Junk-rated United Airlines backs $1 billion Houston airport deal

Houston will sell its biggest special facilities revenue bond issue this week with a $1 billion deal backed by junk-rated United Airlines to fund terminal projects at George Bush Intercontinental Airport.

The Houston deal comes as airport special facilities revenue bond sales surged this year with issuance already the highest since at least 1999, according to LSEG data.

The tax-exempt bonds, scheduled to price Tuesday, will commence financing for a third phase, $2.55 billion project at the airport's Terminal B that was officially launched a year ago to expand and update the 55-year-old facility with new concourses, a baggage handling system, ticketing area, TSA security screening checkpoint, additional gates and other improvements.

Primary security for bonds, which are subject to the alternative minimum tax, are payments made by United under a lease that expires in November 2053, according to the deal's presentation to potential investors.

In the event of a payment default by United, the city is required to "use commercially reasonable efforts" to lease the facilities to other airlines with subsequent revenue generated by new leases applied to bond payments, it added.

United's enplanements at the airport, which serves as its fourth-largest domestic hub, accounted for about 72.4% of total passenger traffic last year. The airline has exclusive use of Terminals B, C, and E.

There is $556.7 million of parity debt outstanding backed by United under a trust indenture, including nearly $290 million for Terminal B phase one and two projects and $219.32 million from a 2021 deal for Terminal C projects, according to the investor presentation.

In its third quarter 10-Q filing with the Securities and Exchange Commission, the airline reported about $1.8 billion of outstanding tax-exempt special facilities revenue bonds due between 2027 and 2041.

Moody's Ratings assigned a speculative grade Ba3 rating to the bonds, which is a notch below United's corporate family rating of Ba2.

"The Ba3 rating assigned to the Series 2024B bonds reflects the unconditional payment guarantee of United Airlines, Inc. of all principal and interest pursuant to a guaranty between United and The Bank of New York Mellon Trust Company, National Association, as trustee," Moody's said in a report.

Fitch Ratings, which rates United BB-minus with a positive outlook, rated the bonds at the same level.

"Although the revenue bonds benefit from a security interest in United's lease payments, Fitch views the risk profile of these revenue bonds as closer to United's unsecured issuances," Fitch said in a report.

"United does not have a master lease at George Bush Intercontinental Airport," Fitch's report said. "Instead, United has multiple leases in place tied to various terminals and facilities. In a bankruptcy scenario, it is possible select leases could take priority and leave other leases to be rejected or consolidated."

The deal has the attention of high-yield debt buyers.

"We own other tranches under the same indenture, so we're looking at it from the point of view that yes, we already have a significant commitment to this particular project and if we see cash flow ? and that's always a big if, a big contingency ? then I would say right now it looks like we might participate," said one high-yield investor, who declined to be identified.

Dora Lee, research director at Belle Haven Investments, said the deal brings supply amid a high-yield issuance drought in recent years.

"Further driving demand is the increased AMT exemption under the (Tax Cuts and Jobs Act) and expectations of continuation or even expansion of tax cuts under the next Trump administration, which would make AMT bonds more valuable," Lee said in an email.

She added that most investors "have wizened up to special facility bonds and know to do their homework on these types of credits."

The popularity of the debt, typically backed by an airline, dimmed in the wake of United's December 2002 Chapter 11 bankruptcy filing, which eventually resulted in bondholders recouping a small portion of the $1.7 billion invested in the carrier's special facilities revenue bonds. After reaching nearly $3 billion in 2001, volume fell to just $529.78 million in 2003 and didn't top $3 billion until 2016, according to LSEG data.

Delta Air Lines (DAL) followed a similar course in its 2006-2007 bankruptcy by rejecting unsecured debt.

Unsecured municipal bondholders were also dragged through the 2011-2013 bankruptcy of American Airlines (AAL), but received a stronger settlement.

Airline bankruptcy was back in the headlines with Monday's Chapter 11 filing by Spirit Airlines.

Special facilities revenue bond sales totaled $4.58 billion so far in 2024, with almost all of the debt issued through the New York Transportation Development Corp., which sold $2.55 billion of the bonds for JFK International Airport's New Terminal One project and $1.945 billion of the debt for the airport's Terminal 6 redevelopment project.

The JFK bonds fund P3 deals for private operators of the terminals; unlike the Houston deal, the bonds are not directly secured by an airline.

Airline-backed debt like the Houston deal is "definitely not a trend" as airports across the country undergo makeovers, according to Kevin Archer, a S&P Global Ratings analyst.

"There's a lot of people flying these days and some of these facilities are really outdated ? they need a face lift, or they need better security arrangements, things of that nature," he said. "So there's a lot of activity in the market. It still primarily has been the traditional (general airport revenue bond) financing."

Under an agreement with Houston, United can issue up to $1.95 billion of special facilities revenue bonds for the phase three project. Houston's share of the project is $624 million.

In emailed responses to questions, Mayor John Whitmire's press office said further issuance of special facilities revenue bonds is likely in 2025's second or third quarter, while the issuance of GARBs for the city's portion will begin in the first quarter after completion of a feasibility study.

Houston City Council's approval of an initial $150 million appropriation for phase three projects was held up first by City Controller Chris Brown last year and then by Chris Hollins, who took office in January.

Brown cited a laundry list of concerns last November that included United's non-investment grade ratings, as well as terminal design plans and a feasibility study for the city's issuance of GARBs for the project that were both incomplete.

Hollins didn't sign off on the funding until March, following a full review that focused "on efficiency, fiscal sustainability, and ensuring that Houstonians were best served under the terms of the agreement."

Joint bookrunners for the $1 billion bond sale are BofA Securities and J.P. Morgan. Co-senior managers are Loop Capital Markets, Morgan Stanley (MS), and Raymond James. Co-managers are Mesirow Financial, Siebert Williams Shank, and Wells Fargo Securities.

Co-municipal advisors are Masterson Advisors and RSI Group and co-bond counsels are Bracewell and The Bates Law Firm.

Caitlin Devitt contributed to this article.