Chicago selling $1 billion in debt for O'Hare expansion
Chicago plans to offer about $1.1 billion in debt for a scaled-back expansion at O'Hare International, the second-busiest U.S. airport, a month after ending a legal battle with the hub's two largest carriers.
United Continental Holdings Inc. and AMR Corp.'s American Airlines sued the city Jan. 18 seeking to delay the O'Hare modernization program. This week's sale will help finance a new terminal complex on the western side of the airport and finish taxiways and other airfield infrastructure costing about $3 billion, mostly paid for by the airlines.
“Almost everyone who's ever flown across the country has had an experience at O'Hare,” said Richard Ciccarone, a managing director at McDonnell Investment Management in Oak Brook, Illinois. “The project reduces the travel delays. This is not just to shine up the walls but to increase efficiency at the airport.”
While the plan may improve travel through Chicago, potential investors will be scrutinizing the security of the debt, said Ciccarone, who helps oversee more than $7 billion of muni debt. United and American account for about 80 percent of travelers to O'Hare, the busiest U.S. airport by passenger traffic after Atlanta.
“Energy prices are high, and there's a question how that will impact the bond issue,” Ciccarone said.
Spread Widens
An O'Hare revenue-bond due January 2026 for the first phase of modernization traded at an average yield of 5.33 percent April 20, according to Municipal Securities Rulemaking Board data. That's 151 basis points over top-rated 15-year debt, according to a Bloomberg Valuation index. It sold at a spread of 91 basis points on April 15, 2010. A basis point is 0.01 percentage point.
Yields on top-rated tax-exempts due in 10 years fell for nine straight days through April 21 to 3.06 percent, the lowest since March 23, BVAL indexes show. Issuance touched the lowest level this year on April 21, with the Bloomberg 30-day visible supply index at $4.4 billion, the least since Dec. 30.
“It seems like there's money to be spent, the market has rallied pretty well,” said Anthony Greco, a trader at Boston- based Breckinridge Capital Advisors, which manages $13.5 billion. “Everybody's waiting for supply to pick up, but we may just see a lower year altogether.”
This week's sale, which was originally planned for early February, includes $1 billion in tax-exempts backed by a third lien on general airport revenue, and $51 million in refunding bonds backed by airline-passenger facility fees, which are federally approved charges added to plane fares to support airport improvements.
Subject to AMT
About $33 million of the refinancing will be subject to the alternative minimum tax, a levy on debt issued for projects that lie beyond the scope of the public good.
The sale is planned for tomorrow and April 27, Pete Scales, a spokesman for the City of Chicago, said in an e-mail.
Alexander Samuelson, a spokesman for Citigroup Inc., which is leading underwriters for the airport bonds, declined to comment on the sale.
American and United agreed with Chicago on a scaled-back expansion plan on March 14, allowing work to begin on a new runway and other airfield improvements, preventing an escalation of flight delays at O'Hare, according to a statement from Chicago Mayor Richard Daley, the airlines and the U.S. Transportation Department. It is one of the largest airfield modernization programs in the U.S., federal officials said.
The project “will create up to 195,000 new jobs and add $18 billion to the region's economy,” the city said in a statement March 23.
Legal Battle
American and United sued the city in January to block the sale of bonds for the original $3.4 billion expansion, arguing demand didn't justify the buildup and that Chicago didn't receive their required approval before proceeding. The city said the airlines had no veto power and that the project was important for economic growth and jobs in the Chicago area.
The price of jet fuel, one of airlines' largest costs, rose 28 percent this year through April 21, according to data compiled by Bloomberg. United Continental joined Delta Air Lines Inc. and American in cutting 2011 growth plans. United, the world's largest carrier, said March 7 it anticipates no growth in capacity this year, paring a previous forecast for a 1 percent to 2 percent increase.
O'Hare, handling about 64 million passengers in 2009, trails behind only Hartsfield-Jackson Atlanta International Airport among U.S. airports, according to Airports Council International, a trade group.
Following are descriptions of pending sales of U.S. municipal debt: