CHICAGO -- The world's busiest airport is scheduled to land in the market today with its largest refunding ever.
Chicago's O'Hare International Airport will do a current refunding of about $639 million of general airport revenue bonds issued in 1983 and 1985.
According to Walter Knorr, Chicago's comptroller, the deal is only the third bond refunding in the airport's history and by far its largest. The airport refunded $175 million of bonds in 1983 and $152 million of bonds last spring.
The bonds in today's refunding have a call date of Jan. 1, 1994. Knorr said he hopes to close the deal right before the redemption notice date, which is at the end of November.
The bonds carry coupons ranging from 7.9% to 9.6%, according to officials at Goldman, Sachs & Co., the bookrunner on the deal.
The high coupons on the bonds, coupled with an expected pricing in the mid-5% range, would give the airport a present-value savings of $150 million to $170 million, Knorr said. The savings will be passed along to the airlines operating at O'Hare in their rates and charges, he said.
Knorr said most of the debt service savings will be taken in the early years to provide relief to airlines.
The deal will probably be sold in a 60-40 combination of senior and junior lien debt, or vice versa, Knorr said.
The junior lien bonds will be insured by Municipal Bond Investors Assurance Corp., while the senior lien bonds will be sold unenhanced, Knorr said. The senior bonds are rated A-plus by Standard & Poor's Corp. and Al by Moody's Investors Service. Before the junior securities were insured, they had been rated A by the two agencies to reflect a weaker security pledge.
The senior bonds are secured with the airport's operating net revenues. After debt service on the senior bonds is met and required deposits are made to other airport funds, debt service on the junior securities will be paid.
Adam Whiteman, a vice president at Moody's, said the debt service coverage on the junior bonds is 110% versus 125% on the senior bonds.
Knorr said about $50 million of the junior bonds will consist of PARS, or Periodic Auction Reset Securities, and INFLOS, Inverse Floating-Rate Securities.
The proposed structure includes some variable-rate bonds reset at an auction every 35 days. The other side of the structure is an inverse floating-rate security that pays a higher rate of interest as the rate on the auction bonds declines. But the city's cost is fixed, as the rate on the two types of securities together always add up to the same amount.
Knorr said the derivatives will be used only if a 10-basis-point savings can be achieved. If the threshold is reached, it would mark the first time the city or the airport has used derivatives, he said.
However, low interest rates in the market yesterday made the use of derivatives less likely, according to Stuart Fuchs, a vice president and co-manager at Goldman Sachs.
Municipal market sources said yesterday that long uninsured bonds would probably be priced with a coupon of 5% to yield 5.37%, while insured securities would garner a 5% coupon for a return of 5.27%.
The junior bonds will free up debt service reserve money that the airport plans to use to buy down about $10 million of 1984 airport revenue bonds that carry 10% coupons, Knorr said.
Fuchs said institutional interest from funds and insurance companies is expected for the bond sale.
"Investors are very comfortable with the economic prospects at O'Hare," Fuchs said.
As airlines are cutting back their operations at other airports, O'Hare is experiencing historic operating levels, according to David Mosena, Chicago's aviation commissioner. O'Hare kept its title as the world's busiest airport in 1992 with record-breaking number of enplaned passengers -- 64 million, he reported. For the first half of the year, the airport was running about 3% above 1992 levels, Mosena said.
"The central location of O'Hare keeps it strong. We've not had reductions in service here," he said. "Our goal is to continue to operate more and more efficiently and keep our costs down, especially because of the current status of the airline industry."
The airport enjoys an A-plus rating by Standard & Poor's, the highest among hubs, because of its importance to the national aviation system, said Ernie Perez, a director at the rating agency.
O'Hare has kept airline charges and rates flat over the last three years, has privatized some airport services to save money, and has recently completed a number of capital projects. They include a new international terminal and a people mover system connecting long-term parking lots with terminals.
The airport has other capital improvements planned as well.
With Federal Aviation Administration approval to collect $3 passenger facility charges at O'Hare and Midway airports, the city has planned a $740 million project to improve terminals and runways and do soundproofing work, Mosena said. At O'Hare, the plan is to pay for improvements on a cash basis with revenues from the charges, while at Midway, Mosena said "a small amount" of bonding may be done using those revenues in a double-barrel approach with general airport revenues.
By early next year, O'Hare is scheduled to complete a layout plan that may call for an additional runway, estimated to cost $250 million. If approval for the runway can be obtained from the FAA and Illinois, Mosena said that revenue bonds would probably be issued.
Further down the road, Chicago will have the opportunity to move a military installation from O'Hare to another site, freeing 360 acres of land for development. The federal government has given the city until 1995 to come up with a plan to finance the move.
Mosena said that a request for qualifications for developers has been sent out for the military and other undeveloped land at O'Hare. If the military move can be held to $150 million, revenue bonds, backed by leases for the use of the land, might be issued, he said.
As for a third airport in Chicago, Knorr repeated Mayor Richard Daley's mantra that the airport is "dead, dead, dead." Daley last year killed the idea for a $10.8 billion, largely bond-financed airport on Chicago's southeast side after the Illinois Senate failed to approve an agreement between the city and the states of Illinois and Indiana for the airport. Mosena said the city is now focusing all its resources on improving the existing airports.
O'Hare will have nearly $1.7 billion of senior and junior lien bonds outstanding. The airport also has $664 million of international terminal special revenue bonds outstanding.
The co-senior manager on the deal is Morgan Stanley & Co. Co-managers are Apex Securities Inc.; Artemis Capital Group Inc.; M.R. Beal & Co.; William Blair & Co.; Carmona, Motley & Co.; Chicago Corp.; First Chicago Capital Markets; Gaean Capital Inc.; Hamilton Investments Inc.; Kidder, Peabody & Co.; Lazard Freres & Co.; Llama Co.; Mesirow Financial Inc.; PaineWebber Inc.; Pryor, McClendon, Counts & Co.; Reinoso & Co.; Muriel Siebert & Co.; Smith Mitchell Investment Group Inc.; and Dean Witter Reynolds Inc.
