Chicago O’Hare heads into market on upgrade tailwinds

Chicago-owned O’Hare International Airport heads into the market next week with $1.77 billion of across-the-board A-plus-rated paper after two upgrades.

The city will sell the bonds in four series offering a mix of paper subject to the alternative minimum tax and non-AMT with $1.3 billion being raised for projects and the remainder refunding outstanding debt for near-term savings without extending the final maturity.

Fitch Ratings and S&P Global Ratings both lifted O’Hare’s general airport bond rating to A-plus from A last week and assigned a stable outlook. S&P also raised the city’s passenger facility charge rating to A-plus from A. Kroll Bond Rating Agency affirmed its A-plus and stable outlook.

“It’s a great credit for us to sell,” Chicago Chief Financial Officer Jennie Huang Bennett said in an interview with reporters. “As a part of the marketing what is really important for us to relay to investors is that O’Hare is just a very competitive airport.”

The city timed the deal to allow for current refundings as paper becomes callable in the fall, having the summer passenger travel numbers in hand, and following the city’s annual investors’ conference earlier this month that allowed for some pre-marketing.

The deal should go down easy with investors despite the uptick in overall airport borrowing so far this year that rebounded from a nosedive early in the pandemic.

New money borrowing through July of $10.8 billion was up 46% from the same time last year, according to CreditSights. August airport issuance could hit $4.7 billion, the largest single month since 2010.

“O’Hare is one of the most well regarded credits within the airport sector of municipals, and this sector has recovered both fundamentally and within the marketplace. So this issue should be relatively straightforward and it’s pricing and spread to MMD is clearly defined in a range of top hub airports around the country,” said John Miller, head of municipals at Nuveen.

The 10 year in a non-AMT series in the city’s last O’Hare GARB sale in 2020 priced at 1.46% yield and 63 basis point spread to the triple-A benchmark but is currently evaluated at a 39 bp spread, according to Refinitiv.

CreditSights said O’Hare’s spreads to Bloomberg’s BVAL hit a near-term low of 22 bps late last year before widening along with the market this year to the 70 bp range but this month was trading at a 58 bp spread. The widening stems in part from the surge in airport borrowing which has seen airport bond spreads grow by 18 bps compared to the general revenue bond index at just 3 bps.

The airport hasn’t seen a rating upgrade since 2016 as borrowing ticked up to fund major expansion and runway and terminal makeover plans. It was threatened with a potential downgrade by all four rating agencies that assigned a negative outlook as the COVID-19 pandemic crippled air travel, but O’Hare’s ratings held firm as an infusion of federal relief propped up finances.

“The airport’s continued recovery in air travel demand that we believe is sustainable and demonstrated financial resiliency and prudent management actions aided by federal operating grants, as well as the expected return to fully residual operations as remaining COVID-19 federal relief operating grants are substantially applied through 2022, contributed to the rating change,” S&P analyst Joe Pezzimenti said.

The airport has about $8.5 billion of parity debt.

O’Hare’s upgrade was one among a handful from S&P doled out over the last month including Cleveland Hopkins International Airport, raised to A from A-minus, the Indianapolis Airport Authority, lifted to A from A-minus, and the Omaha Airport Authority, upgraded to AA-minus from A-plus.

S&P also raised the Minneapolis-St. Paul Metro Airports Commission’s senior-lien bonds to AA-minus from A-plus and junior lien to A-plus from A ahead of a $386 million sale this week.

S&P in July said in a special report that updated U.S. transportation infrastructure activity estimates show air travel normalizing. It placed a positive outlook on the sector last November.

Chicago’s completion last year on time and on budget of the $6 billion O’Hare Modernization Program that revamped the runways along with the progression to date on the Terminal Area Plan to makeover passenger terminals contributed to the upgrade, Fitch said.

O’Hare holds a central spot in the national air traffic grid, handling 54 million passengers last year, according to Airports Council International, making it fourth-busiest in the U.S. (and the world). Passenger traffic was still 34% below the last pre-pandemic year of 2019.

It benefits from a rare dual hub status with United Airlines accounting for 42.9% of passengers and American Airlines 37.8% and strong demand drives a healthy origination and destination market.

The upgrades come despite $9 billion of borrowing expected through 2029 that will drive up the airport’s debt load to fund $12 billion in escalated dollars of airline-approved capital program that includes the capital improvement program and the initial phase of terminal redevelopment. Federal funds and passenger facility charges help round out the overall financing plan.

The borrowing will drive up the cost per emplaned passenger – a key metric in analyzing airport credits – to $40 in 2032 from $28 this year, S&P said.

The airlines’ “preapproval for the overall capital program and the long-term residual airline agreement provide mitigation to this credit weakness,” Fitch said.

The airport managed through the pandemic with $294 million of CARES Act aid, $69 million from the later CRRSA Act, and $289 million in ARPA relief. About $257 million remains to help smooth out this year and next.

Air traffic remains in recovery mode ending last year at about 64% last year of pre-pandemic levels with the final month at about 80% and June at 82%. The airport has maintained a strong liquidity position of about 400 days cash on hand.

The city expects to complete the makeover and expansion program in 2032, which is beyond the original 2030 original date due to construction timing, Bennett said.

“What O’Hare has done masterfully is manage through some of those increasing inflationary pressures” with early construction purchases and will “aggressively manage the program,” Bennett said.

Moody’s Investors Service, which was not asked to rate the bonds, affirmed its A2 rating and stable outlook in November when it revised the outlook to stable from negative.

JPMorgan, Cabrera Capital Markets, and Citi are senior managers on the O’Hare deal. Frasca & Associates LLC and Public Alternative Advisors LLC are advising. Katten and Neal & Leroy LLC are bond counsel.

Wells Fargo Securities and Jefferies are senior managers on the sale for the Minneapolis-St. Paul International Airport. The subordinate bonds also carry an A-plus rating from Fitch.