CHICAGO The move by American Airlines to seek bankruptcy protection on Tuesday raised concerns over billions of dollars of tax-exempt debt, particularly issued by airports where the carrier has a big presence.
Kurt Krummenacker, an airport analyst at Moody's Investors Service, said Chicago's O'Hare, Dallas/Fort Worth and Miami airports will be particularly watched to see if American's Chapter 11 filing will have any impact on the roughly $16 billion of general airport revenue bonds (GARBs) sold by those airports.
"They are certainly a point of concern, but we expect underlying origin and destination demand will continue to support outstanding debt requirements," Krummenacker said.
He said American, like other airlines that had filed for bankruptcy in recent years, was expected to continue to operate and pay lease rental and landing fees airports use to pay off their bonds.
As for O'Hare, American and United Airlines, the airport's two major carriers, agreed in March to a $1.17 billion plan to continue a big expansion and modernization program. Under the agreement, the airlines dropped a lawsuit seeking to stop Chicago from selling bonds for the project, which adds and reconfigures runways to help reduce delays.
"We're certainly going to be looking particularly closely at any additional debt O'Hare takes on," Krummenacker said, adding the Dallas airport was also eyeing significant debt sales in the future.
Chicago Aviation Commissioner Rosemarie Andolino said the city anticipates "minimal immediate or long-term negative impacts" resulting from American's filing.
"The city anticipates that American Airlines will continue to serve O'Hare in substantially the same manner and has been reassured that O'Hare is a critical airport in the airline's current operation and is a key hub in their future plans," Andolino said in a statement, adding that the airport did not suffer any material changes in air service or revenue as a result of United Airlines' bankruptcy in 2002.
Jeff Fegan, CEO of the Dallas/Fort Worth International Airport, said in a statement he expects the airport's revenue will remain strong and that the airport will continue with plans for its terminal renewal and improvement program and other ongoing capital improvements.
Seth Lehman, an analyst at Fitch Ratings, said airports tend to survive events like an airline's bankruptcy, noting there haven't been any defaults by rated airports.
In its bankruptcy filing, American lists nearly $1.63 billion of tax-exempt special facility revenue bonds due through 2036 and the fate of that debt will be decided in court.
On Tuesday, Standard & Poor's Ratings Services downgraded the CCC-plus rating on the airline's secured airport bonds and CCC rating on unsecured bonds to D its lowest rating, which indicates a payment default.
Unlike GARBs, which are paid off with an airport's collective revenue, special facility revenue bonds are solely the responsibility of the airline. Recent deals include $800 million of secured bonds sold through the New York City Industrial Development Agency on behalf of American for a project at John F. Kennedy International Airport in 2005 and nearly $109 million of unsecured debt issued in 2007 for the airline by O'Hare Airport.
Yields on some of those bonds shot up in secondary market trading on Tuesday.
American Airlines' bankruptcy underscores how "quasi-private payment bonds" are different from municipal debt backed by revenues and payment guarantees, said Rick Ashburn, chief investment officer at Creekside Partners in Lafayette, California.
"It comes down to the risk," said Ashburn, whose firm manages roughly $100 million for private investors, with about $60 million of it in municipal debt.
"We stopped buying anything tied to a lease," Ashburn said. "We like things that are tied directly to revenues and taxes."
Special facility revenue bonds plummeted in popularity after United Airlines defaulted on $1.1 billion of the debt when it filed for bankruptcy protection in 2002.