Los Angeles Airport Bonds Found Strong Demand
LOS ANGELES — Los Angeles Department of Airports bonds continue to receive a healthy reception as the operator of Los Angeles International Airport hits the halfway mark on a $7.2 billion modernization project slated for completion in 2019.
De La Rosa & Co. priced $241.8 million in bonds in a two-part deal on Nov. 6 following a retail order period the day before. Closing and delivery are scheduled for Nov. 19.
“I think people stepped up because of the name,” said Edward De La Rosa, president of De La Rosa & Co., the lead manager. “When you get close to $1 billion in orders for $241 million in bonds that’s a really nice reception.”
The airport also has strong metrics as outlined by LAWA officials during the road show presentation for the bonds, De La Rosa said.
LAX boasts the second most populated service area for U.S. airports with 18 million people. Origination and destination passengers accounted for 76% of total enplaned passengers in calendar year 2012, according to the road show presentation.
LAX also has a diverse carrier base and alliance networks with no carrier accounting for more than 16.5% of total passengers, which lessens the impacts of airline mergers, Steve Martin, LAWA’s chief operations officer, said during the investor road show.
“This diversity is unmatched by probably any other airport,” Martin said.
Enplanements grew by 3.2% to 32.5 million passengers in 2013 over the previous year, roughly 14.8% more than fiscal 2009, Martin said.
The bond sale consisted of $170.6 million of senior revenue bonds subject to the alternative minimum tax and $71.1 million in subordinate revenue non-AMT bonds. The Series A bonds mature serially from 2014 to 2028 with term bonds in 2038 and 2043. The Series B bonds mature serially from 2016 to 2025 with two sets of term bonds in 2038.
Standard & Poor’s, Moody’s Investors Service and Fitch Ratings rated the senior bonds AA, Aa2 and AA, and the subordinate bonds AA-minus, A1 and AA-minus, respectively.
The all-in true interest costs were 4.66% on the sale, said Ryan Yakubik, LAWA’s interim chief financial officer.
“Our forecast allowed for a much higher rate, but I think generally we came in where we hoped we would,” Yakubik said.
Retail investors placed $194 million in orders primarily targeting the $71.1 million non-AMT bonds, De La Rosa said. A billion dollars in orders were placed by institutional investors for the remainder of the bonds, De La Rosa said.
De La Rosa and the co-managers on the deal were able to re-price “various maturities, some of them by up to six basis points,” De La Rosa said.
In further indication that the market has stabilized since this summer, De La Rosa said the LAX revenue bonds only sold 33 basis points cheaper than the $240 million in general obligation bonds sold by the Triple-A rated San Francisco Bay Area Rapid Transit District.
The narrow spread showed that a lot of investors were looking for higher grade paper and felt comfortable with the credit, he said.
“The issuer did a good job of being able to bring the AMT spread on the narrower side,” said Craig Brothers, managing director, portfolio manager of Bel Air Investment Advisors.
Brothers said he didn’t bid on the bonds, because he’s currently buying shorter term bonds and doesn’t have many retail clients who won’t get dinged by having AMT bonds in their portfolio.
He considers LAX generally a solid credit, however.
“The airport is vital to southern California,” Brothers said. “It’s a monopoly with a captive audience. There is no reason to worry the credit will ever be less than double-A.”
A shooting rampage that occurred the Friday before the bond sale that left one person dead and three others wounded had no impact on the bond pricing, officials said.
De La Rosa said they fielded few questions about the shooting from investors.
“I can’t speak for investors, but it is possible that investors understood it was a one-time event by a lone individual,” he said.
The lone shooter, evidently on a vendetta against the Transportation Security Administration, was wounded by police officers and hospitalized after he allegedly shot and killed a TSA officer, and injured two other TSA officers and a bystander, according to news reports.
Officials contemplated changing the date of the sale, but only because they wanted to make sure there were not any issues from a disclosure standpoint, Yakubik said.
“It was a random act of violence, and a very unfortunate one,” Yakubik said. “We are always looking at what we can do better in terms of security and emergency management protocols.”
LAWA doesn’t anticipate any impact on the airport’s financials as a result of the shooting, he said.
Even as the airport operator looks to issue an additional $2 billion in debt on top of its $2.9 billion in outstanding debt, projections show total debt service coverage continuing to exceed 2.5 times through 2019, according to Yakubik’s presentation during the investor road show. For fiscal 2013, the presentation showed that senior debt service coverage is 6.33 times and the total debt service coverage is 3.02 times.
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, he said.
The modernization began with Tom Bradley International Terminal in 2007-2008. Prior to that, LAX had not experienced major renovations since that terminal was built for the 1984 Olympics.
The terminal only had gates on one side of the terminal and the airport needed to be able to accommodate more.
“It needed much more than a rehabilitation,” Yakubik said. “From a functionality standpoint, it needed to be reconfigured to accommodate a much larger aircraft.”
The $1.9 billion terminal that opened on September 18 is considered the most significant piece of the $4.1 billion first phase of the airport’s planned capital improvements. Completion of the terminal 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 enable the airport to accommodate larger aircraft such as the Airbus A380 super jumbo jet and Boeing 747-8.
The new terminal is expected to help LAX retain its competitiveness as the premier U.S. West Coast international gateway, particularly for the Asia-Pacific region, according to airport officials.
The next phase is to get the rest of the Tom Bradley building open, Yakubik said.
“We have to demolish part of the old building before we can use the rest of the building,” he said. “We will only be able to use the gates on the west side until we take down the concourses on the east side.”
Co-Managers include JPMorgan, Loop Capital Markets and Ramirez & Co. Inc. Bond counsel is Kutak Rock. Disclosure counsel is Polsinelli. Co-financial advisors are Public Resources Advisory Group and Public Financial Management Inc.
“It was a very straightforward issue,” Yakubik said. “The underwriter did a good job. We had very good demand for the bonds from a really diverse group of buyers. Overall, it was a positive trip to the market.”