The Port Authority of New York and New Jersey’s (PANYNJ) has closed $796.28 million in special project series eight bonds for the expansion of Delta Airlines’ Terminal 4 at John F Kennedy International Airport (JFK). With the financing the airline and air­port have finally addressed the last choke­point at the airport, represented by Delta’s existing, and antiquated, Terminal 3.

The bonds will partially finance a $1.2 billion project that involves the addition of nine gates to T4, the demolition of T3 – the former Pan Am Worldport – and construction of a new airside pedestrian walkway between T2 and T4. While the issuer for the bonds is the Port Authority, Delta is the guarantor, though JFK International Air Terminal (JFK IAT), lessee of T4, is obligated to make principal and interest payments to the airport operator. The airline will finance the balance of the project’s $403 million cost with equity.

Lead underwriters Citi, Barclays Capital and JP Morgan closed on the tax-exempt municipal bond sale on 9 December. The 32-year, fully amortizing issue was split into five tranches and two times oversubscribed. The tranches are valued at $46.005 million with a 5.125% yield and maturing on 1 December 2020; $170.22 million with a 5.5% yield and maturing on 1 December 2028; $88.565 million with a yield of 5.8% and maturing on 1 December 2031; $185.06 million with a yield of 6.07% and maturing on 1 December 2036; and, $306.43 million with a yield of 6.15% and maturing on 1 December 2042. The tranches were priced off the Municipal Market Data Index. The co-managers were Bank of America Merrill Lynch, Goldman Sachs, Morgan Stanley, MR Beal & Company and Rice Financial Products.

Under the terms of a 30-year anchor tenant agreement with JFK IAT, Delta will make monthly payments equal to both debt service on the series eight bonds and operations and maintenance (O&M) fees to the terminal operator. The agreement will come into force when the airline takes control of space in T4, including a maximum of 16 gates. This is expected by the end of 2013.

During construction Delta will also make debt service payments to the guarantor. These will be in the form of rental payments for use of T4 facilities during the construction period. In the case of project delays or cost overruns, the airline will continue to make interim rental payments until completion. JFK IAT will make payments on the bonds pari passu with its $943 million in 1997 series six bonds, which have $761.59 million in principal outstanding, and after O&M costs and ground rental fees to PANYNJ.

The bonds, which begin amortizing in 2018, have a minimum debt service coverage ratio (DSCR) of 1.25x. JFK IAT reported a DSCR of 2.15x in 2009 and is expected to maintain a ratio above 1.8x through 2020, according to the bonds’ offering documents. The terminal operator posted revenues of $217.85 million in 2009, up 4.7% year-on-year. The same year, O&M and ground rental fees were $64.7 million, up 0.3% compared to a year earlier.

The bonds are dependent for debt service on a carrier operating in a notoriously cyclical industry that filed for bankruptcy protection as recently as 2005 and emerged from chapter 11 in April 2007. But New York’s airports are extremely crowded and landing slots are scarce. The bonds were rated BB/Baa3/BBB- (Fitch/ Moody’s/Standard & Poor’s) on account of the limited terminal space at JFK and strong demand for air travel in the New York area. Fitch noted that, while risks included a heavy reliance on one airline (Delta), competition from other airports and terminals, and the potential for cost overruns and construction delays (T3 and T4 will continue to operate normally during the construction), the bonds will benefit from the fact that the project is a net reduction in gates at an already overcrowded airfield in its report. The potential for a second bankruptcy at Delta was not viewed a significant risk as demand from other airlines to expand at the airport would likely quickly fill the gap left by the carrier.

Delta acquired T3 as part of its acquisition of defunct Pan Am’s trans-Atlantic routes in 1991 and initially discussed the project with the airport operator in 2000. However, it shelved the plan after air travel volumes dropped 11 September 2001, and delayed it again after Delta’s 2005 chapter 11 filing, and again as management concentrated on acquiring and merging Delta with Northwest Airlines in 2008. During that time American Airlines opened its new T8 in 2007 and JetBlue Airways its new T5 in 2008. With this competition in mind, airline and airport operator finally announc­ed the project to replace T3 and expand T4 on 11 August 2010.

Various underwriters say they were con­sulted regarding the bond issue as early as 2008 though they did not begin preparing it for launch until the third quarter of 2010. Delta bought a class B non-controlling equity stake in JFK IAT Member, the holding company for JFK IAT, when LCOR JFK and Lehman JFK sold their respective 40% and 20% stakes in April 2010. Schiphol Airport (another Delta hub), owns 100% of the class A shares in JFK IAT Member.

Delta is managing the project as design and construction program director. It has contracted with Arup and SOM for architecture and engineering, and AECOM as construction administrator. Frasca & As­so­ciates was PANYNJ’s financial adviser. Debevoise & Plimpton was legal counsel to JFK IAT, O’Malveny & Myers counsel to the underwriters and Sidley Austin coun­sel to Delta. PANYNJ now has the resources to work on other projects, such as upgrading or replacing the cramped and outdated central terminal at La Guardia Airport, which dates back to the 1940s. n