Despite the parlous state of local and regional government finances in 2011, airport bond ratings and bond issuances remained strong, and the outlook for next year remains positive, industry experts say.
While airports in the U.S. have issued $7.7 billion in bonds through the end of this year, this is below the annual average of approximately $10 billion, says D.J. Mehigan, Managing Director of investment bank Morgan Keegan. The issuances, however are in line with and slightly above the 35% downturn in total 2011 negotiated municipal issuance, he says.
This could change, though, if the airline industry suffers unforeseen setbacks. Continuing fuel price volatility could crimp airline revenues, forcing further cutbacks in capacity. “Fuel prices would affect airlines directly and if airlines cut capacity because of fuel prices, it would affect airports indirectly,” says Liying Gu, Airports Council International-North America’s senior director of economic affairs and research.
A weakened economy could also hurt airline tickets sales, notes Fitch Ratings, which also warns that the continually delayedReauthorization bill could again force the agency to shutdown as it did in 2011 and so lose million of dollars in in taxes, including airport fees.
How the AMR Corp. bankruptcy filing will affect airport bonds remains to be seen, analysts say. Dallas/Fort Worth and Chicago O’Hare international airports will probably retain their strong ratings, but this has less to do with AMR and more to do with a bias this among rating agencies toward large hubs over smaller airports.
Due to continuing high usage and traffic, hub airports tended to keep their strong credit ratings in 2011, and this is unlikely to change in 2012, Fitch Ratings says.
A trend from this year that is expected to continue into 2012 is a predilection to refinancing. This year, says PiperJaffray analyst Jason Simmon, 78% of all bond issuances were for refinancing against 22% for new capital, in sharp contrast to 2010, when the majority of bonds issues raised new debt.
Last year also was an outlier, with more than $18 billion in airport bond issuances, although this was due in part to an exemption from the Alternative Minimum Tax (AMT). Congress has not renewed the tax holiday, and there is little appetite on Capitol Hill to do so, says Deborah McElroy, ACI-NA senior vice president for policy and external affairs. “ACI-NA continues to push very strongly for reinstatement of the AMT waiver for private-activity bonds,” she says. “We have clear evidence from the 2009 to 2010 time period that this relief provided economic activity and created jobs.”
But extending the AMT waiver means less government revenue, which is a tough sell on the Hill, McElroy concedes. “Unfortunately, there doesn’t appear to be any legislation pending with changes to the tax code.”