SAN FRANCISCO — San Francisco International Airport plans to refund $215.9 million of fixed-rate debt with variable-rate demand obligations next week, as it seeks to pair debt with forward swaps it agreed to enter before the financial crisis.
The airport agreed to the swaps with Depfa Bank Plc. and Goldman Sachs Capital Markets LP back in 2007 when it was planning to issue auction-rate securities this year as part of a its variable-rate debt program.
“It was going to be the capstone for the airport’s variable-rate debt program,” said Kevin Kone, head of capital finance. “It’s the last piece we had planned on doing.”
Most municipal bond issuers have been headed toward fixed-rate debt and away from variable-rate debt in the two-plus years since the financial crisis destroyed the auction-rate bond market and hobbled many banks that provide liquidity for the VRDO market.
Kone said the San Francisco airport’s new debt will be backed by a letter of credit from JPMorgan Chase Bank, which was one of the first big banks to pay back federal aid from the Troubled Asset Relief Program. The bank’s long-term debt is rated Aa3 by Moody’s Investors Service and AA-minus by Standard & Poor’s and Fitch Ratings.
Kone said he isn’t looking to increase the airport’s variable-rate debt these days. But he said paying for liquidity and issuing VRDOs was cheaper for the airport than terminating swaps, which he said would have cost “tens of millions of dollars.”
The airport will pay a fixed rate of 3.925% to its counterparties in exchange for 61.85% of the one-month London Interbank Offered Rate plus 0.34% on a notional amount of $143.95 million for Goldman and $71.97 million for Depfa.
“Three years ago, the relatively low interest-rate environment gave us the opportunity to lock in at good fixed rates on those swaps to hedge the variable rates we would enter into,” Kone said.
Despite the extra administrative burden caused posed by the variable-rate portfolio, tapping the front end of the yield curve has saved the airport millions in debt service and helped it lower costs for passengers and airlines, which has been a major goal for an airport with above-average costs.
Keeping a lid on costs has helped SFO compete with cheaper Bay Area airports in the current economic downturn. The airport’s passenger enplanements were little changed last year, even as other airports in the region and across the country suffered deep declines in business.
“While SFO’s traffic has been stable, total air passenger traffic at all Bay Area airports (SFO, Oakland and San José) fell 9% in fiscal 2009,” Standard & Poor’s analyst said Robert Hannay in a report. “SFO maintained its activity levels by increasing its market share from 60.5% of all Bay Area passengers in fiscal 2008 to 66.1% in fiscal 2009.”
Business has been boosted by an increase in traffic from discount airlines like JetBlue, Virgin America and Southwest Airlines. The airport’s revenue bonds are rated A by Standard & Poor’s, A1 by Moody’s and A-plus by Fitch Ratings.