DALLAS – Dallas-Fort Worth International Airport will close on its first and last deal of the year Thursday, a $302.4 million private placement to reconstruct one of its original runways.
The bonds will be placed with Bank of America Merrill Lynch, which provided a true interest cost of 2.11% on bonds maturing from 2021 through 2024, according to Mike Phemister, vice president for treasury management at DFW.
BAML offered the lowest rate in competition with JP Morgan and Citi, which financed a $280 million private placement for DFW in 2016, Phemister said.
“It worked very well for us in 2016, and this one has worked very well for us,” said Phemister, who has guided the large banks in designing the hybrid financing tool. The structure combines the advantages of a bond issue with those of a private bank loan, Phemister said.
“To us it’s a pure bond deal; we just placed it with a single bank,” Phemister said.
“This was a good size to do as a private placement, kind of a sweet spot,” he added. “If you get much bigger than that, you have to go through multiple banks or a syndicate.”
DFW needed only one rating on the deal, an A-plus from S&P Global Ratings with a stable outlook. The issue is tax-exempt, according to Thomson Reuters data.
DFW had about $6.7 billion in debt outstanding as of Sept. 30, 2016, with a final maturity of Nov. 1, 2050. All airport debt is fixed-rate with no derivative exposure.
“Although we already view DFW's debt per enplaned passenger as high, we consider it manageable,” S&P analyst Todd Spence wrote.
Another benefit of the private placement is that it reduces disclosure requirements as DFW awaits decisions by its major tenant, American Airlines, on long-range plans for its terminals.
At American’s request, the airport deferred remodeling on Terminal C under its $1.9 billion Terminal Renewal and Improvement Program, which revamped the other original terminals A, B and E. The international Terminal D was built in 2005 at a cost of $1.7 billion. American is considering whether to use Terminal C or to build a new Terminal F as the airline drafts a master plan that could cover the next 20 or 40 years.
The uncertainty limits DFW's ability to lay out its long-range finance plans to investors.
“We take disclosure very seriously here,” Phemister said. “So, I don’t want to say something that might change next week.”
In the meantime, DFW is reconstructing one of its original runways, 17C, a project expected to cost $220 million and close for four months next year.
“This is our major arrival runway,” Phemister said. “About 60% of arrivals use it.”
The airport, jointly owned by the cities of Dallas and Fort Worth, received two grants for airfield improvement from the Federal Aviation Administration totaling over $52 million, with most going to Runway 17C and associated taxiway improvements. About $2.6 million will help fund a lighting upgrade for the terminal ramp areas.
The runway project includes installation of an updated pavement sensor system for measuring weather effects.
DFW's six other runways will allow a full schedule of flight operations, officials said.
DFW is as the fourth-busiest airport in North America based on passenger count, according to Airports Council International statistics. Although enplaned passenger traffic levels fell by 2.7% in 2008 and 3.8% in 2009, those decreases were less severe than those of other airports, S&P said, largely because of DFW's smaller reductions in connecting passengers.
Enplaned passenger traffic has increased 1% to 4% annually for the past seven years, even as DFW faced competition on new routes from Dallas Love Field.
“DFW faces additional competition that could affect traffic, in our opinion, although traffic for fiscal 2016 increased approximately 1%,” Spence said.
Before 2014, Love Field’s major carrier Southwest Airlines could fly only to cities in Texas and nearby states. That restriction was imposed under the federal Wright Amendment, named for the late Fort Worth Congressman Jim Wright, who sought to protect DFW from competition after the airport’s opening in 1974. Love Field, previously the primary Dallas airport, was limited to regional service as DFW became established in the Dallas-Fort Worth market.
“Given the traffic performance post-expiration during the first two fiscal years, we do not believe the changes will have a material effect on DFW's traffic,” Spence said.
Under one forecast, DFW was not expected to reach 32 million annual enplanements until 2020, but the airport exceeded that level in 2015, according to S&P.
“We anticipate American will continue to use DFW as a key hub, but any change in strategy by the airline that significantly reduces its hubbing activities could lead to a lower rating,” Spence wrote.
As it talks with DFW about plans, American is also negotiating with Chicago over terminal modernization and expansion at O’Hare International Airport.
American is also beginning a $1.6 billion investment to upgrade its two terminals at Los Angeles International Airport over seven to 10 years as Delta Air Lines plans a $1.9 billion overhaul and United nears completion of a $573 million renovation to two terminals there. With no hub carriers, LAX is considered one of the most competitive airports in the country.
DFW remained the home of American after its merger with Arizona-based U.S. Airways in 2015. The merger created the world’s largest airline with more than 6,700 daily flights to 336 locations in 56 countries worldwide, about $40 billion in operating revenue, and more than 100,000 employees.
The replacement of runways marks another major milestone for DFW in its 43rd year of operations. On runway 17C, the process is called a “keel replacement” in which the center third of the pavement is replaced. The runway is comprised of 12 inches of lime-treated sub-base, 8 inches of cement-treated base and 18 inches of Portland Cement concrete.
“This is the beginning of a runway program of which we will finance about $2 billion,” Phemister said. “We will use some of our capital funds to handle the cost.”
The private placement comes as other issuers are scurrying to market to get ahead of major Congressional tax reform that is likely to end advance refundings and possibly tax-exempt interest for private activity bonds of the type most airports use. The House and Senate versions of the tax legislation could also eliminate the federal alternative minimum tax that has affected most airport issues.
Phemister said DFW has already made plans to issue taxable bonds in the future and has never done an advance refunding.
“We have made the decision that we will not issue AMT bonds in the future,” he said. “We really think it will have no impact on our planning.”