DALLAS — Denver International Airport plans to take advantage of historically low interest rates with $425.9 million of refunding bonds as it pursues a major expansion.
The upcoming DIA series was to be submitted to the Denver City Council for final approval Monday night as series 2011B through D. The city and county of Denver, which owns and operates the airport, is the issuer on behalf of DIA.
The bonds will be priced through negotiation with book-runner and senior manager JPMorgan with Barclays Capital, Piper Jaffray & Co. and RBC Capital Markets as co-managers. Jefferies & Co. and Estrada Hinojosa & Co. are financial advisors, with Hogan Lovells and Bookhardt & O’Toole as bond counsel.
Proceeds will be used to refund all or a portion of outstanding 1998A, 2001A, 2001B, 2001D and 2002E bonds. The airport anticipates a present-value savings of $34 million through the final maturity.
Officials are hoping for a market response as strong as the one they enjoyed in April on a $349 million issue of alternative minimum tax revenue refunding bonds. That sale, led by senior manager Citi, was expected to take two days for retail and institutional investors. However, all the bonds were sold in a single day with oversubscription in every maturity.
With supplies of tax-exempt municipal bonds falling sharply this year, issuers have scored extremely low interest rates. The 10-year municipal yield is just off its record low, the 30-year is hovering around its lowest level in three decades, and the two-year yield is at its lowest in 40 years, according to Thomson Reuters.
The Series 2011A bonds issued in April refunded all of the outstanding Series 2008A3-A4 bonds, as well as most of the 2000A bonds, and generated over $10 million in present-value savings. The bonds were issued as fixed-rate senior obligations with a final maturity of 2023.
“The solid pricing of the transaction demonstrates that DIA’s credit is still in strong demand and well-received by investors,” said Denver aviation manager Kim Day. The upcoming bonds are rated A-plus by Standard & Poor’s and Fitch Ratings with stable outlooks.
“DIA has a relatively high debt burden with aggregate debt outstanding of approximately $4 billion, which is among the highest for a U.S. airport,” noted Fitch analyst Scott Zuchorski. “The current [capital improvement plan] requires close to $900 million in additional borrowing through 2016 which could reduce financial flexibility and result in higher airline rates and charges at current traffic levels.”
Moody’s Investors Service, which rated the April deal A1, has not rated the upcoming issue. It placed DIA’s revenue bonds on negative outlook due to what it considered non-core investments, particularly the development of an airport hotel.
DIA officials counter that hotels have become standard amenities at major connecting hubs. However, the viability of the airport hotel has become an issue again as Gaylord Entertainment Co. develops plans for an $824 million, 1,500-room resort complex nearby. Designed to anchor a new National Western Stock Show and Rodeo complex in Aurora, it would compete with the 516-room Westin Hotel expected to break ground at DIA next year.
A recent study from PKF Consulting USA estimated that the new Gaylord would lower the Westin’s occupancy by two percentage points in 2016 for a net revenue loss of about 5.5% in 2016. The impact of the resort would be negligible in later years, according to the study.
The $153 million Westin Hotel would anchor DIA’s south terminal, which will also serve as a station for a new commuter-rail line from downtown Denver. The Regional Transportation District that serves metro Denver is using a combination of muni bonds, federal funds and private investment to build the line as part of its $6.7 billion FasTracks system. The rail service is also expected to begin in 2016.
The RTD’s plans call for the commuter rail to pass near the proposed Gaylord and National Western sites, but there are no plans for a stop there. Double-tracking the site for a rail station could cost as much as $47 million, officials estimate. The district is already battling public perceptions of cost overruns that will force the RTD to call for higher sales tax rates in 2012.
The National Western Stock Show’s proposed move to Aurora at an anticipated cost of $300 million has also caused disputes over sharing of revenues and debt with Denver. The stock show has been in Denver for 105 years and adds an estimated $83 million to the city’s economy. Moving the grounds to a vacant site in Aurora would require $150 million of bonds from Denver.
Aurora and Denver are also seeking $91.5 million in state subsidies under the Regional Tourism Act, which is designed to direct sales-tax revenue generated directly from new attractions to developers to help pay off construction bonds.
Development of vacant land since DIA’s opening in 1995 has been somewhat slow compared to Dallas-Fort Worth International Airport, which opened 21 years earlier. One thing the two share is drilling for oil and natural gas on the airports’ vast tracts of undeveloped land. DFW also has a Gaylord resort nearby and will be connected by rail to Dallas and Fort Worth.
The ambitious plans for the Gaylord resort and National Western relocation conflict with austerity measures that are limiting options for new facilities. Amid efforts to reduce the costs of the expansion, DIA in April said it would not proceed with plans to build a Santiago Calatrava bridge for the FasTracks commuter train.
Estimated costs for building the signature bridge were put at $22 million. The RTD identified $1.4 million as its cost for a standard bridge crossing Peña Boulevard, the airport’s major thoroughfare. The $1.4 million would have represented only a portion of the cost of the Calatrava bridge.
The decision on the bridge came after development of a 10-year financial strategy for the airport that includes a $500 million budget for the South Terminal Redevelopment Program and an additional $500 million for other capital improvement projects over the next five years.
“Our first and foremost responsibility is to maintain the fiscal strength of this airport,” Day said. “And investing $20 million in this structure is just not the best use of our capital.”