DALLAS -- When Houston sold $107 million of airport revenue bonds recently, the city discussed Continental Airlines at such great length that one investment banker joked that the official statement might be mistaken for the bankrupt carrier's annual report.
Despite the amount of information provided on Continental, investors found no mention that three tax-exempt issues around the nation, totaling $127.5 million and supported by payments from the carrier, had defaulted as result of the bankruptcy -- including debt issued by Harris County, Tex. Houston is located in Harris County.
While airport finance experts agreed that the city was right not to disclose a default by the county or others, they said the case illustrates a growing dilemna for ussuers and buyers of airport bonds: How important is the financial health of the carriers that us airports, and how much disclosure is enough?
There may be good reason to ask those questions. In 1990, five airport revenue bond issues totaling $366 million went into default, accounting for 21% of $1.728 billion of defaulted bonds tracked last year by the Bond Investors Association.
"These [issues] are the kinds of things that make municipal bonds a risky investment sometimes," said Richard Lehmann, editor of the association's Defaulted Bonds Newsletter. "Sometimes bonds seem to be issued where there are obviously some risks."
Beyond bankruptcy-included defaults, the main reason for concern is a matter of simple economics: Of the 11 major carriers, only three are considered financially strong, while six have sought or plan to seek bankruptcy court protection because of troubles.
In a recent report on airport debt, Moody's Investors Service noted that, in some cases, payment of debt service may hinge on the viability of an airline.
"The hub [or connecting] facility could live or die with the air carriers themselves, because these private companies -- not the local economy -- are the primary generators of passenger traffic," the report notes. "If a dominant air carrier at a hub airport falters, another carrier might not be available or interested in replacing it."
When Houston sold its bonds earlier this month, it addressed the issue of how the loss of Continental Airlines might affect the city's two airports. The conclusion: Other carriers would replace Continental because of the strong local demand in the nation's fourth-largest city.
As for Continental's default on a $19.6 million special facilities obligation sold by Harris County, the city did not see it as relevant.
"Those are Harris County bonds. Why would we disclose it?" asked Richard Berrones, deputy director of aviation for finance and administration in Houston. "It never even came up."
That surprised one investor, who said he holds some of the defaulted Harris County bonds and city of Houston airport bonds refunded by the latest issue. Even though Harris County issued the debt to finance a flight kitchen for Continental, he said, the facility is owned by the city.
"When I read the preliminary official statement, I was surprised," he said. "It was like, oh, by the way, nobody is getting paid for these others bonds" and it did not merit disclosure.
But investment bankers and bond lawyers specializing in airport debt agreed that defaults on tax-exempt debt by separate issuers should not be disclosed.
For example, the latest Houston airport bonds are backed by revenues of the entire airport and are not special facilities bonds that, like the three defaulted issues, depend solely on Continental for payment.
"It's a question of whether any bond is dependent on one source or a broader revenue base," said a senior banker at a Wall Street firm. "In this case, whether Continental survives bankruptcy is really not that important unless you believe that no other airline would want to replace them" at the Houston airport.
Bondholders are taking note of carrier problems, prompting issuers to respond. Read most recent airport bond offering statements and you will find that a discussion of airline industry problems have become boilerplate.
In Denver, investors have purchased two-thirds of an estimated $3 billion of bond financing for a new airport in spite of continuing concerns, including the future of Continental. Bondholders say the city has respondend to their concerns.
"It's something we watch out of the corner of our eyes, but it is an issue that Denver is aware of and keeps us informed on what it means to the project," said one institutional investor. "They make sure we don't lose sleep over it."
Airport finance experts point out that while the economic health of airlines has long been an important credit factor, the recent high-debt, low-profit profile of U.S. carriers has sparked greater awareness.
"I think there's a very heightened level of sensitivity to the issues," said Lynn Goldschmidt, a bond lawyer at Hopkins & Sutter in Chicago." An airport credit is not the same as the airlines using the airport. Nevertheless, the viability of an airline using an airport is a relevant issue."