Chicago plans to bring $1.003 billion of tax-exempt bonds to market Wednesday for O'Hare International Airport, part one of a three-phase financing plan for 2024.
Interest on the $563.9 million of general airport senior lien revenue bonds, Series 2024A, is subject to the alternative minimum tax. The $440 million of general airport senior lien revenue bonds, Series 2024B, are not subject to the AMT, according to the
Secured on a parity basis with the airport's outstanding senior lien bonds and other senior lien obligations, the bonds are payable from and secured by revenues from the operations of one of the world's busiest airports.
Co-senior managers are Wells Fargo Securities and Jefferies. Co-financial advisors on the deal are Frasca & Associates and Phoenix Capital Partners. Co-bond counsel are Katten Muchin Rosenman LLP and Neal & Leroy, LLC.
Proceeds will fund $962.5 million of capital program projects, including through the refunding of outstanding credit agreement notes. They will also raise the amount held in the common debt service reserve sub-fund and pay costs of issuance and bond insurance.
Specifically, the Series 2024AB bonds will support airfield and terminal improvement projects, and site preparation and construction work for terminal projects like Satellite Concourse 1 and the O'Hare Global Terminal.
"This bond deal is just another positive step in the implementation of the [O'Hare Terminal Area Plan]," said Kevin Bargnes, director of communications for the Chicago Department of Aviation. "TAP creates significant efficiencies for the airlines and traveling public, which will improve the passenger experience and meet forecasted demand."
Among other things, the plan calls for the enlargement of passenger processing areas and hold rooms; improvements to international-to-domestic connections and baggage handling; and new facilities that will cut utility and maintenance costs.
Ahead of the deal, the airport's revenue bonds were affirmed at A-plus by Fitch Ratings, Kroll Bond Rating Agency and S&P Global Ratings. They all assign stable outlooks.
Fitch cited Chicago's strategic location and its status as a hub for both American Airlines and United Airlines, as well as the airport's strong air trade service area. But it also noted risks from O'Hare's large capital programs, which will cost nearly $12 billion over the next decade, about $9 billion of that bond financed.
Leverage will likely stay below 13x during the construction period and should average 11x from 2024 to 2035, the rating agency said.
"The airlines' preapproval for substantial elements for the overall capital program and the long-term residual airline agreement provide mitigation to these credit limitations," Fitch said in its rating report.
"[United and American] seem to have put aside their disagreements about these capital plans, because this modernizing and expansion of the airport has been around for eight years," said Howard Cure, partner and director of municipal bond research at Evercore, a New York-based wealth management firm. "This is a huge capital program, and there are definitely risks involved. You want to make sure this is going to be done on time and on budget, because the cost of this is going to be passed on to passengers."
KBRA noted the airport's economically diverse air trade area and favorable liquidity, "particularly for an airport that employs a residual-based cost recovery mechanism." But it cautioned that the scale and complexity of the airport's capital programs mean its leverage is only likely to grow over time.
S&P pointed to a healthy enterprise risk profile, an "adequate" financial risk profile and a positive holistic analysis adjustment.
"Our opinion is based on our forward-looking view of the airport's improving metrics and rate-setting flexibility following a period of materially weakened activity and slower passenger traffic recovery relative to that of other large hubs," S&P credit analyst Kevin Archer said in a statement.
Cure contrasted the O'Hare approach with what's going on at New York City's airports, where terminal improvements are happening through
"In Chicago's case, because they're coordinating the capital projects and the airport itself is securing the debt, the city maintains the gate controls, which is important," said Cure. "So they can have a lot of say in which airlines are using the system, as opposed to when you have a P3… it may not be as efficient."
However, "there have been delays and cost overruns with Chicago's system," Cure noted.
"United and American have to get really involved with the construction aspects of this," he added. "The thing about construction is, it's very disruptive… It's more inconvenient for passengers. They're making major capital improvements while still trying to operate an airport."
In addition to the Series 2024A and 2024B bonds, the city plans to issue a second double series of airport revenue bonds this year to refund outstanding senior lien bonds, and a third double series of bonds to fund more capital projects.
According to an online investor presentation, $7.8 billion of capital program project costs will be funded by bonds in the coming years, on top of the $1 billion in this week's deal.
All of O'Hare's existing debt is fixed-rate, with no derivative exposure. And over the next decade, the airport expects to pay down $3.1 billion of outstanding bonds.
The airport said in the presentation that its revenues and traffic are projected to grow in coming years, with a compound annual growth rate in enplanements of 2.7%.
Cure noted that while
O'Hare had 36.6 million enplanements in 2023 compared to 42.2 million in 2019.
Nationally, 2023 enplanements were up 1.6% over 2019, according to
KBRA noted that the airport has a proportionately higher share of business travelers than other airports, and business travel has returned to pre-pandemic levels more slowly than leisure travel.
More than half of the lost traffic compared to 2019 can be attributed to American — O'Hare enplanements for the airline and its affiliates were down 35% in 2023 compared to 2019. The airline has shifted focus elsewhere; according to the investor presentation, O'Hare accounted for 5% of American's scheduled seat capacity in 2023, down from 6.8% in 2019.
Its market share at O'Hare fell to 29.9% from 35%, as United's grew to 47.7% from 44.4% according to the investor presentation, which said both hub airlines are adding capacity there this year.
It remained in 2023 the world's second-busiest airport by airport movements, according to
The airport said in its presentation that airline revenues went from $924.8 million in 2019 to $1.099 billion in 2023. Concession revenues per enplaned passenger have reached 115% of 2019 levels. But with fewer passengers, overall concession revenues were only $320.2 million in 2023 to 2019's $322.1 million.
O'Hare had $255 million in its general fund and 370 days cash on hand as of Dec. 31, 2023. And its $800 million credit agreement note program "serves as an additional source of standby liquidity," the presentation adds.
The Airline Use and Lease Agreement gives the city some leeway in how it delivers on its capital program, and so the city has prioritized construction of the Satellite 1 concourse and the O'Hare Global Terminal over the Satellite 2 concourse, the airport said in its presentation.
All told, O'Hare's capital projects are expected to raise the number of gates at O'Hare to 220 from 203.
The airport says its capital project costs are currently estimated at $11.2 billion, but there are also $744.9 million of previous projects approved under prior agreements.
Cure said he will be watching how the two series of bonds — one subject to the AMT and one not — will do in the market. He pointed out that there could be changes to who is subject to the AMT if Congress
"The maturities are very similar," he said of the bonds pricing today. "And they're pretty close in size. So it'll be interesting to see how they price differently. Usually you get a premium [on the bonds] for the AMT."
Investors may take a cautious approach to these initial series of bonds, Cure said.
"If you're concerned about all the factors I mentioned, you might want to wait to see if they're on time and on budget before you buy any additional airport bonds," he said.
"Because this is not their last time coming into the market, so you're going to get another chance."
