O’Hare May Save $100 Million in Best Airport Rally: Muni Credit
U.S. airport debt is on a pace to beat the municipal market for a second straight year. That may help Chicago save more than $100 million when it sells $1.2 billion of bonds for O’Hare International this week.
City-owned O’Hare, the second-busiest U.S. airport, is refinancing higher-cost bonds. Such securities may have the same appeal to investors as water or sewer debt, which is backed by a dedicated revenue stream.
“We consider the big, major metropolitan-area ones essential-service revenue bonds,” said Ebby Gerry, who helps manage $14 billion of munis at UBS Global Asset Management Inc. in New York. While airports account for about 6 percent of municipal bonds, UBS allocates 9 percent to the area, he said.
The extra yield over top-grade securities on some O’Hare debt has shrunk to the smallest in at least three years. Buyers are demanding 1.15 percentage points of added yield this year on average for 22-year O’Hare revenue bonds subject to the alternative minimum tax, similar to this week’s offer, Bloomberg Valuation data show. The annual average is the smallest since at least 2009.
Municipal airport bonds have earned 6 percent this year, compared with 5.6 percent for the broader muni market, according to Bank of America Merrill Lynch data. The facilities’ borrowings gained 13.6 percent last year, to 11.2 percent for the local-debt market.
O’Hare, located about 18 miles (29 kilometers) from downtown Chicago, is undergoing a $6.5 billion program that will add a new runway and extend two strips. This week’s sale, which is secured by general airport revenue, may save the facility more than $100 million, said Lois Scott, Chicago’s chief financial officer, in an interview.
“The market is very strong right now,” she said. “There are strong fundamentals in terms of the amount of investors on the sidelines looking to put their money to work in high quality investments.”
Investors have sought tax-free debt as a haven from concern that Europe’s debt crisis will deepen. Municipal mutual funds have added $18.5 billion this year through Aug. 1, the most for the period since 2009, Lipper US Fund flows data show.
Moody’s Investors Service lowered its grade on O’Hare revenue bonds last month to A2, its sixth-highest mark, from A1, affecting $6.5 billion of revenue debt. The company cited the facility’s “high leverage.” Of the airport credits that Standard & Poor’s rates, O’Hare’s debt for each passenger boarding a plane was $219 last year, more than double the 2009 average for similarly rated facilities.
City officials marketing the debt included a six-year segment with a preliminary yield 1.25 percentage points above top-rated munis, said Paul Mansour, managing director at Hartford, Connecticut-based Conning. That compares with a 1.97 percentage point spread on a similar maturity in April 2011, the last O’Hare sale that was subject to the alternative minimum tax.
Scott, the city CFO, declined to comment on pricing of the deal.
The preliminary price indications don’t give investors enough extra yield, given the downgrade and renovation costs, Mansour said.
“You need to be compensated a little bit more for the likelihood that you’re not going to see any sort of ratings improvement for a while and they’re in the middle of this extensive modernization program,” said Mansour, whose company oversees about $10 billion of munis. “There’s a little more downside risk than upside risk.”
O’Hare is building as the federal government is reducing financial support to some airports to help balance the national budget.
President Barack Obama in February signed the Federal Aviation Administration Modernization and Reform Act, which includes $3.35 billion annually in airport improvement grants through 2015, down from $3.5 billion, Fitch Ratings said this month.
The diminished federal funds will probably prompt airport issuers to sell more debt backed by so-called passenger facility charges, which are fees for every traveler boarding a plane, Fitch said.
Investors have other airport deals to choose from this week that are subject to the alternative minimum tax, including a $291 million Dallas-Fort Worth International Airport sale. The securities are rated A+, Standard & Poor’s fifth-highest grade.
Following are pending sales:
CALIFORNIA plans to borrow $10 billion of revenue- anticipate notes as soon as soon as the week of Aug. 13. The notes are rated MIG 1, Moody’s highest short-term grade. (Added Aug. 8)
SAN FRANCISCO is set to sell $290 million of general- obligation debt through competitive bid as soon as Aug. 14, data compiled by Bloomberg show. Fitch Ratings grades the bonds AA-, fourth-highest. (Added Aug. 6)
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