on the north concourse that opened in March of that year enabled the airport to accommodate larger aircraft such as the Airbus A380.
The proceeds from the upcoming sale will help fund general terminal renovations, improvements to security screening checkpoints and to general building systems and the bag screening process, Yakubik said. The majority of the terminal renovations are interior improvements that will be paid for by the airlines through terminal fees.
Westfield, the Australian retail developer and shopping mall operator, expects to complete construction on 17 new restaurants and stores in the Bradley terminal this year.
L.A. Airport officials typically fund on an as-needed basis based on the forward projection of cash flows, Yakubik said of the timing of the sale.
"We have a general cash need over the next nine months, so this is the time we are going to market," he said.
He anticipates being in the market periodically every four to six months for the next couple of years.
Gurtin considers LAX a strong credit, Johnson said, particularly since it has a large origination and destination component, which gives it a fair amount of stability.
Gurtin only holds about $8 million in LAX bonds, a small position for the firm, but Johnson said it has to do with finding the right structure, which doesn't always correlate with how highly Gurtin regards a credit, he said.
"Right now, we like short call structures," he said. "For certain investment strategies, we are looking to limit the volatility. One way we do that is to keep maturities between 10 and 15 years and calls currently callable to one and a half years out."
With California's improving financial picture, spreads are extremely tight on state debt, if the same holds true for the airport bonds it could impact whether Gurtin is a buyer.
"If the yields are too low, we won't buy," he said. "We are still going to try to find ways to eke out value."
