DALLAS – After the largest bond sale in its history, Denver International Airport expects a rapid roll-out of its five-year capital plan to expand and update the 23-year-old aviation hub.
“When you combine the growth with our aging infrastructure, now is the time to begin significant improvements to the airport that will increase capacity, enhance safety and improve the passenger experience,” airport chief executive Kim Day said after the bond sale.
The City and County of Denver will close Aug. 28 on $2.53 billion of bonds priced last week through book runner Bank of America Merrill Lynch & Co. The total was boosted from the planned $2.28 billion based on strong demand.
The offering included $2.3 billion of Series 2018A subordinate revenue bonds subject to the alternative minimum tax and $200 million of Series B non-AMT debt.
The deal was rated A2 by Moody’s Investors Service, A by S&P Global Ratings and A-plus by Fitch Ratings. All three ratings agencies assigned stable outlooks.
“The stable outlook is based on our expectation that higher revenue origination and destination enplanements will continue to grow and will improve financial performance at the airport, balancing higher leverage and construction risk associated with the capital plan,” Moody’s analyst Earl Heffintrayer wrote.
Day noted that the underwriter’s syndicate included 11 firms with both local Denver-based and minority owned firms represented. The issue drew 146 investors, with about $40 million going to retail investors.
Total interest cost for the issuance was 4% with coupons ranging from 3.5% to 5.25% and the yield from 1.6% to 4.07%, officials said.
Projects to be funded by the proceeds include a $992 million Gate Expansion Program that adds 39 gates due to increasing air service demand by the airlines. Gate capacity will grow by 30%.
About $450 million goes toward the Great Hall Project, a redevelopment of tent-roofed Jeppesen Terminal that will consolidate underused airline ticket counters, relocate the security screening areas and update the shopping and dining services.
Other projects include restroom renovations and updates to the automated train that connects the concourses and terminal.
An additional $300 million in proceeds will refund the airport's series 2017C subordinate bonds, which the airport issued as an interim financing vehicle. The airport may apply proceeds from the series 2018B bonds to refund the variable rate series 2007F1 and 2007F2 bonds and any related swap termination fees. The series 2018 bonds will carry fixed interest rates.
Since 2008, Denver has issued more than $9 billion of bonds, with the most issuance prior to this year coming in 2008 when it sold $1.45 billion. It sold the least amount in 2014 when it issued $16 million.
Under construction since September 1989, the $4.8 billion Denver International Airport opened to passengers on Feb. 28, 1995, following months of delays caused by an automated baggage system that failed to operate as promised and was later scrapped.
Significant planning under the administration of Mayor Federico Pena began in 1988 when the city agreed with Adams County to acquire a 53-square-mile site for the new airport.
At that time, the cost of the airport was estimated at $1.34 billion. In May 1989, voters in Denver approved a plan to build Denver International Airport. Site preparation and construction began in September 1989. The first formal construction budget, set at $2.08 billion, was produced in May 1990. Financing for DIA has included about $508 million from the Federal Aviation Administration in grants and facilities and equipment funds, and about $3.8 billion in bonds.
Shortly before the opening of the airport, Continental Airlines, one of the original signatories on the new facility, announced that it was closing its Denver hub. That left only United Airlines as a hub carrier.
Despite the rocky start, DIA (now known by its FAA designation as DEN) began to grow steadily, surpassing the traffic of the retired Stapleton, which was redeveloped into a mixed-use community.
Among the major milestones in recent years was the arrival of a commuter rail line operated by the Regional Transportation District connecting the airport to downtown Denver. The train station adjoined a new Westin airport hotel.
Under the current $3.9 billion capital plan, airport officials are collaborating with private developers to remodel the terminal. The airport issued $200 million for its private partners last November.
The P3 coalition known as Great Hall Partners includes Spain's Ferrovial Aeropuertos with Saunders Concessions and Magic Johnson Enterprises/Loop Capital. Work on the project began in July.
The Great Hall Project represents Ferrovial’s first U.S. airport project. The company has invested in 33 airport projects around the world since 1998. Its subsidiary Cintra has worked on the airport projects and has several toll highway projects in the U.S.
The P3 model allowed the airport to leverage private sector capital, thereby transferring risk, airport officials said. The arrangement also allows shorter project delivery time at a lower cost and provides a guaranteed price and schedule.
Day said remodeling of the 22-year-old terminal is an important step in improving efficiency and keeping up with passenger growth. Passengers often experience the security checkpoint as a chokepoint.
“Although DEN remains the country’s youngest commercial airport, no one could have predicted how security and technology would fundamentally change the aviation industry and passenger processing over the last two decades," Day said. "By investing in this project, we will prepare DEN for the future: enhancing security, increasing capacity, updating aging systems and elevating the overall passenger experience.”
Following the issuance of the series 2018 subordinate-lien bonds, the airport will have approximately $5.9 billion in bonds outstanding, including $2.8 billion or 47% in senior lien debt and $3.1 billion or 53% in subordinate lien bonds.
Before this deal, the airport had about $4 billion in total debt outstanding, according to S&P. The existing debt portfolio is 77% fixed rate, 21% variable rate that has been synthetically fixed via interest rate swaps, and 2% unhedged variable rate.
In 2017, Denver International ranked as the fifth-busiest airport in the U.S. by passenger traffic, according to preliminary 2017 data from the Airports Council International. The 30.7 million enplanements in 2017 were 5.4% higher than 2016's 29.1 million.
With the continued growth, 2018 is expected to be the fifth consecutive year of record enplanement levels, and eighth year of the past nine with a new enplanement record set.
“Supported by its strong underlying demand base, DEN's enplanement levels demonstrate what we believe is a material degree of resiliency, with enplanements falling just 2% in 2009 at the height of the Great Recession, and quickly rebounding to post another record year in 2010,” S&P analyst Andrew Bredeson noted.“From 2008-2017, enplanements grew at a compound average annual rate of 2%.”
Of the 23 airlines serving the airport, United Airlines and its affiliate United Express remain dominant in the Denver market after 25 years. United's share of total enplanements equaled 42% each of the past three years. Denver is United Airlines' fourth largest hub by enplaned passengers, and second largest by domestic enplaned passengers.
Southwest Airlines has been the second busiest airline at the airport each year since 2012. Southwest captured about 30% of total enplanements in 2017, up from 29% in the two preceding years.
Frontier Airlines, the third largest carrier has seen significant fluctuations in passenger counts over the past several years, partly due to alterations to its business model, S&P noted. However, the airport on which Denver-based Frontier’s business plan was based, remains Frontier's largest hub.
