CHICAGO — Federal officials yesterday announced $410 million in new funding to help support Chicago’s $8 billion runway expansion project at O’Hare International Airport, an award that comes one week ahead of the city’s sale of more than $1.1 billion of new-money and refunding O’Hare debt.
The long-planned transaction that will wrap up borrowing to finance the first phase of the $8 billion O’Hare modernization program includes six series of new-money and refunding bonds totaling more than $1 billion, backed by a third-lien general airport revenue bond pledge.
Another four new-money and refunding series totaling more than $100 million that are secured by passenger facility charges collected at O’Hare will also be sold in the deal tentatively scheduled to price next Wednesday. The size of the refundings could change depending on interest rates.
The transaction includes one tranche of $557 million of taxable Build America Bonds secured by O’Hare’s third-lien GARB pledge with a make-whole call provision.
Bank of America Merrill Lynch is the senior manager. Barclays Capital, Cabrera Capital Markets LLC, and Melvin & Co. are co-senior managers. Nine other firms are listed as co-managers.
A.C. Advisory Inc. is financial adviser and Ricondo & Associates Inc. is the city’s airport consultant. Katten Muchin Rosenman LLP is bond counsel and Gonzalez Saggio & Harlan LLC is co-bond counsel.
Ahead of the sale, all three rating agencies affirmed O’Hare’s first-, second-, and third-lien GARB credit, but two downgraded the PFC ratings due to declining debt-service coverage ratios.
Chicago will refund outstanding second- and third-lien GARBs for savings and convert $300 million of existing commercial paper into a long-term structure in the transaction. A portion will be used to replace an Ambac Assurance Corp. surety with liquid reserves.
The new-money tranches will provide funding for the O’Hare capital improvement program, which calls for $90 million in annual spending through 2012, and airfield, noise mitigation, and other projects included in the $3.3 billion first phase of the OMP runway expansion program.
The PFC bonds include about $87 million of new money. A mix of debt, federal funding, and PFCs is financing the first phase.
The new federal funding comes in the form of a letter of intent by the federal government to provide $410 million that would go towards paying for two new runways and a runway extension that make up the completion phase of the overall program.
Chicago received $337 million in LOI funding for the first phase and the city was always counting on additional federal support for the final phase. Still, the announcement provides a boost to the program as officials continue to negotiate with O’Hare’s struggling airlines that have resisted signing off on the remainder of the program because of the increased costs and opposition to some projects.
U.S. Secretary of Transportation Ray LaHood made the announcement of the new funding at a news conference at O’Hare alongside U.S. Sen. Dick Durbin, D-Ill., Gov. Pat Quinn, and Mayor Richard Daley.
“The funding we’re announcing today … brings the total federal support to $747 million, which is the largest federal investment in an airport reconstruction project in history,” Durbin said. “With this funding, we will be able to reduce delays, increase capacity, and boost operations and safety at one of the busiest airports in the world, all while putting people to work right here in Chicago in jobs that pay well.”
The upcoming transaction includes $112.6 million of third-lien revenue bonds not subject to the alternative minimum tax, $557 million of taxable BABs, $175.8 million of third-lien non-AMT revenue bonds, $55.3 million of third-lien revenue refunding bonds, $45.9 million of third-lien revenue refunding bonds, and $92.9 million of third-lien non-AMT revenue bonds.
The PFC tranches include $41.3 million of non-AMT PFC revenue bonds, $48.7 million of non-AMT PFC revenue bonds, $21.9 million of taxable PFC revenue bonds, and $15.2 million of non-AMT PFC revenue bonds.
Moody’s Investors Service affirmed the A1 it assigns to $4.2 billion of third-lien GARBs and nearly $500 million of second-lien bonds, and the Aa3 on $73 million of first-lien bonds. Moody’s downgraded $709 million of PFC-backed bonds to A2 from A1. Coverage previously stood at more than two times but the ratio is expected to fall to 1.52 times in 2011 and remain below 1.75 times through 2015 due to a drop in passenger levels.
Congress is considering a boost in the federal cap of $4.50 to the passenger facility charge rate, raising it as high as $7 under some proposals. A boost to more than $5.50 would restore the O’Hare coverage ratios to more than two times.
The first and second GARB liens are closed and bonds in each mature in 2016 and 2018, respectively. Chicago’s use agreement with its airlines expires in 2018. The third-lien bonds are secured by a pledge of net airport revenue subordinate to the first and second liens, although the $92.9 million GARB series carries a backup PFC pledge. The PFC credit is a stand-alone pledge of those fees collected at the airport.
Standard & Poor’s affirmed its A-minus on the third lien, the AA-minus on the second lien, and the AA on the first lien. It downgraded the PFCs to A-minus from A.
“The downgrade is due to a combination of factors: lower stand-alone PFC maximum annual debt-service coverage from this proposed financing, the airport’s lower enplanement levels, the airport’s significant additional debt needs, and the fixed-rated nature of the narrow revenue stream … that secures the stand-alone PFC bonds,” wrote analyst Joseph Pezzimenti.
Fitch Ratings affirmed its A rating on the third lien, the AA on the second lien, the AA-plus on the first lien, and the A-plus on the PFC pledge.
The airport’s credit is supported by its strong originations and destinations base, high demand for service, and unique dual hub status. Both United Airlines and American Airlines operate hubs at O’Hare, with United accounting for 48% of travelers and American for 35%. Another positive credit factor is that the first phase of the runway expansion is on schedule and within budget, with roughly 75% of projects completed.
O’Hare’s challenges include the impact of the expansion on airline costs, and the airport’s exposure to United and American cutbacks and financial strength. The airport also has seen a weakening in its passenger levels, which declined by more than 15% between 2007 and 2009, when 32 million passengers transited the facility. The latest forecast shows some stabilization, but officials are still anticipating an additional 2.7% traffic loss this year.
Under the $8 billion runway plan, Chicago is shifting the airport’s runways to a parallel configuration from an intersecting design that leads to runway closures during poor weather conditions and negatively affects the national air traffic grid. The plan, unveiled by Daley in 2001, is also designed to expand capacity to a yearly 1.2 million flights from the roughly one million it can now handle.
The city last year opened the first new runway. It has provided some flight-delay relief, though more significant relief is not expected until an additional runway opens. A runway extension and new traffic control tower have also been completed. Construction of a runway set to open in 2013 has been hampered by litigation that delayed the city’s acquisition of land and a cemetery in an adjacent suburb.
Chicago has won a spate of recent court rulings, allowing it to take ownership of St. Johannes Cemetery, but the relocation of burial sites is still pending. The city last year also struck an agreement with the suburb of Bensenville, ending the village’s long-standing challenge to the project and clearing the way for its acquisition and demolition of properties.
The airlines support the runway construction plans but have resisted funding for a new western terminal, given their own fiscal struggles. The overall plan to be completed by 2014 also includes a new automated people-mover system and construction of two more additional runways and extension of a third runway.
Overall, the total O’Hare runway plan loosely relies on $4.43 billion of GARBs, $1.6 billion of PFC-backed debt, $752 million of third-party financing, and $747 million of federal aid and other pay-as-you-go funds.