CHICAGO — American Airlines and United Airlines on Tuesday sued Chicago to block its financing of remaining projects under an $8 billion expansion program at O’Hare International Airport ahead of the city’s planned sale of $1.1 billion of passenger facility charge-backed bonds next month.

The two main airlines at O’Hare filed the suit in Cook County Circuit Court. It asks the court to block the city’s funding of projects included in the completion phase of the expansion plan and to bar issuing any general airport revenue bonds until the court decides whether the carriers’ approval is needed.

The airlines have not yet agreed to fund the completion phase. “The projects will move forward at exorbitant expense financed by massive, unauthorized bond offerings. In the meantime, the airlines’ fundamental voting and approval rights with respect to the completion phase and its financing will be lost forever,” the lawsuit reads.

The airlines warned Chicago they were considering such action if it pursued the passenger facility charge issue, which does not include any GARBs. Chicago disclosed the warning — which came from the airlines in the form of a Jan. 14 letter addressed to Mayor Richard Daley — in the litigation section of its preliminary offering statements released this week on the deal. The city revealed the threat but did not enclose a copy of the letter.

“We are alarmed at the city’s actions to proceed with the issuance of debt for this project without airline approval, which our leases with the city require,” reads the letter, which was obtained by The Bond Buyer. “We do not want to litigate with the city of Chicago … regrettably, the city will leave us no choice, however, if it proceeds to prepare for and issue the bonds for this project.”

Chicago shows no signs of backing down. The offering statement says the city “is continuing its negotiations with American, United, and other airport parties, and intends to proceed with the issuance of the 2011 PFC obligations and the O’Hare Modernization Program completion phase as set forth in this Official Statement.”

Without airline approval, the city decided to put together a structure that officials contend does not require such approval. A $468 million series and a $152 million series, both for new money, are backed solely by PFCs. An $81 million PFC series will refund debt. A fourth series for $413 million is backed by federal grants and secondly by a subordinate PFC pledge.

The program relies on the future ­issuance of $2.5 billion of third-lien GARBs, but without airline approval the city has said it would structure the deal to delay debt-service repayment until after the current airline-use agreement expires in 2018.

The airlines argued in their letter that the city lacks authority to proceed with the PFC issue even though it’s not tied to the fees they pay under their lease agreement. “The first bond issuance, which we understand would be backed by extra charges to our customers and a grant from the federal government, is inextricably linked to the second debt issuance, which would be backed by airline revenues,” the letter said. The letter is signed by American Airlines chief operating officer Thomas Horton and United vice president and chief operations officer Pete McDonald.

The city is scheduled to take retail orders on Feb. 1 and hold an institutional pricing the next day. Citi is senior manager and Siebert Brandford Shank & Co. is co-senior manager.

The threat will likely drive up the city’s borrowing cost. It can expect to pay a rate of above 6% for the low single-A rated bonds, about 50 basis points more than comparably rated debt. That’s because of the litigation threat, the weak market, and penalties demanded by investors because of Chicago’s budget struggles and location in a fiscally troubled state, said Thomas Spalding, senior investment officer at Nuveen Investments.

In comments made in recent days, Daley has refused to back off the bond issue or the program’s timetable. City aviation officials referred calls to the finance department, but no one there returned calls for comment by press time.

While it has faced litigation from nearby suburbs and other opponents of the nine-year-old expansion program, Chicago now faces perhaps its most formidable opponents in the two airlines that handle about 80% of the airport’s passenger traffic.

The airlines were strong early supporters of the OMP that calls for a redesign in the airport’s runways, the construction of additional runways, a new western access terminal and other smaller projects. The airlines signed off on the city’s use of various airline fees and charges to support GARB borrowing needed for the first $3.3 billion phase and praised the city’s management, but talks have long been stalled over remaining projects.

The airlines wanted the new $2.2 billion terminal taken off the table and while they support the remaining $3.36 billion of runway projects, they want the city to back off a 2014 completion deadline and to undertake construction based on agreed-upon operational triggers.

The letter notes that operations are down 5% from the levels that triggered phase one runway projects. “Based on FAA projections, the project won’t be needed for many years to come,” the airlines wrote, referring to capacity needs. The airport’s debt load is expected to hit $11.4 billion in 2015, up from the current $6 billion.

Ahead of the sale, Fitch Ratings assigned its A-minus to the bonds and ­lowered by two notches to A-minus its rating on outstanding PFC-backed bonds. Fitch also downgraded the third-lien GARB credit to A-minus from A. Moody’s Investors Service affirmed its ratings on the various O’Hare credits, including the A2 assigned to PFC bonds but revised to negative its outlook on the A1 rating on third-lien GARBs. 

Standard & Poor’s affirmed the A-minus it assigns to the airport’s PFC bonds and its ratings on the airport’s first-, second- and third-lien bonds.

“The ratings incorporate our view of O’Hare’s generally sound air travel demand as a result of being one of the world’s largest and important ­connecting hub airports, the airport’s significant additional debt needs, its high exposure to connecting traffic, and high air ­carrier concentrations,” said analyst Joseph ­Pezzimenti.

On Friday, airport officials held a news conference with freshman U.S. Sen. Mark Kirk, R-Ill., in which he offered to mediate negotiations with the airlines. “The successful completion of the O’Hare Modernization Program is essential to the future economic success of Chicagoland,” Kirk said in a statement.

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