Dallas-Fort Worth Downgrade Dismissed by Investors: Muni Credit

Dallas-Fort Worth International, set to become the biggest hub for the world’s largest airline, is embarking on a borrowing plan that will make it the nation’s most-indebted airport.

The world’s eighth-busiest facility, which will benefit from the pending merger of US Airways Group Inc. and American Airlines, plans to issue $736 million of municipal bonds in April and May, part of $3.1 billion of sales it has announced for 2013. Moody’s Investors Service last month cut DFW to five steps below AAA, citing the rising debt load.

Still, the yield penalty on some of its bonds has shrunk by about a third since October. Investors such as Duane McAllister at BMO Asset Management U.S. said they like the debt because the facility provides an essential service to a growing region. The Dallas-Fort Worth vicinity saw the largest population jump among metro areas last year, according to U.S. Census data.

The region “is strong and growing, and people are moving there,” said McAllister, who helps manage $4 billion of munis in Milwaukee. “They’re building for the future and for the growth, and that’s what airports have to do.”

Renovation Plan

DFW, which opened in 1974, is borrowing to renovate four terminals and refinance debt, according to an investor presentation. U.S. Bankruptcy Judge Sean Lane in Manhattan last week approved the merger between American parent AMR Corp. and Tempe, Arizona-based US Airways. AMR, based in Fort Worth, Texas, filed for bankruptcy in 2011. The merger will probably close in the third quarter, according to the presentation.

The DFW revenue bonds are backed by rental fees and charges the facility collects from airlines. Airport debt is beating the broader $3.7 trillion municipal market, earning about 1 percent this year, according to a Bank of America Merrill Lynch index with an average rating of A1, fifth-highest. That compares with about 0.55 percent for all munis. Airport bonds have outpaced the market for two straight years, their best run since 2006.

Investors are buying the bonds, which tend to have credit ratings four to six steps below top-rated munis, for their higher relative yields, McAllister said. They’re also a bet that traffic at airports will rise as the economy improves.

Economic Leverage

The U.S. gross domestic product will grow 2.7 percent in 2014, according to the median forecast of 83 analysts in a Bloomberg survey. It would be the strongest expansion since 2006. The Bloomberg U.S. Airlines Index of shares of 10 carriers gained 35 percent last quarter, the best start to a year since at least 1999, Bloomberg data show.

“An improving economy means more people are traveling, whether it’s personal, leisure-type travel or business travel,” said John Bonnell, who helps manage $4.3 billion in munis in San Antonio at USAA Investment Management Co.

Investors are looking to lower-rated securities as muni yields remain below historical averages. Yields on general-obligations maturing in 20 years were 3.99 percent last week, compared with the 52-year average of 5.89 percent, according to a Bond Buyer index. The index set a generational low in December.

Dallas-Fort Worth bonds maturing November 2029 traded in the past two months with an average spread of 0.4 percentage point, compared with 0.63 percentage point when the facility sold the debt in October, Bloomberg data show.

Cost Competition

“It’s that demand for incremental yield that’s driving the yield spreads down and compressing them,” Bonnell said.

Among US Airways and American Airlines hubs, Dallas-Fort Worth has the most daily flights and the third-lowest cost for each departing or arriving passenger, according to a JPMorgan Chase & Co. report dated Feb. 8.

Moody’s said it may lower the airport’s rating if American were to reduce flights at Dallas-Fort Worth by 10 percent or more, Kurt Krummenacker, an analyst at the company, wrote in a March 22 report.

Michael Phemister, vice president of treasury management at the airport, said he doesn’t see that happening, given the facility’s central location in the U.S. and its status as American’s most-profitable hub.

“We just don’t see any scenario where we will lose traffic,” Phemister said.

Flight Path

The airport in north-central Texas is within a four-hour flight of 95 percent of the U.S. population, according to bond documents. Dallas-Fort Worth served 58.6 million passengers in 2012, according to Airports Council International.

Its largest current capital project is a $2 billion plan to renovate four terminals, bond documents show. The facility will have $5.7 billion of debt after the sales this month and next, the documents say.

Moody’s downgraded Dallas-Fort Worth last month to A2 from A1.

“Total debt outstanding, already among the highest in the nation for airports, is expected to become the highest during 2013,” Moody’s Krummenacker wrote.

The airport’s 2013 bond sales include $1 billion of debt that had been slated for 2014 and 2015. It is bringing the issuance forward to secure lower interest rates.

“It’s surprising that they have continued to stay this low, and it’s our plan to take advantage of them,” Phemister said.

Terminal Appeal

Upgrading terminals will keep the airport competitive and help attract carriers, BMO’s McAllister said.

“There’s plenty of demand for airport debt,” he said. “Despite the near-term concerns by Moody’s, the market would still look favorably upon this particular issue.”

Dallas-Fort Worth heads to market as states and cities have already scheduled $11.7 billion of debt sales in the next 30 days, compared with the one-year average of about $9 billion.

At 1.95 percent, the interest rate on benchmark munis due in 10 years compares with 1.81 percent on Treasuries with a similar maturity, Bloomberg data show. The ratio of the two is about 108 percent, the highest since September. The higher the figure, the cheaper munis are relative to federal debt.

Following is a pending sale:

GRAND PARKWAY TRANSPORTATION CORP., created to finance a new toll road around Houston, plans to sell $3 billion of revenue debt as soon as April 15. The offer would be the year’s largest tax-exempt sale. Proceeds will help finance segments of the Grand Parkway project to build a 180-mile (290-kilometer) loop road. (Added April 4)