Los Angeles International Airport’s (LAX) USD 758.9m bond deal, expected to price tomorrow (27 January) has sparked interest from investors who see the international gateway’s strong cash position and an anticipated post-COVID-19 travel rebound as reasons for confidence, but some say tightening spreads raise questions about the value equation for deals in the sector.
Like the rest of the US airport sector, LAX’s revenues took a beating last year as passenger volumes plummeted amid the initial stateside outbreak of the COVID-19 pandemic and have remained depressed throughout the continued public health crisis.
Although a full recovery to 2019-level passenger volumes at LAX is expected to take between three and five years, investors told Debtwire Municipals that a strong financial position coming into the crisis, high base-line passenger volumes, federal aid, and expectations of a coming air travel rebound based on accelerating COVID-19 vaccine distribution all serve as sources of confidence in the airport’s future.
As of this month, LAX held 456 days of unaudited unrestricted cash on hand, totaling USD 959m, excluding a maintenance and operation reserve fund that, when included, pushes the total to USD 564m, Tatiana Starostina, chief financial officer for LAX parent Los Angeles World Airports (LAWA), said during an investor presentation.
The airport received USD 326.6m in federal grant money under the Coronavirus Aid, Recovery and Economic Stimulus (CARES) Act, of which USD 271.2m was carried forward to the airport’s current fiscal year, which ends 30 June.
The airport expects to deplete its CARES funds in the current quarter ending 31 March, Starostina said.
LAX expects to qualify for USD 2bn in additional federal grant assistance through the most recent round of federal stimulus legislation.
Despite the acute impact of COVID-19 on airline travel, Daniel Solender, a partner and director at Lord Abbett, told Debtwire that strong overall financials going into the crisis, support from the federal government, and the rollout of a nationwide vaccination program, have helped the sector weather the storm, leaving it primed for recovery.
“With the vaccine starting to be distributed, the sector has been doing better as expectations are that travel will pick up in the near future,” said Solender, who oversees the firm’s tax-free fixed income investment activities. “Los Angeles Airport has a good market position, so it is one of the stronger ones in the sector.”
That sentiment appears to be behind strong demand for bonds issued by other large international airports, even before the first vaccine for the virus was approved in the US.
Despite continuing pressure on the sector from COVID-19, investors gobbled up USD 331.5m in bonds issued for New York’s John F. Kennedy International Terminal 4 as recently as November, as reported.
Evercore Wealth Management has participated in airport deals during the COVID-19 pandemic, even as an initial explosion in spreads on such deals has tightened profoundly, driven by increased confidence in the sector and strong market demand for yield amid sparse supply, said Howard Cure, the firm’s managing director of municipal bond research.
Evercore is expected to look into tomorrow’s LAX deal, he said.
“We’ve bought airports when the spreads were much wider because we think they usually have pretty good days cash on hand because they’re ridden a 10-year wave of growth in enplanements,” Cure said. “The airports had spread much wider early on and they’ve come in but still have some extra yield on it.”
Spreads on bonds issued for LAX have followed the trend of expansion during the early months of the crisis, followed by significant contraction.
A USD 27.2m 5% tranche of Department of Airports of the City of Los Angeles subordinate revenue AMT bonds due in 2031 sold on 25 January for 128 to yield 1.39%, a spread of 63bps over the AAA MMD. The spread had widened out to 206bps in May 2020. Last January, before the pandemic, the spread was at 39bps, about half of what it is trading at this week.
Shaun Burgess, a portfolio manager and fixed income analyst at Cumberland Advisors told Debtwire that his firm may look at the deal. But he said yields on the bonds will ultimately determine whether they’re a worthwhile buy.
“Obviously, airports are what we would classify as pandemically-affected, so you should be compensated for those risks, and we’ll see if the yield that they come at compensates us enough,” he said.
Burgess said the rollout of vaccinations for COVID-19 should drive a recovery in the travel sector, to take place over the next few years, and larger and busier airports like LAX will be poised to benefit.
“Los Angeles is a very large airport, obviously sees significant demand. So, it’s probably in a much better shape than say a small regional airport,” he said.
Maergarethe Amoussou, a senior fixed income analyst at Segall Bryant & Hamill, told Debtwire she expects to pass on the deal.
Although LAX is bolstered by a strong liquidity position and continued federal support, market demand has squeezed spreads on bonds for large airports like Los Angeles to the point where there no longer seems to be much compensation for remaining risk in the sector, Amoussou said.
“We bought a lot of the airline paper last year when spreads widened out, but as things have compressed here, I think there’s a little bifurcation between the credit quality and where actual yields are,” Amoussou said.
“Going forward with such a yield grab year to date here in January, everything with a little bit of yield has compressed so much that there’s not much value [compared with deals outside the airport sector]” she added.
While Amoussou says she sees LAX’s position as generally favorable, she also said there is reason to believe international travel may be slower to recover than domestic travel. But that does not appear to have impacted pricing on airports with a strong international base.
“There really is no differentiation in pricing. I think they’re all being priced very similarly,” she said.
LAWA’s Starostina attributed LAX’s slower passenger recovery compared to the national average to the airport’s high number of international passengers.
Enplaned passengers in November 2020 were down by 70.4% from the previous year at LAX after falling by more than 95% in April. The number of passengers screened by the US Transportation and Security Administration for the entire country in November 2020 was down by 64.4%, after also falling by more than 95% in April, Starostina said.
The USD 758.9m deal comprises USD 420.3m in Series A subordinate private activity bonds subject to the alternative minimum tax (AMT) maturing between 2025 and 2051; USD 244m in Series B governmental purpose bonds, not subject to the AMT, maturing between 2025 and 2048; and USD 94.5m in Series C taxable fixed rate bonds maturing between 2025 and 2036.
The bonds will be used to refund existing bonds maturing on 15 May, refund commercial paper, pay capital project costs, and make a subordinate reserve fund.
The bonds have been rated Aa3 with a negative outlook by Moody’s Investor Service, A+ with a negative outlook by S&P Global and AA- with a negative outlook by Fitch Ratings.