SAN FRANCISCO — Officials at Norman Y. Mineta San Jose International Airport will ask the San Jose City Council to approve a nearly $836 million revenue bond sale at its Aug. 14 meeting. The debt would be issued by the city and cover the lion’s share of a three-year, $1.3 billion expansion program — a plan that was scaled back from $4.5 billion after the Silicon Valley economy ran into trouble earlier in the decade. Scaling back the plan has turned out to be a good thing, according to David Vossbrink, communications director at the airport. “The plan approved a few years ago turned out not to be in sync with the reality of today,” he said. “Now we can build an airport that’s far more functional and convenient for passengers and airlines alike.” A second phase could follow with a project list based entirely on demand from airlines and passengers. “One of two measures could trigger this, and we expect it will sooner rather than later,” Vossbrink said. “When daily flights go from today’s 189 to 217, or when annual passenger traffic goes from around 10.6 million annually to 12.2 million per year.” Either of those thresholds could prompt the airport to begin design work on an additional southern concourse for the forthcoming Terminal B. Terminal B is a brand-new structure that would replace what is now called Terminal C. The $1.3 billion plan also includes improvements to Terminal A, plus parking and road-related enhancements. The architectural engineering firm of Hensel Phelps is managing the entire project under a design-build contract signed with the airport. “We’re rebuilding and renovating our airport to take care of the passenger projections we see in the future. But we’re not looking to a return of the extreme boom time from 1999 through 2000. If you take out those peaks, you’ll see a much more orderly growth trend,” Vossbrink said. The negotiated sale is expected to take place Aug. 22. Lehman Brothers is running the books and Orrick, Herrington & Sutcliffe LLP is bond counsel. “We moved it back a week” from an original sale date of Aug. 14, said Julia Cooper, deputy director of finance for San Jose, which sells bonds on behalf of the airport. “We have a long lead time to get items onto our City Council agenda.” Cooper said a decision on insurance could occur within the next week, and a draft official statement will be available in time for the council meeting. “We’re still working on the disclosure portion of the official statement,” she said.
The transaction consists of four series, a combination of new-money and refunding bonds with some of the debt subject to the alternative minimum tax and the rest tax-exempt. “Wherever we have the terminal area improvements, there is private activity, thereby causing the need for AMT debt. Roads and other public infrastructure are tax-exempt,” Cooper said.The largest portion of the deal, Series A, consists of just over $589 million AMT bonds generating new money. Series B has over $187 million new-money non-AMT bonds. Series C consists of almost $51 million non-AMT refunding bonds and Series D has over $9 million of AMT refunding bonds. The refundings are market driven, Cooper emphasized. Standard & Poor’s rated the bonds A with a stable outlook, affirming that rating for all of the airport’s outstanding revenue bonds. San Jose had $494.9 million of outstanding general airport revenue bonds as of June 2006. “Our general obligation rating for the city is AA-plus. With transportation revenue bonds, there’s generally a lower ceiling on the rating because of the demand profile, whereas the tax bases provide a more stable revenue source for the city,” said Mary Ellen Wriedt, an analyst at Standard & Poor’s. On July 12, Fitch Ratings revised its outlook on the airport to negative while affirming its A-plus rating on the facility’s outstanding debt and applying it to the forthcoming deal. The outlook revision “is a reflection of the continued enplanement volatility coupled with the large-scale and costly capital improvement program, which is at 30% design on certain elements,” Fitch analyst Jessica Soltz Rudd said. Karen Ribble, another analyst at Fitch, stressed that the revenue bond rating applies only to the airport. “Certainly the city’s management of its own debt as well as the airport is a positive,” she said. “We rate the city AA-plus for its general obligation bonds.” Moody’s Investors Service has yet to release a formal rating report, but the airport’s deputy director for finance and administration, Terri Gomes, said she expected the agency to affirm its rating of A2 with a stable outlook. Moody’s rates the city’s GOs Aa1. Gomes said she didn’t think that Fitch’s outlook revision to negative would impact the bond sale.“We’re still going forward with the program. Even though Fitch knows the projections on the feasibility report are tentative, they want to see how enplanements are working out for us. They have been flat and we think they will grow,” Gomes said. She said the airport now has 5.3 million enplanements for the current fiscal year, but expects to see that figure grow at a compound annual growth rate of 2.5% over the 10-year capital improvement program. The airport plans to sell about $314 million of commercial paper over the course of three years, most of which will finance a rental car facility, a project that will get some funding from the August bond sale. This financing officially became possible last week when Gov. Arnold Schwarzenegger signed a bill specifically authorizing San Jose International Airport to collect rental car fees. “The new state law for customer facility charges will allow us to collect that fee three years sooner than we had previously planned, so that would be part of the expansion,” Gomes said.Additional funding for the project could come from Federal Aviation Administration’s airport improvement program grants estimated at $54 million. “Sometimes, in order to get the grants, you have to spend the money first and then get reimbursed,” Cooper said. The airport expansion will use about $120 million of pay-as-you-go money, or revenues generated by the facility. Debt service for the forthcoming bond issue will draw upon lease revenues, including passenger facility charges and charges for use of non-airline airport facilities. Gomes said that 40% of the money for debt service will come from sources outside of the airlines. Cost per enplanement now runs about $6.89 but will rise to $14.26 over the 10-year program, “which is still lower than what’s projected for other airports in the region,” Vossbrink said. The airport’s passenger facility charges are collected at the federally mandated cap of $4.50, but could rise as a pending FAA reauthorization would allow. “Different proposals under discussion now could increase the PFC to as much as $7.50, and it’s possible Congress won’t increase it at all,” Gomes said. The Santa Clara Valley Transportation Authority and the California Department of Transportation have completed work on expanding highway access to the airport, with the help of grant anticipation revenue vehicle debt. “The city was instrumental in releasing Garvee bonds to get that advanced,” Vossbrink said.The VTA has future plans for a bond- and tax-financed people mover that would connect with an existing light-rail system in downtown San Jose by 2018.
