DFW Seeks For­eign In­vestors

The Bond Buyer - - Front Page - By richard Wil­liamSon

DAL­LAS – Fresh off a whirl­wind of meet­ings with in­vestors in Europe and Asia, Dal­las-Fort Worth In­ter­na­tional Air­port is pur­su­ing a new mar­ket­ing strat­egy for more than $10 bil­lion of debt over the next five to seven years.

“We are hop­ing to get 20% in­ter­na­tional par­tic­i­pa­tion,” Michael Phemis­ter, DFW’s vice pres­i­dent for trea­sury man­age­ment, told The Bond Buyer’s Trans­porta­tion Fi­nance/P3 Con­fer­ence in Dal­las. “That may be an un­re­al­is­tic goal, but that’s what we’re aim­ing for.”

Fac­ing a flood of com­pe­ti­tion from other air­ports sell­ing bonds sub­ject to the al­ter­na­tive min­i­mum tax, DFW plans to by­pass the tra­di­tional air­port mar­ket and is­sue tax­able debt, broad­en­ing the ap­peal to U.S. and for­eign in­vestors who typ­i­cally pur­sue cor­po­rate bonds.

“The dif­fer­ence in yields be­tween AMT and tax­able we be­lieve to be mar­ginal and they’re just go­ing to get tighter when the AMT mar­ket gets flooded with bonds,” Phemis­ter said Thurs­day.

DFW ex­ecs are also con­cerned about how tax-ex­empt bond pro­ceeds are reg­u­lated, and the im­pact of last year’s tax re­form on the muni mar­ket’s ap­petite for new is­sues.

For high-in­come in­di­vid­u­als, the AMT is a par­al­lel tax code to de­ter­mine the min­i­mum li­a­bil­ity a tax­payer would be re­quired to pay af­ter elim­i­nat­ing the de­ductibil­ity of cer­tain “pref­er­ence items.” In­ter­est on qual­i­fied pri­vate ac­tiv­ity mu­nic­i­pal bonds is in­cluded among the pref­er­ence items.

In ad­di­tion to air­ports, qual­i­fied PABs, all sub­ject to the AMT, are is­sued for wa­ter and sewer ser­vice, solid waste fa­cil­i­ties, sin­gle and multi-fam­ily hous­ing, and cer­tain small is­sue in­dus­trial de­vel­op­ments and en­ter­prise zones.

The turn to­ward tax­able is­suance is some­thing DFW has been plot­ting for years.

With an es­ti­mated $70 bil­lion of cap­i­tal projects planned at ma­jor U.S. air­ports over the next decade, per J.P. Mor­gan, Phemis­ter reck­ons that the AMT mar­ket is not large

enough to ab­sorb that amount of debt. The new tax struc­ture en­acted last year, with lower rates on wealthy peo­ple, also re­duces in­cen­tives for shel­ter­ing in­come, a key draw for the tax-ex­empt bond mar­ket.

While DFW will con­tinue to is­sue about $1.5 bil­lion of tax-ex­empt bonds for re­fur­bish­ing run­ways and other air­field im­prove­ments, bonds for a new ter­mi­nal and projects that ben­e­fit air­lines and other cor­po­ra­tions will be tax­able, Phemis­ter said.

About half of the es­ti­mated $10 bil­lion to $11 bil­lion of bonds over the next five to seven years will be re­fund­ing and half will be for new money, Phemis­ter said.

With $6.5 bil­lion of out­stand­ing debt, DFW has $5.2 bil­lion of bonds that are callable over the next five years.

If in­ter­est rates fa­vor re­fund­ing, about $1.8 bil­lion will be re­funded as tax-ex­empt while $3.4 bil­lion will be re­funded as tax­able. New money is ex­pected to fi­nance $3 bil­lion to $6 bil­lion of con­struc­tion over the next 10 years.

Af­ter a cou­ple of quiet years await­ing Amer­i­can Air­lines’ plans at its home hub, DFW ex­pects to bring about $1 bil­lion per year to the mar­ket over the next four to five years, Phemis­ter said, with the first of those is­sues, a $1.3 bil­lion re­fund­ing of AMT bonds with tax­able debt, com­ing next sum­mer.

Amer­i­can also signed off on plans at its other ma­jor hub, Chicago’s O’Hare In­ter­na­tional Air­port, where an $8.5 bil­lion ex­pan­sion, the largest in the air­port’s 73-year his­tory is just be­gin­ning.

Chicago is pric­ing $1.848 bil­lion of gen­eral air­port se­nior lien rev­enue and re­fund­ing bonds for the air­port on Tues­day.

Af­ter op­pos­ing the O’Hare plan be­cause com­peti­tor United Air­lines was awarded five ad­di­tional gates, Amer­i­can ap­proved af­ter Mayor Rahm Emanuel agreed to speed up con­struc­tion of three ad­di­tional gates at the end of an Amer­i­can con­course.

At the same time, Amer­i­can is con­struct­ing a $300 mil­lion cam­pus on a 300-acre site near DFW and the air­line’s ex­ist­ing head­quar­ters. The cam­pus is home to train­ing and sup­port build­ings, in­clud­ing an op­er­a­tions cen­ter, flight academy and reser­va­tions cen­ter. The air­line will be­gin mov­ing into the new, high-tech head­quar­ters next year.

Amer­i­can was awarded a $21.25 mil­lion tax in­cen­tive pack­age from the city of Fort Worth. The new head­quar­ters will be on the Fort Worth side of the air­port, which is jointly owned by Fort Worth and Dal­las. In June of 2014, the Fort Worth City Coun­cil ap­proved a 15-year, $6.5 mil­lion tax in­cen­tive from the city for the cam­pus. Fort Worth ex­pects about $7 mil­lion in tax rev­enue over 15 years, of­fi­cials es­ti­mate.

DFW’s most re­cent pro­ject was a $2.7 bil­lion re­mod­el­ing of its orig­i­nal ter­mi­nals A, B, and E, com­pleted this year. At Amer­i­can’s re­quest, the air­port skipped re­mod­el­ing Ter­mi­nal C, Phemis­ter said. The lat­est plan calls for the de­mo­li­tion of C and con­struc­tion of a new ter­mi­nal in its place. The air­port is also con­sid­er­ing build­ing a Ter­mi­nal F.

“The air­field is in good shape, but we are out of gates again,” Phemis­ter said.

DFW’s next round of debt will over­lap with heavy is­suance from the na­tion’s largest hub air­ports.

“The lever­age that’s com­ing is ob­vi­ously con­sid­er­able,” said Peter Stet­tler, mu­nic­i­pal credit an­a­lyst at Piper Jaf­fray & Co. “But some of these air­ports have not had a lot of ma­jor projects over the past 15 years. These projects are nec­es­sary and im­por­tant.”

Along with the DFW and O’Hare ex­pan­sions, New York’s aging JFK In­ter­na­tional Air­port is launch­ing a $13 bil­lion ren­o­va­tion in 2020 that will in­clude two new ter­mi­nals. That pro­ject will co­in­cide with an $8 bil­lion re­de­vel­op­ment of New York’s LaGuardia Air­port now un­der­way.

A $14 bil­lion re­de­vel­op­ment at Los An­ge­les In­ter­na­tional Air­port tar­geted for com­ple­tion in time for the 2028 Olympics in­cludes a $1.6 bil­lion in­vest­ment by Amer­i­can Air­lines in its fa­cil­i­ties at the third busiest U.S. air­port. Amer­i­can calls the LAX pro­ject the “largest in­di­vid­ual in­vest­ment at an air­port in its 92-year his­tory.”

Multi-bil­lion-dol­lar projects are also planned or in progress in Kansas City, Den­ver, San Fran­cisco, At­lanta, Salt Lake City, San Diego, Seat­tle, Fort Lauderdale and Char­lotte.

“There is a clear need for the projects,” said Moody’s an­a­lyst Earl Heffin­trayer.

“When you take it al­to­gether, the ques­tion is: Can the air­lines af­ford this?” he told The Bond Buyer con­fer­ence. With the cost per pas­sen­ger for the projects rang­ing from $1.40 per pas­sen­ger for Delta to $4 for United, the air­lines are able to ab­sorb the cost, he said.

Air­port bond is­suance this year is ex­pected to to­tal about $11 bil­lion com­pared to an his­tor­i­cal av­er­age of about $3 bil­lion to $5 bil­lion per year, Heffin­trayer said.

DFW sees an op­por­tu­nity to sell air­port bonds to overseas in­vestors look­ing for safety and a bet­ter yield than they might find in their home mar­kets. In meet­ings with 25 in­vestors in Lon­don, Paris, Seoul and Taipei over two weeks, Phemis­ter and chief fi­nan­cial of­fi­cer Chris Poin­satte pro­vided a primer on air­port cred­its.

“DFW be­lieves there is in­ter­na­tional de­mand for high qual­ity U.S. in­fra­struc­ture debt,” Phemis­ter said.

The air­port’s rev­enue bonds are rated A1 by Moody’s In­vestors Ser­vice, A-plus by S&P Global Rat­ings and Fitch Rat­ings, and AA-mi­nus by KBRA.

“Com­pared to the credit rat­ings of U.S. cor­po­rate bonds, U.S. air­port bonds are gen­er­ally con­sid­ered to be un­der-rated,” Phemis­ter told in­vest­ment groups. “No pub­licly owned U.S. air­port has ever de­faulted on its rev­enue-backed bonds.” ◽

DFW Air­port

The air­port plans to by­pass the tra­di­tional mar­ket and is­sue tax­able debt, broad­en­ing the ap­peal to U.S. and for­eign in­vestors.

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