Kansas City heads into the market Wednesday to wrap up financing for its $1.5 billion replacement of the Kansas City International Airport terminals.
The deal selling through the Kansas City Industrial Development Authority offers $478 million series of airport special obligation paper subject to the alternative minimum tax and $57 million of non-AMT airport special obligation bonds.
The new money carries a final maturity of 2057 with interest payments capitalized through 2023. Principal repayment begins in 2025.
A $72 million taxable series under the same credit will refund 2013 general airport revenue bonds for savings taking out remaining GARB debt. The final maturity is not being extended.
In response to the pandemic, the airport revised its terminal financing plans to include the reduction in $60 million of pay-as-you go passenger facility charges. The airport team also decided to include the 2013 refinancing as part of the deal.
The finance team decided to use $30 million of the $60 million for a runway project that will serve as the primary runway once the overhauled facility opens and then “with the reduction in enplanements from COVID, we eliminated the remaining $30 million pay-go and chose to completely bond fund the project,” said John Green, the airport’s chief financial officer.
The bonds are secured by payments from the city to the authority under a financing agreement subject to the annual appropriation by the city council with airport revenues serving as the source of repayment. Repayment is built into the airport’s lease agreement with the airlines.
The new money follows the city-owned airport’s
A 39-gate terminal with room to expand will replace two operating terminals and one that has already been demolished.
The horseshoe terminal layout established in 1972 failed to accommodate the larger aircraft, routes, and security requirements of current air travel. The city and airlines agreed in 2016 to replace it all with new terminal, and voters approved it in 2017.
Morgan Stanley is running the books. Hilltop Securities and Moody Reid Financial Advisors are advising the airport. LeighFisher Inc. is airport consultant.
While the airport’s revenues have plummeted due to the pandemic’s impact on travel, the airport said it has not had a ripple effect on the project.
“To date, the construction is on schedule and at or below budget,” the airport reports in an investor presentation. Demolition and foundation work has been completed and opening is projected for early 2023.
The city turned to a public-private partnership model to lead the design, construction and financing, hiring Edgemoor Infrastructure & Real Estate LLC after a competitive selection process. After exploring its financing options settled on a more traditional airport bond financing.
There was one hiccup. Voters had not approved a general airport bond sale as would be required under state law, so the city and airport turned to a special obligation security structured with some similarities to a general airport bond.
The pandemic’s impact drove a one-notch downgrade to A-minus from A by Standard & Poor’s, which assigned a negative outlook. The downgrade resolved the CreditWatch placement in August with negative implications.
"The rating action and negative outlook reflect our expectation that activity levels” at the airport “will be depressed or unpredictable, or demonstrate anemic growth due to the COVID-19 pandemic and associated effects outside of management's control," said S&P analyst Kevin Archer. "In our view, the severe drop in demand has diminished MCI's overall credit quality and will likely pressure financial metrics relative to historical levels.” MCI is the formal air traffic code for the airport based on its original name of Mid-Continent International Airport.
The rating agency placed airport ratings on the watch with negative implications in August as it reviewed individual credits for the pandemic and recession’s impact on traffic levels, expected financial performance metrics, and overall credit quality. It has downgraded 78 ratings representing 62 issuers with airports accounting for 63% of the rating hits, 20% airport special facilities, 14% parking, and 3% transit.
“This seems to be consistent with what S&P has done on other airport issues,” Green said of the downgrade.
The airport suffered a 13.3% decline in passenger levels to about 5.17 million for fiscal 2020 ending April 30. The worst impact came in April with a 96% drop compared to April 2019.
While the declines remain steep they are recovering with declines of 89% in May, 78% in June, 71% in July, and 68% in August. The average number of daily departures in August was 86, compared to 160 in August 2019. Non-airline revenues from parking and concession took deep hits early in the pandemic and remain depressed over 2019 but have been improving.
The airport is stressing its strong liquidity position of $140 million, providing coverage of 598 days, as of the end of September. The airport is receiving $43.3 million of relief from the CARES Act signed March 27 that provided $100 billion in airport aid.
The airport has so far used $14.2 million including $5 million for the September debt service payment on its 2013 bonds and expects to use the remaining funds to continue to strengthen “liquidity and help withstand decreases in revenues during fiscal year 2021 and 2022,” the airport reported in the presentation.
The airport forecast anticipates a recovery to fiscal 2019 passenger levels between 2025 and 2027 based on recovery scenarios outlined by the rating agencies.
Fitch Ratings affirmed its A rating and negative outlook and Moody’s Investors Service affirmed its A2 rating and stable outlook.
“The negative outlook reflects the substantial adverse impact on operating and financial performance due to the coronavirus and related containment measures, along with uncertainty around the timing and magnitude of recovery,” Fitch said.
“The stable outlook reflects Moody's view that air travel will recover substantially by 2023 and that the enterprise's available liquidity and low annual debt service requirements through fiscal 2024 provide headroom during the worst of the disruptions caused by COVID-19,” Moody’s said.
The CARES Act “really was a lifeline” for airports and the transportation sector overall with future relief “still unknown” as negotiations have long been stalled as differing messages come out of Washington, D.C., S&P transportation sector lead Kurt Forsgren said during a public finance webinar earlier this month. “We are really looking at these long term sustainable business profiles as their key to long term credit quality,” Forsgren said of rating reviews.
Kansas City's is the latest among a series of Midwest airport downgrades.
In September, S&P cut Chicago-owned Midway International Airport’s rating one notch to A-minus from A due to depressed volume as passenger levels fell 53.6% from January through June and the unknowns of the timing of a recovery. The outlook is negative.
The rating agency had affirmed Chicago's larger O’Hare International Airport ahead of a
S&P also in September cut to A-minus from A the Indianapolis Local Public Improvement Bond Bank’s bonds issued for the Indianapolis Airport Authority. IAA has $880 million in debt outstanding, including $152.8 million in variable-rate debt outstanding held in five separate series directly purchased by a group of banks.
S&P in September lowered St. Louis Lambert International Airport’s rating to A-minus from A and assigned a negative outlook to reflect its “expectation that activity levels at STL will be depressed, unpredictable, or demonstrate anemic growth due to the COVID-19 pandemic and associated effects outside of management's control," said analyst Scott Shad.
S&P in August cut Minneapolis-St. Paul Metro Airports Commission's senior airport revenue bonds issued for the Minneapolis-St. Paul International Airport to A-plus from AA-minus and its subordinate bonds to A from A-plus and assigned a negative outlook saying the pandemic’s impact will likely pressure financial metrics relative to historical levels.
S&P also in August downgraded to A-minus from A Wayne County, Michigan Airport Authority senior-lien revenue bonds issued for Detroit Metropolitan Wayne County Airport and the junior bonds to BBB-plus from A-minus and assigned a negative outlook over the depressed volumes at the airport and unknowns beyond management’s control on the air travel recovery.
