Burbank airport terminal plan means higher debt load, lower rating

California’s Hollywood Burbank Airport has embarked on a $1.3 billion project to replace its dowdy and arguably obsolete passenger terminal with a safer, more comfortable and contemporary one.

Paying for the project, which broke ground in January, will add substantial debt to the balance sheet of an airport that hadn’t issued bonds since 2015.

The level of issuance brought a Fitch Ratings downgrade to A-minus from A of the Burbank-Glendale-Pasadena Airport Authority’s general airport revenue bond credit.

The plan to price in late May $857.8 million of GARBs, and a second issuance of $346 million in 2026, takes the airport from having a modest amount of debt on the balance sheet, roughly $77 million in GARBs today, to being more highly leveraged, Fitch analysts said.

“The point (of the downgrade) is the debt burden at the airport and the base cost of the project repositions the airport from a financial perspective,” said Seth Lehman, a Fitch senior director.

The airport has a $200 million commercial paper program for the project, which is expected to be completed by October 2026.

Moody’s Ratings and S&P Global Ratings affirmed Aa2 and A ratings ahead of the deal. All three rating agencies assign stable outlooks.

If the airport authority’s commissioners approve the bond resolution at their May 6 meeting, the preliminary offering documents for the $857.8 million issuance would post May 8 and the bonds would price on May 22, according to an April 15 report prepared by Louis Choi, a senior director at the Public Resources Advisory Group, the municipal advisor on the deal, and John Hatanaka, the authority’s senior deputy executive director. Choi presented the report’s findings to commissioners at Monday’s meeting.

The deal will be priced by a seven-bank syndicate with BofA Securities as lead senior manager, and J.P. Morgan Securities and Ramirez & Co. as co-senior managers.

Other members of the finance team are Orrick Herrington & Sutcliffe as bond counsel and disclosure counsel, Stradling, Yocca Carlson & Rauth as underwriters counsel and Ricondo & Associates as airport feasibility consultant.

Fitch views the construction risk as neutral, because the agreement will have a guaranteed maximum cost, guaranteed delivery and it involves experienced contractors, Lehman said.

“Right now, Burbank is well-positioned, though it is an older terminal,” Lehman said. “Its passenger charges are the lowest, but in this day and age, the airlines want modern facilities, which is why this project is viewed as a positive.”

The 355,000-square-foot replacement terminal will be 50% larger than the existing terminal, decreasing congestion with expanded walkways, and adding bathrooms, restaurants and shops, according to design documents. It will also have improved baggage, ticketing and security screening spaces.

Though the airport is 50% larger, it will have 14 gates just like the terminal it replaces, said Fitch associate director Jim Code.

The clearance between the gates increases in the new footprint, expanding the parking positions, which would enable larger planes to land at the airport, and could help the airport to add additional flights.

“The airport configuration was created before the jet age of commercial aviation,” Lehman said. “It wasn’t meant to serve large 737 planes.”

The existing terminal does not comply with Federal Aviation Administration safety standards because of its proximity to the taxiways and runways, an issue that will be resolved with the new design, to be built on a different part of the airport property. That will require new parking and roadway connections contributing to the cost of the project.

After the new terminal is built, the current one will be demolished, so revenues will be unaffected by construction, Code said.

Fitch calculated debt service coverage at 4.3 times in fiscal year 2023, which will drop to an indenture debt service coverage ratio of 1.25 times following the new issuances. Leverage will “significantly increase following the new issuances,” according to the report.

The cost per enplanement will jump to $22.84 from $2, but the airport should remain competitive in the region and the airlines appear to be supportive, Fitch analysts wrote in the ratings report.

Jumping to $22.84 puts them at the higher end compared to other airlines in the Los Angeles market, Lehman said.

Fitch Ratings

The downside is that it could discourage other low-fare airlines like Avelo, which began serving Burbank in 2021, from wanting to locate there, Lehman said.

Choi presented a chart during the authority’s Monday meeting that compared Burbank’s passenger fees and debt per enplanement to other California regional airlines. They had the following cost per enplanement charges: $7.66 for Ontario International Airport, $11.13 for John Wayne Airport in Orange County, $13.18 for Oakland International Airport and $15.57 for San Jose Mineta International Airport.

Even with the Fitch downgrade, Choi said the airport is rated in the middle-A category, and has similar ratings to competing southern California airports.

“Overall, the comments from the rating agencies were favorable,” Choi said. “They believe many of our expectations will come to fruition, and that the strong management and governance here will continue to make the airport perform well.”

Costs aside, the airport’s main calling card is location: it spares San Fernando Valley residents a trip to Los Angeles International Airport. Because many of those residents also complain about airport noise, the airport has faced a long, slow road to replacing the terminal.

The airport reports serving more than six million passengers in 2023 — a new record.

One of the hurdles in the road was voter approval, which Burbank city voters granted in 2016, with a key provision being the new terminal is capped at the same 14 gates as the current one, with the number of parking spaces also capped.

The net proceeds of the 2024 bonds will comprise 70% of the total costs of the $1.3 billion project expected to be funded by bonds, according to the staff report. Other funding sources are four grants totaling $142.9 million, $48.4 million from passenger facility charge revenues, $100 million from the facility development fund and $2.1 million from the sale of Kenwood parking lot.

The 2024 bonds are expected to be issued as fixed rate 30-year bonds and secured on parity with the authority’s outstanding general airport revenue bonds. They will be sold in three series comprising tax exempt non-alternative minimum tax, tax-exempt AMT and federally taxable.

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The proceeds will fund project costs, a capitalized interest account used to defer paying debt service until six months after the anticipated opening of the terminal, a debt service reserve fund and the costs of issuing the bonds.

The finance team also has been getting bids from municipal bond insurers and will make a decision based on the bids and what they hear from investors the day of pricing whether to insure all or a part of the bonds, Choi said.

“We won’t know until we go to market (whether we will include bond insurance),” Choi said. “Some investors will be interested in direct exposure to the airport and others would rather have insurance.”

Having insurance from the bond insurers could result in the deal receiving lower interest rates, Choi told commissioners.

“It will be a live decision after we have the bid in hand,” Choi said. “We will shop it to investors.”