Chicago’s $2 billion O’Hare International Airport deal sells Wednesday.

CHICAGO — Chicago is promoting O’Hare International Airport’s recent growth spurt, improved credit, and conservative debt portfolio as it preps a $2 billion issue that will mark the city’s largest deal ever.

The airport’s finances are well-segregated from the troubles of the city government, but the city’s general credit deterioration coupled with the mammoth size of the deal is likely to create yield penalties compared to similar revenue debt, market participants said.

“The city will incur a penalty in the rate because of the combination of the name and the size of the transaction,” said Thomas Spalding, a Chicago-based portfolio manager at Nuveen Asset Management.

The securities pricing Wednesday should draw buyers for their relative value, the market participants said.

About $1.7 billion of the sale will refund outstanding general airport revenue bonds, with the remaining $300 million as new money to fund terminal and airfield projects, capitalized interest, and pay down commercial paper used for interim financing.

The airport has an ongoing $8 billion runway configuration and expansion plan known as the O’Hare Modernization Program and a $1.3 billion capital improvement program through 2019.

JPMorgan and Loop Capital Markets LLC are co-bookrunning senior managers. Another 11 firms round out the syndicate.

Ricondo & Associates Inc. is airport consultant. D & G Consulting Group LLC and Frasca & Associates LLC advised the city. Katten Muchin Rosenman LLP and Charity & Associates PC are bond counsel.

The sale includes an A series for $330 million that matures in 2034 with interest subject to the alternative minimum tax; a B series for $1.3 billion that matures in 2034 and is not subject to the AMT; a C series for $208 million that matures in 2046 and is subject to the AMT; a D series for $125 million that matures in 2046 and is non-AMT, and a final E series for $21 million that matures in 2025 and is non-AMT. The final series also benefits from a subordinate pledge of passenger facility charge revenues.

The city heads into the market with positive credit momentum on the O’Hare credit. Fitch Ratings affirmed the GARB rating of A-minus but revised the outlook to positive from stable. Standard & Poor’s upgraded its rating one notch to A and assigned a stable outlook. Kroll Bond Rating Agency assigned a first time rating of A-plus with a stable outlook.

Moody’s Investors Service was not asked to rate the deal. It rates $6.5 billion of outstanding GARBs and $663 million of stand-alone passenger facility bonds A2.

The city and its sister agencies have dropped Moody’s from its list of rating agencies asked to rate new deals after Moody’s dropped Chicago’s general obligation ratings to junk and severely downgraded some revenue credits, primarily over their pension burden and the overlapping strain posed on the tax base.

The city in an investor presentation highlights the airport’s strengths including completion of a good portion of the modernization program.

“The airport has weathered the storm of both the recession and airline retrenchment and is really poised for growth and already capturing it through the improvements made by the O’Hare Modernization Program,” Chicago Deputy Chief Financial Officer Jeremy Fine said in the presentation. “This refunding will provide additional profitability to the airport and airlines.”

The city underscores that unlike other city credits, the O’Hare debt portfolio lacks any exposure to interest rate swaps and has just limited bank risk with only $240 million in floating-rate debt and is amortized more rapidly. The city’s general obligation credit slide triggered defaults on bank support and swaps, heightening attention on those types of credit risks.

After years of flat growth, the airport recorded a 5% increase in passenger levels last year and through August numbers are up by 9.3%. The airport recorded 882,000 flights last year, ranking first among airports, and 70 million passengers, ranking third.

Kroll said the airport’s credit profile benefits from a strong, diverse, expansive air trade area that supports origination-and-destination activity, a demonstrated ability to undertake the complex air field reconfiguration which is within budget and meets ongoing operational demands, recent growth that reflects increased access to low cost carriers, and airline profitability.

Key concerns high leverage, narrow debt service coverage ratios of 1.1 times, and a growing near term debt burden.

"The upgrade reflects our view of ORD's large origin-destination base, high traffic levels, and importance to the global aviation system as a major connecting hub," said Standard & Poor’s analyst Joseph Pezzimenti.

Analysts will be keeping an eye on how the city tackles remaining projects which require airline approval and the outcome of lease negotiations as the current one expires in 2018.

Fitch attributed its new positive outlook to the “continued favorable progression of the airport capital programs with overall costs continuing to remain in line within existing budgets while airport traffic is trending in a positive direction.”

Remaining costs of more than $2 billion in phase two require airline approval. Planned funding sources include $1.7 billion of GARBs, $285 million from federal grants, and PFC-backed GARBs of $200 million, Kroll said. A proposed terminal expansion that makes up the $8 billion price tag is on hold.

United Airlines and American Airlines operate hubs with the duo accounting for more than 80% of market share. In 2014, the airport handled over 35 million enplaned passengers with about half being connecting traffic.

O'Hare will open the third of four new runways next month and has completed one of two planned runway extensions as the first $3.2 billion phase of the modernization plan is completed and the city has is nearing completion on another $1 billion that represents the first part of phase two.

The airport’s balance sheet will bear some burden for the city’s growing pension contributions. Under Mayor Rahm Emanuel’s proposed budget and long-term plan to fund rising pension costs the airport would see its personnel costs grow steadily to an additional $72 million in 2024. 

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