CHICAGO – American Airlines’ refusal to sign Chicago’s proposed O’Hare International Airport lease won't ground Chicago's $8.5 billion terminal makeover plan, but it could complicate the timing and add to borrowing cost.
Chicago Mayor Rahm Emanuel last week introduced the new lease and use agreement that incorporates the eight-year terminal overhaul and an initial authorization for up to $4 billion of borrowing. Aldermen will take up the plans during committee hearings this spring.
Market participants say the plan appears affordable and needed given O’Hare’s international status and need to stay competitive. But the city is advancing the plan amid Fort Worth, Texas-based American’s opposition over five gates awarded to the airport's other hub carrier, Chicago-based United Airlines.
American accounts for 36% of passengers at O'Hare and United 44%.
Negotiations are ongoing but Emanuel has said the city will press forward. American has countered that it’s exploring its options, which could include reducing its O'Hare presence or some form of litigation. Chicago’s fiscal chief has said the city hopes to win over American but demand at the airport is sufficient without American's support for the city to generate the fees needed to support necessary borrowing.
“It’s really important for the long-term viability of the whole state to maintain the viability of Chicago’s airport," said Howard Cure, director of municipal bond research at Evercore Wealth Management, LLC. "The market could accommodate” the needed borrowing levels “at a reasonable yield,” he said.
But “you want all the major players to buy in,” Cure said, to reduce risks that American shifts some traffic elsewhere. “They are a large enough player they could get in the way of the full expansion project,” he said.
“I think the city won’t just stop” the planned terminal overhaul, said Fitch Rating airport analyst Seth Lehman. “They have to continue to modernize the airport. They will move forward. The question is whether there will have to be adjustments.”
Other risks loom. A recent court ruling in Puerto Rico’s Title III bankruptcy on its highway and transportation debt, if upheld, could pose a threat to special revenue credits rated above a municipality’s issuer default rating, Fitch Ratings has warned. Fitch rates the airport’s general airport revenue bonds at A while it rates Chicago’s general obligation debt at BBB-minus.
AMERICAN AND UNITED
American charged the city is favoring United in gate allocations while United countered that the distribution of gates in question was part of a longstanding agreement that the city is now honoring.
"We still feel the gate advantage that the proposed lease gives to United is anti-competitive and bad for Chicago," American spokeswoman Leslie Scott said in an email. "We have proposed a simple solution – accelerate the construction of three gates for American to help level the playing field."
Emanuel last week characterized American’s opposition as a dispute between two competitors, and said the new lease “breaks out of that and allows us to actually be in control of our own destiny and design it.”
The new lease replaces a 35-year-old agreement that expires in May. It sheds provisions that gave the airlines exclusive rights to some gates and allowed the two hub carriers to hold sway over projects.
Few believe American would actually walk away, that Chicago would not take additional steps to prevent a departure, or that American would shift to non-signatory status giving up preferred treatment, but nothing is certain.
“Modern American airports are essentially public-private partnerships and airport authorities typically move in concert with their airline, so to roll out a sweeping new plan without buy-in from a major airline is unique but it doesn’t mean it’s not possible” to proceed, said Matt Fabian, partner at Municipal Market Analytics.
“In general, Chicago’s economy is growing and it would make sense for them to make a big investment in the terminals,” but American’s opposition “complicates the situation and it could raise the price” of borrowing whether the airport takes a rating hit or not, Fabian added.
“It makes it risker and possibly more expensive” without both of the lead airlines on board, Cure said. In the alternative, the city could scale back on the timing or scope of the overhaul.
A “spirit of cooperation” between the key airlines and city would serve as a “mitigating factor for a large debt program,” Lehman noted.
Chicago’s CFO stresses first that the city respects both airlines and is “optimistic” both hubs will be maintained but she also strikes a tough public tone.
When the city is ready to bring bonds to market, Carole Brown said she must demonstrate the airport has sufficient traffic levels, a fee structure and operations in place to support the debt.
“What I have to show is there’s sufficient demand” at the airport to generate that support and “I will be able to show that,” Brown said. If American doesn’t sign the lease but remains it still must pay based on non-signatory rates, and if it pulls back demand for gates is strong, she added.
The first deal tapping the $4 billion authorization isn’t likely to sell until late this year, Brown said.
Additional general airport revenue and passenger facility charge borrowing could be sought and other financing alternatives such as public-private partnerships and special facilities revenue bond structure could also play a role.
Proposed borrowing will drive up O’Hare’s debt levels and cost-per-passenger levels – estimated at nearly $19 last year -- but that doesn’t necessarily translate into a rating hit, because the agencies have anticipated additional O’Hare borrowing.
“We can judge better once we see more on the specifics,” Lehman said. Fitch rates O'Hare's senior lien general airport revenue bonds A, a rating most recently affirmed ahead of a June bond deal. It also rates the airport's passenger facility charge-backed debt A.
“This is a long-term vision and it’s expensive but when they get to the debt levels they need to be at, they won’t be far off where Los Angeles International Airport and San Francisco International Airport will be,” he said.
S&P Global Ratings in June also affirmed its A rating on O’Hare’s $7.28 billion of GARBs and $560 million of PFC debt.
Moody’s and Kroll Bond Rating Agency – which rate the airport’s GARBs at A2 and A-plus, respectively -- were not asked to rate the June issue but affirmed their ratings last year.
A separate possible drag on at least the Fitch rating is posed by U.S. District Court Judge Laura Taylor Swain’s dismissal in late January of claims regarding payment of Puerto Rico Highways and Transportation Authority debt.
A finding on appeal that payment on special revenue obligations during bankruptcy is optional would create uncertainty about full and timely payment of special revenue obligations, potentially removing the basis for rating such obligations above a municipality's issuer default rating, Fitch wrote in a Feb. 6 report.
“For example, airport revenue bonds and water and sewer bonds issued by the city of Chicago might be capped at the city's” IDR, which is BBB-minus, the Fitch report said. The 1st Circuit of Appeals will hear the appeal.
Fitch followed up that report with another on Feb. 14 suggesting it believes the outcome of the Swain ruling is “likely to change” on appeal given the precedent for treatment of special revenue obligations in Chapter 9 cases.
No immediate impact on criteria or ratings is expected and municipal issuers will have options. Restrictions on diverting enterprise revenues could remove the incentive to delay payments to special revenue bondholders during a municipal bankruptcy even if the decision is upheld, Fitch said.
"Any potential criteria modifications would need to fully consider how to account for such protections when separating enterprise ratings from a municipal IDR," wrote author Amy Laskey.
The expansive O'Hare makeover plan calls for the redevelopment of existing terminals, the expansion of the existing international terminal, and demolition of one domestic terminal that would be replaced with another global terminal to smooth international and domestic connections.
“For O’Hare to remain competitive we have to do this work,” said Brown, who was part of the city’s team negotiating terms with the airlines over the last 18 months.
The plan is being pursued as the city is far along with a roughly $10 billion O’Hare Modernization Program dating back to 2001 to reconfigure runways.
Chicago’s airport credits have fared well in the market with little penalty imposed for the city’s weaker GO rating. A 10-year non alternative minimum tax maturity with a 5% coupon in the June issue landed at 2.3%, a 44 basis point spread to the Municipal Market Data’s AAA benchmark.
The airport has recently ranked third nationally in passenger count and serves about 80 million passengers annually.