SFO prepares bond refunding as airport rides out pandemic

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San Francisco International Airport’s finance team says the facility is financially well-positioned despite a steep drop in passenger numbers.

SFO is planning a $291 million refunding deal.

A security worker and two passengers, all wearing masks, at San Francisco International Airport in June.

The COVID-19 pandemic has taken a hammer to traffic at SFO. In June, 554,760 passengers used SFO, an 89.9% drop from June 2019, according to the airport's monthly traffic report.

The airport in pre-pandemic times was a major hub for travel to Asia and other overseas destinations, but travel restrictions brought SFO's international passenger counts down 97% in June compared to a year earlier.

"We have been pretty conservative financially," Ronda Chu, the airport's capital finance director, said in a phone interview.

The airport cut the 2020-21 budget originally proposed in February by 9% to $1.25 billion and it has postponed $1.4 billion in capital improvement projects, to reduce its capital improvement plan to $6.3 billion.

Cuts to CIP will delay the need to issue new money debt, saving SFO money on debt service in the near term, and allowing it to pay down existing debt and lower its leverage level, said Jeffrey Lack, a Fitch Ratings analyst.

"The airport's fully residual airline agreement and proven management team provide a solid framework for stable and competitive results; however, its elevated leverage profile and additional borrowing needs create some pressures on the rating," Fitch analysts wrote in the ratings report ahead of the sale.

The airport doesn’t expect to have to issue new debt until July 2021, according to its online road show presentation, because it had $922.4 million as of June 30 in its construction fund to cover ongoing projects. It also has $1.65 billion of bonds that are refunding candidates that will be callable over the next few years.

The Airport Commission of the City and County of San Francisco’s revenue refunding bonds are being sold in three series: a $111.6 million Series 2020A that is tax-exempt but subject to the alternative minimum tax; a $48.9 million Series 2020B tax-exempt, non-AMT/governmental purpose; and a $130.5 million taxable Series 2020C.

BofA Securities is bookrunner with Barclays and Siebert Williams Shank & Co. LLC as co-lead managers. Backstrom McCarley Berry & Co. LLC, PFM Financial Advisors, Robert Kuo Consulting and Vincent McCarley are municipal advisors.

Squire Patton Boggs and Amira Jackmon, Attorney at Law are co-bond counsel. Nixon Peabody is disclosure counsel. Orrick, Herrington & Sutcliffe is special tax counsel.

The airport doesn’t have a present value savings target for the sale, but is focusing on refunding maturities in 2021, 2022 and 2023 to lower debt service expenses during those years, Chu said.

On Friday, S&P Global Ratings downgraded the airport to A from A-plus. The outlook remains negative.

"The rating action further reflects our view that enplanements will continue to be severely or materially depressed or unpredictable for fiscal 2021 and beyond as a result of the ongoing COVID-19 pandemic and associated effects that we believe are outside of management's control," analyst Paul Dyson said in a news release.

Moody’s Investors Service affirmed its A1 rating and stable outlook, and Fitch Ratings affirmed its A-plus rating and negative outlook.

“We came into the pandemic in a strong position,” said SFO capital finance director Ronda Chu.

SFO is not an outlier with the Fitch negative outlook. Most airports Fitch rates have a negative outlook, Lack said.

“We did take a standardized approach to reviewing our portfolio,” Lack said. “By and large, all airports are on negative outlook. There are five small and medium regional airports on rating watch negative, because they are subject to higher amounts of competition, and face more risk coming out of the pandemic. We also have some airport public-private partnerships in single passenger facilities on rating watch negative.”

The airport’s $8 billion in outstanding revenue bonds are largely comprised of fixed, plain vanilla debt, according to its online road show.

The airport had experienced 50% growth in traffic from 2010 to 2019 making it the seventh busiest airport in the U.S., said Kevin Kone, the acting chief financial officer, during an online road show.

Through the refunding, it hopes to restructure to reduce debt service over the next two to three years as it weathers the decline in traffic wrought by the pandemic. Scenarios run by LeighFisher, a San Francisco-based airport consultant, estimate it could take until 2024 for the airport to return to 2019 traffic levels.

That is what SFO is expecting in terms of how long it will take to recover airport traffic to pre-pandemic levels, but revisions are likely once there is more evidence of what the recovery will be like in the near term, Chu said.

CARES stimulus money and healthy reserves have positioned the airport quite well.

“We came into the pandemic in a strong position,” Chu said. “We had cash on hand. There are projects that need to come online. CIP is demand driven. We are aligning our needs with the current environment.”

But the airport is also setting itself up so there are on ramps for projects that have been postponed to resume as airport traffic picks up, Chu said.

As SFO officials evaluated costs, they looked at which projects needed to move forward and which ones could be postponed to reserve funds until airline traffic returns to previous levels, she said.

On the bright side, the airport may save money by completing some projects more quickly because the airport is not as busy as normal.

“You will remember that last year we experienced some flight delays due to construction projects,” Chu said. “With the lowered traffic volume, we are moving forward on repaving runways and certain taxi areas. We have also consolidated operations in the terminals, closed boarding area A in the international terminal, so we can move forward on an enhancement project there.”

The airport received $254.8 million from the CARES coronavirus relief bill that cleared Congress in late March, which it plans to use in fiscal year 2020-21 to offset operating and maintenance expenses.

Cuts to the budget and fiscal restraints are allowing the airport to keep its cost per enplanement charges to $28.90 in fiscal year 2020-21. The airport had planned to hit $30 CPE charges by 2025, so it is accelerating how fast it hits that number, Lack said.

“We are seeing this across the industry,” Lack said. “The cost per enplanement is going to rise for the next few years. The industry has been hit hard, and there is only so much you can do. The airline authorities are doing the best they can, given the pressures.”

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