Denver - Standard & Poor's Corp. dumped Denver International Airport's revenue bonds into the junk category yesterday after expressing discomfort with the indefinite delay of the airport's opening.
The is the second downgrade for the beleaguered airport in less than two weeks. Last week Moody's Investors Service lowered its rating to conditional Baa from conditional Baa 1.
Prices of Denver airport bonds went into a tailspin, losing most of the altitude gained since the market for the bonds stabilized late last week. Traders said yields on some maturities rose by as much as 35 basis points. Trading was sporadic, market players said, but added that it was difficult to judge whether to blame the long bond's one-point decline or the Standard & Poor's downgrade.
The rating agency downgraded more than $3 billion in Denver airport system revenue debt from BBB to BB, including $2.7 billion associated with Denver International Airport.
The rating agency said that the downgrade was prompted by the fourth delay of the airport's opening that resulted from continuing problems with the $193 million automated baggage system.
Institutional bondholders said the fact that other rating agencies still rate the debt investment grade allows them and others to own the debt. Some said they were surprised while others believed Standard & Poor's warning last week that the junk downgrade would occur.
"We felt uncomfortable saying it was investment grade when the city couldn't say when the airport would open or couldn't even tell us when they would know when the airport would open," Standard & Poor's director Todd Whitestone said in an interview.
Whitestone said the rating agency's big fear is the uncertainty involving the baggage system. Try as they might to dissuade Standard & Poor's from downgrading the bonds to junk during a meeting in New York City Tuesday, city officials had no answers to numerous questions about the esoteric baggage system and its complex set of computer operating software that runs it.
"We kept asking them about the baggage system, how it got to this point and what can they tell us about the length of time it would take to get it running. They just didn't have the answer," Whitestone said.
In the Moody's downgrade last week, the rating agency cited Denver's managerial deficiency. Also last week, Fitch Investors Service, which rates the bonds BBB, placed the credit on Fitch Alert with negative implications.
Though it is widely perceived that Standard & Poor's downgraded the debt two steps, the downgrade was actually three steps. Standard & Poor's has a BB-plus rating, but it is rarely used in municipal issues, Whitestone said.
Denver officials were not pleased with the rating agency's action.
"Clearly, Standard & Poor's who distinguishes itself from other rating agencies who have maintained the airport bonds at investment grade, takes a short-term approach to the rating of Denver airport bonds," revenue manager Patricia Schwartzberg said at a press conference in Denver. "We believe the resources we have identified and our approach to solving the baggage system will lead to a successful opening."
Schwartzberg said that Denver is well under its cost cap stipulated in its agreement with airlines and that Denver has "plenty of money."
Denver has said it has $100 million in airport system reserves and another $315 million in reserves related to the Denver International issues. Updated figures from the city show that the delay will cost $33 million a month, less $17 million in monthly profits from Stapleton. United Airlines has pledged to pay $8 million a month for three months to offset the delay's cost.
But Denver officials don't know when the baggage problems will be solved. The airport has been delayed four times since October and a fifth date can't be set until the system is operating. It took Frankfurt, Germany, six years to build and debug its system, which is similar to Denver's but not as large.
Denver is searching for a consultant to try to solve the problem and city officials are hoping to come up with a more thorough analysis of the baggage system within a month.
The downgrade will hurt a refunding and partial new offering that Denver is planning for late July, Schwartzberg said. Denver plans to refund $180 million of bonds issued in 1985 with an average coupon of 8.8% and borrow more money to pay for the delay.
Schwartzberg said one scenario would be to borrow $100 million extra, enough to fund capital interest on the project for six months. The city has scaled back its capital plan for this year to $11 million in further improvements at Denver International.
On the trading front, one institutional investor in New York said the announcement was already factored in by the market, which during the last two weeks increased the yield on Denver airport bonds 60 basis points compared to the greater municipal market.
"It's almost sort of no big thing. Moody's chose not to go below investment grade. The rating agencies play this game a lot," the fund manager said.
But other fund managers were less sanguine.
"The rating downgrade did take us by surprise. I think it was an overreaction," said Peter Allegrini, a portfolio manager at Fidelity Investments.
"We feel as though it is still an investment-grade investment. Our outlook is still long-term positive. I don't think there's any reason to believe it's not a viable project."
Despite the bonds' below-investment grade credit rating, Fidelity funds can still own the securities, said Allegrini, whose Advisor high-income municipal fund contains the securities.
However, the next few days will be critical, Allegrini said, to determine whether funds that cannot hold below-investment grade securities will sell Denver bonds.
One municipal dealer said that the downgrade may have a favorable outcome for the Denver credit.
"In the very near future you don't have any jeopardy of them being downgraded again. Certainty is probably better. We can go home at night and not worry about a position being downgraded," the dealer said.
There has been some buying interest at the newer depressed levels, the dealer said.
Some investors at a high-yield municipal bond conference in New York also expressed confidence that in the long run the Denver airport would be a viable project.
"It's just too big" for it not to be successful, one conference attendee said.
Denver traders reported a $6.5 million block of 7 1/4% coupon bonds maturing in 2023 traded yesterday morning at a 7.80% yield , up about 30 basis points from last week.
In other action, $1 million of 7% bonds of 2025 traded at a 7.70% yield. The benchmark 6 3/4% coupon maturing in 2022 also attracted a bid of 7.70%. A counter offer came in at 7.65%, but the bonds were not traded. The benchmark bond reached the 7.70% level three weeks ago.
"After the initial information, it's become a non-event again. We've seen a lot of odd-lot retails for the bid," said Sam Doyle, head of municipal trading at Kirkpatrick Pettis in Denver.
"Moody's dropped it to Baa, so it's investment grade to somebody," he said. "As long as you have investment grade by one rating agency, it gives it some comfort."
