Denver International Airport returns to the municipal market next week to complete financing for its current capital improvement plan, boosted by a rating upgrade as it continues to recover from passenger and revenue losses due to the COVID-19 pandemic.
The $1.5 billion deal consists of $1.375 billion of senior lien bonds subject to the alternative minimum tax structured with serial maturities from 2024 through 2042 and $125 million of non-AMT bonds due in 2026 through 2042, according to the preliminary official statement. Both series have 2047 and 2053 term bonds.
Guadalupe Gutierrez-Vasquez, Denver’s cash and capital funding director, said some of the planned AMT debt could be sold as taxable bonds instead.
Denver International Airport
“When it comes down to the economics, if taxables are less expensive then we will go that route,” she said, adding that the deal will refund about $700 million of 2021 interim notes.
Senior manager BofA Securities is scheduled to price the deal on Thursday with co-managers Loop Capital Markets, Ramirez & Co., JP Morgan Securities, Morgan Stanley, and Stifel Nicolaus & Co.
Frasca & Associates is the financial advisor, with Hogan Lovells US as bond counsel and Ballard Spahr as special counsel.
“We realize we are accessing the market at a very tumultuous and interesting time,” Gutierrez-Vasquez said. “I think the credit and the story behind Denver and how successful it’s been is really kind of a testament to its leadership and the soundness of the facility and its operations, so we’re very optimistic about the sale.”
Proceeds are expected to wrap up funding for the $4.3 billion, 2018-22 capital plan, which includes the addition of 39 gates and expansion and renovation of the Jeppesen Terminal’s Great Hall.
That plan has had its share of bumps in the road, including a public-private partnership that fell apart amid the discovery of substandard concrete work in the terminal project. The P3 was terminated in 2019.
The airport, the third-busiest in the world in 2021 based on total passengers, serves as a connecting hub for United, Southwest, and Frontier airlines, with which it has agreements in place for the next 12 to 13 years.
United accounted for nearly 44% of passenger volume last year, followed by Southwest at 31.7% and Frontier at 11%.
The 53-square-mile airport’s 2021 operating revenue totaled $716.4 million, which was 17.45% less than in pre-pandemic 2019, but 21.1% higher than in 2020.
Enplanements are forecast to steadily grow through 2030 after rebounding last year from 2020’s drop. Cost per enplaned passenger, which nearly doubled to $20.01 in 2020 from $10.33 in 2019, fell to $10.60 last year and is forecast to climb to $17.89 in 2025.
“The market looks pretty favorably at Denver,” said Howard Cure, director of municipal bond research at Evercore Wealth Management, adding that days cash on hand is “very strong” so the airport should continue to do well.
CreditSights said a dearth of non-AMT bonds in the market could generate outsized demand for those DIA bonds, while the AMT bonds would not fare as well due to a limited pool of buyers and the size of the series.
“We view Denver as a core revenue bond holding and we expect demand to be strong for the non-AMT series,” a CreditSights report on Friday said. “The AMT series, particularly on the long end, could come cheap.”
The report also noted that debt service coverage on senior bonds is projected to rise to 3.9 times this year from 3.7 times in 2021, but falls to 2.1 times by 2025. DIA used $269 million in federal coronavirus aid for debt service in 2020 and 2021.
Ahead of the sale, Moody’s Investors Service raised the senior revenue bond rating to Aa3 from A1 and upgraded subordinate revenue bonds to A1 from A2, affecting about $5.2 billion of outstanding debt.
“The ratings upgrades reflect the airport’s improved market position that began before the pandemic and has been maintained with the strong recovery in traffic to date,” Moody’s said in a statement.
Earl Heffintrayer, a Moody’s analyst, said DIA has some of the best demographics for travel.
“It skews young, it skews educated, and it skews high median family income,” he said. “It’s for those reasons we also think that while our forecast is not for a recession, if there is economic slowing, Denver should still be able to sort of ride those strengths and outperform during downturns, which they have following 9/11 and following the global financial crisis.”
Moody’s said that the greatest risk for the airport is cost escalation for the next capital plan, noting a subsequent upgrade is unlikely “until the plan is complete and no additional large capital projects are envisioned.”
The 2023-27 plan is estimated to cost $2.9 billion of which $2.157 billion is to be financed with bonds.
S&P Global Ratings, which has had a positive outlook on the airport’s A-plus senior lien and A subordinate lien bond ratings since October 2021, said it could upgrade DIA within the next 12 to 18 months.
”We could raise the rating if financial results demonstrate (the airport’s) debt service coverage and debt metrics will either meet or closely approach pre-pandemic levels–and be sustained at that level,” S&P analyst Andrew Bredeson said in a June 21 report.
That report cited the airport’s recovery in passenger volume “with enplanements exceeding both national averages and our baseline expectations, partly reflecting the stronger recovery in domestic versus international travel, as well as (the airport’s) importance in the route networks of its three largest carriers — which together represent 87% of total enplanements.”
It added that the airport’s recovery trend, “extremely strong” market position, and strong liquidity mitigate factors such as 2021’s financial performance lagging pre-pandemic levels and a growing debt load.
Fitch Ratings, which affirmed the airport’s AA-minus and A-plus ratings with a stable outlook, said successful cost management and execution of the airport’s capital program could lead to an upgrade.
The bonds were part of a $3.98 billion authorization for 2022 approved by the Denver City Council last month that also included possible refundings of outstanding airport bonds callable in November and $865 million of new debt for the next capital plan.
“That’s a component we may be looking at later on in the year depending on the project’s readiness, interest rates, and how rapidly the airport spends the funds that we are going to be securing through the current transaction,” Gutierrez-Vasquez said.
DIA was last in the market in October 2020 with a $629 million bond refunding to ease its near-term debt service burden and terminate some swaps.