Passenger growth helps spur San Francisco airport's newest bond offering

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San Francisco International Airport will issue more than $900 million of bonds this month to finance continuing modernization and expansion projects at the nation’s seventh-busiest airport.

The bonds, which are secured by airport revenues, are expected to go to market in mid-May, said Ronda Chu, capital finance director for the airport.

“It’s an exciting time for the airport,” Chu said. “We’re seeing a lot of traffic growth in 2018.”

The $914.4 million revenue bond deal is the latest in a series of bonds financing a $7.4 billion, ten-year capital improvement plan approved by the San Francisco Airport Commission, which manages the facility.

The airport has $5.3 billion in outstanding bonds that helped finance previous phases of the project, including terminal improvements and a new air traffic controller tower.

Over the last decade, passenger traffic has grown to 57 million anticipated for the 2017-2018 fiscal year from 36.7 million in the 2006-2007 fiscal year, Chu said.

International service alone has grown 49%over that time with the addition of new carriers and new routes, she said.

In a May 1 report, Moody’s Investors Service assigned an A1 rating to the bonds, with a stable outlook.

“The A1 rating and the stable outlook are based on SFO's sustained strong and growing market position for air travel in the San Francisco Bay Area and track record of sound operational and financial management, including the execution of complex capital projects on schedule and within budget,” its report said.

Those strengths are offset by the increasingly high debt levels although the report noted that the airport has been able to keep costs from escalating.

Fitch Ratings affirmed its A-plus rating, with a stable outlook, ahead of the deal. S&P Global Ratings most recently assigned its A-plus rating.

The latest proceeds will go towards renovating the airport’s Terminal 1, originally built in the early 1960s.

The $2.4 billion project includes constructing a new pre-security screening concourse and an expanded boarding area with 24 new gates. The terminal will also feature passenger loading bridges, a central concourse with an art gallery and food vendor hall.

The new terminal will be completed by 2022, according to the airport plan.

The bonds would also help finance a 351-room hotel owned by the airport and managed by Grand Hyatt. Located on a 4.2-acre site on the airport grounds, the hotel – scheduled to open in 2019 – will be accessible to passengers through the airport shuttle train.

The preliminary offering statement includes two pages relating to risks from climate change and rising sea levels as well as another page on climate change regulation. It states “coastal areas like San Francisco are at risk of substantial flood damage over time.”

The question of proper disclosure of climate change impacts in bond documents has been a source of controversy between the oil industry and California cities including San Francisco.

Those cities had sued for damages to pay for infrastructure to deal with increasing flood risk from rising sea levels they say result from climate change. In a countersuit, ExxonMobil claimed the cities hadn’t properly disclosed the risks from climate change in their documents and alleged they may be committing securities fraud.

John Cote, spokesman for the San Francisco City Attorney, said the language in the latest preliminary offering statement is consistent with the city’s practice.

“The San Francisco Airport Commission has been disclosing climate change as a risk factor since at least 2009,” he said in an email. “The exact disclosure language has evolved as the science has evolved.”

Orrick, Herrington and Sutcliffe LLP of San Francisco and Amira Jackmon of Berkeley are the co- bond counsel while Nixon Peabody LLP of San Francisco is the bond disclosure counsel. The financial advisors are Public Financial Management, Inc. and Backstrom McCarley Berry & Co.

The bonds are being underwritten by Citi, Barclays Capital, Raymond James, Bank of America Merrill Lynch, JPMorgan and RBC Capital Markets.

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Airport revenue bonds Transportation industry Primary bond market San Francisco Airport Commission California