LOS ANGELES -- Developers of an automated people mover for Los Angeles International Airport test the market Tuesday with $1.2 billion of low-investment grade bonds.
The structure of the transaction led Fitch Ratings to take a dual approach to rating it.
The Series 2018 A and B senior lien revenue bonds themselves, sold through conduit California Municipal Finance Authority, landed Fitch's BBB-plus rating. The payment obligations of Los Angeles International Airport that support the bonds received Fitch's A rating.
The bonds will be repaid using availability payments made to the developer, but aren’t an obligation of the AA-rated Los Angeles airport authority.
The tax-exempt private activity bonds are being priced by the three lead managers: Bank of America Merrill Lynch, Citi and Ramirez.
LAX struck a $4.9 billion agreement with LAX Integrated Express Solutions in April to design, build, operate and partially finance the 2.25-mile elevated electric train system that will have six stations.
“Under the DBFOM (design-build-finance-operate-maintain) agreement, they are responsible for issuing the bonds and our payments are unsecured obligations of the airport,” said Ryan Yakubik, the airport’s chief financial officer. “We have no direct obligation under the bonds. We are a piece of the credit picture for them, but the bonds are stand-alone obligations of the developer.”
LINXS, a joint venture involving ACSID, Balfour Beatty, Bombardier, Fluor and HOCHTIEF, beat out three other developers in an extensive request for qualification and request for proposal process, Yakubik said.
The airport will make annual payments to cover operating and maintenance costs over a 25-year period. When the contract expires, the consortium will return the people mover to LAX. The 24-hour operation will have ridership capacity of 10,000 passengers per hour and is expected to begin service March 2023.
Fitch was the sole agency asked to rate the bonds.
“There are two components to the transactions. First there is the payment being made by LAX. Then we have all the individual risk factors to the project that could make the rating at the cap or make it lower than the payment stream,” said Jeffrey Lack, an analyst in Fitch’s U.S. Global Infrastructure Group. “That is why we needed two ratings and for Seth to do the review of LAX’s payment.”
The people mover obligation is LAX's most junior lien, said Seth Lehman, an analyst in Fitch’s U.S. Global Infrastructure Group. “Our rating is specific to this sort of obligation.”
The airport’s $3.5 billion in outstanding senior revenue bond obligations carry AA, Aa3 and AA ratings from Fitch, Moody’s Investors Service and S&P Global Ratings respectively; its $2.7 billion subordinate revenue bonds are rated AA-minus, A1 and AA-minus.
The BBB-plus rating is preliminary contingent on final documents from the June 8 closing, because the structure is considered pricing sensitive, Lehman said.
The full wrap of parent company guarantees that go through the life of the project, including the people mover vehicles, convinced Fitch it would not be a strain at a BBB-plus rating, Lehman said. “That is a strong positive we don’t see on all projects.”
Part of the reason for having the developer be the obligor on the debt is so they have some “skin in the game,” because it operates the system, said Yakubik, though the bonds could have received lower interest rates trading on the airport’s double-A ratings.
The bonds could price richer than they should, given the demand for California paper in size in the current market, said Tom Schuette, partner and co-head of the Investment Research & Strategy department at Gurtin Municipal Bond Management.
Gurtin doesn’t plan to buy any of the bonds, nor was it a purchaser of La Guardia Airport’s public-private partnership bonds. The firm’s sweet spot tends to be high-quality bonds it can achieve good value on.
“We tend to avoid these because we believe our clients are looking for the safety of a municipal bond, and many of these P3’s are selling like municipal bonds (given that they are tax-exempt and issued by a municipal obligor), but are ultimately really corporate bonds since you are taking on the risk of the private partner with often no tax-support or government backing if the project runs into problems,” Schuette said.