PHOENIX –San Jose, Calif. is prepared to issue $640.7 million of airport revenue refunding bonds in a deal city officials expect to generate savings "well in excess" of their policy goals and improve on an earlier pricing skewed by seismic market changes.

The deal is set to price in two series, with a retail-only order period Monday followed Tuesday by institutional orders and final pricing.

The bonds are limited obligations of the city secured by the revenues generated at Norman Y. Mineta San Jose International Airport. They carry ratings of A2 from Moody's Investors Service and A-minus from S&P Global Markets and Fitch Ratings. The deal is scheduled to include a $486.5 million series of bonds with interest subject to the alternative minimum tax, with a second series comprising the remainder of the bonds being non-AMT tax-exempt securities.

The bond proceeds will refund all of the 2007 bonds issued for terminal improvements at the airport.

Citi is the bookrunner on the deal, with Goldman, Sachs & Co. as co-manager. It is expected to have a ten-year optional par call.

"We expect some pretty substantial savings, well in excess of our 3% policy goal," said Julia Cooper, director of finance at the City of San Jose. "We're really excited about it."

Cooper said that the airport, which currently has about $1.2 billion of long-term debt outstanding, had experienced a bit of a "spike" in its debt service payments and that the issuance of the 2017 bonds will smooth out the debt service structure. The 2007 bonds were originally intended to be sold as 40-year bonds, Cooper said, but market conditions related to the beginning of the global financial crisis at the time the bonds were being marketed in August 2007 caused the market for 40-year paper to shrink, resulting in the city having to restructure the debt service profile for the issue.

Consequently, a spike in debt service was projected for 2033-2037. The city has long intended to refund and restructure the debt service payment profile of the 2007 bonds after they became callable in 2017 and before the spike in debt service in 2033.

A memorandum to the city council and mayor requesting approval of the bonds shed light on what the city's finance officials hope to achieve with the transaction.

"As of Feb. 5, 2017, the proposed refunding bonds are currently estimated to generate approximately $42.3 million in aggregate net present value savings for the airport, or 6.18% as a percent of the refunded par," the document said.

The airport has experienced strong financial performance, with enplanement growth growing for four consecutive years to more than 5 million in fiscal year 2016 from just over 4 million in fiscal year 2013.

Since 2013, international carriers have added nonstop service to San Jose from Japan, China, the United Kingdom and Germany.

Enplanements are an important measure of airport revenue performance because much of their revenue comes by way of passenger facility charges, which are set, per-ticket fees airports are allowed to charge. The airport has also benefited from an improvement in its liquidity in recent years, reporting $130 million of unrestricted cash balance as of June 30, 2016 compared to $112 million in 2015.

S&P gave the airport some good news ahead of the sale, revising its outlook to positive from stable.

"The outlook revision reflects improving enplanement levels, the airport's strong liquidity position, and the lack of additional debt needs," S&P credit analyst Kevin Archer said.

Moody's cited many positives in rating the bonds.

"Enplanement growth over the last four years has been strong and management continues to actively and successfully stabilize costs to airlines; accommodating increasingly higher debt service while maintaining a competitive cost per enplanement and growing air service in target markets," the rating agency said. "The consequences of cost-containment actions reflected primarily in the airport's unrestricted cash and net revenue debt service coverage metrics, both of which were at low levels five years ago. But liquidity and coverage have improved, and following four years of enplanement growth the airport is now in a position to reduce revenue sharing measures previously in place, further supporting liquidity and coverage."

But the agency also cited the unusually high debt burden of the airport as a potential weak spot.

"The rating is tempered by the airport's leverage, which is the highest among Moody's rated airports as measured by debt per enplaned passenger," said Moody's.

The city also faces a potential legal claim by airlines alleging that San Jose improperly calculated terminal rents in violation of the lease agreements it has with the airlines. But the city estimates that the impact of this potential claim is only about $3.2 million.

The airport substantially completed Phase 1 of its Airport Development Program in fiscal year 2010/2011. Those projects, which were financed in parts by bonds, included nine new gates and approximately 366,000 square feet of new terminal space. There is a plan for an extensive Phase Two, which is subject to event-based triggers.

The sale next week will be the largest San Jose airport bond sale since the 2007 bonds were issued. The city last issued airport revenue bonds in October 2014. Investors were scheduled to visit the airport for a tour on March 23, and closing is anticipated to occur April 11.

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