With state and local governments becoming more and more entrenched with unfunded pension liabilities, traditional muni investors should look to safer alternatives. We consider revenue bonds the safest, because they offer haven from the pension timebombs. More specifically, Airport revenue bonds, if done right, can add safety to your portfolio without sacrificing yield. Airport bonds can be a much safer alternative to traditional general obligation bonds because they aren’t strangled by unfunded pension liabilities. Airports are also extraordinarily essential and usually have very little industry competition. Additionally, airport revs often yield more than their general obligation counterparts.
Major US airports issue bonds to fund ongoing improvement projects. Most of these bond issues are backed by all the diverse sources of airport revenues. They include revenue from airlines, rental car companies, concessions, and passenger facility charges (PFC). Passenger facility charges are the most important. Every airline passenger must pay, so it provides a very stable revenue stream. The fee goes toward the upkeep and maintenance of airports, including bond payments, and is set up and capped according to US federal law.
San Francisco Airport Revenue (S&P: A+): SFO Airport is solid municipal credit and is especially attractive for California residents, who can benefit from its state and federal tax-free status. SFO has a very diverse carrier mix, which makes it a very safe investment despite having competition from other nearby airports (San Jose and Oakland). SFO has a healthy 290 days of cash on hand and good debt service coverage.
We found this short SF Airport bond that looked very attractive versus the recently issued similar maturity California State General Obligation. You may have to hunt around to find similar opportunities, but they are certainly out there.
SFO Airport Revenue 5.00% Due 5/1/2020 CUSIP: 79765A4Q6
Price $102.384 Yield 1.22%
SF Airport Yield to 5/1/20
Cal GO Yield to 4/1/20
In this instance, there is a pickup in yield if you buy the Airport Revenue versus the new Cal GO issue. Even better, the airport bond investor won’t have to lose sleep over California’s billions of unfunded pension liabilities.
Dallas Fort Worth Airport Revenue (S&P: A+): DFW Airport is a solid issuer with good metrics. Although their carrier concentration could be more diverse, they have a strong local economy to support the growing airport. With over 600 days cash on hand and good debt coverage, they have a very strong financial position. Interestingly, Dallas Forth Worth Airport’s revenue bonds include oil as one of the many sources of revenue. They have a few oil wells on the airport grounds whose revenues also support the bonds. Below is a comparison of a recent Dallas Air offer versus a similar-maturity Texas State GO.
Dallas Fort Worth Air 5.00% Due 11/1/2022 CUSIP: 235036Q45
Price $111.30 Yield to Maturity 2022: 1.31%
Dallas Air Rev due 11/1/22
Texas G.O. due 10/1/22
Clearly, the Dallas Airport Revenue offers more bang for the buck (19 extra basis points) and doesn’t have the state’s unfunded pension risk.
Miami-Dade International Airport Revenue (S&P: A): MIA airport can be a safe choice to add to your investment portfolio. They boast over 283 days cash and good debt service metrics. Their carrier mix is heavily concentrated with American Airlines, but it is the primary gateway airport to Latin America and the Caribbean, making it essential for many people. Below is a 5-Year Miami Airport offering that looks good when you compare it with a General Obligation bond of the same area.
Miami-Dade Aviation Rev: 5.00% Due 10/1/2024 CUSIP: 59333PS66
Price $117.35 Yield to Maturity 2024: 1.43%
Miami Aviation due 10/1/24
Miami-Dade G.O. due 7/1/24
The yield of Miami Airport is 15 basis points more attractive than the GO, and investors won’t have to sweat about Florida’s pension obligations.
AMT bonds: Stay away from airport revenue bonds that are subject to the alternative minimum tax. Not only will you be subject to paying the AMT, but AMT airport revs are much less liquid to trade. Therefore, you may have trouble selling at a good price in the event you need to get out.
Do your homework: It’s important to research your airport issuer before purchase. Not all airports are created equal. Currently, Atlanta Hartsfield airport is being audited by the FAA for allegedly improperly using funds. The city has long been dogged with allegations of corruption and bid steering. This is one you will want to avoid. Also, make sure your airport revenue bond is senior lien issue, not a subordinate lien. Senior liens have priority to be paid back first, and therefore, are much safer.
Carrier Concentration: Try to invest in an airport issuer that is not too dependent on one airline. If an airline leaves an airport or the airline company goes belly-up, so will the airport if it’s too concentrated. Try to make sure the airport has a diverse carrier mix or a financially sound airline servicing it.
Event Risk: Terrorist events like those of September 11th can greatly impact the financial condition of airlines and airports. Natural disasters like hurricanes can also disrupt airport operations. Keep in mind these types of risks when looking at airport bonds, and make sure they have a hefty amount of days cash on hand in case of emergencies.
Conduit Bonds: Beware of conduit issuers that mask themselves as general airport revenue bonds. These are municipals which are be issued for a very specific project related to the airport but aren’t supported by the blanket of overall airport revenues. These are usually supported by private businesses like contractors or fuel companies. These are much less safe than the bonds supported by overall airport revenues. Recently, the Denver airport had a conduit airport bond go haywire. A company called Denver Great Hall LLC issued bonds to redevelop one of the Denver Airport terminals. After cost overruns and delays, airport management cancelled its construction contract with the company. As a result, the bonds plummeted in price. Bond provisions state that bonds can redeemed at par $100 in the event of contract cancellation. Bonds were trading at $115 plus before the announcement, but now, these airport bonds have crashed. Below is some August trade history for Great Hall’s 30-year bonds. It shows how they hit the fan when the contract cancellation announcement was made. Bonds went from $114.97 to $103.62 in a heartbeat. This is a great example of the risks of conduit issuers. To look more in depth at the trade history, click here and enter the CUSIP: 74442PFJ9.
As you can see from the large trade sizes, the mutual funds went for the exit doors in a hurry.
The feeding frenzy into Municipal bonds does not look like it going to end anytime soon. Especially in high-tax states like New York and California. Airport Revenues should continue to perform well as savvy muni investors seek tax-free income and decrease their exposure to general obligations with their unfunded pension liabilities.
Airport revenue bonds are safe and are a great portfolio addition. They aren’t strained by unfunded liabilities like many general obligations, and provide an essential service to the public. In addition, airport revenue bonds often yield more than general obligations. No airport bond is perfect, but if you find some with the right qualities, you’ll soar to safety.
This article was written by
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Envision Capital Management is a Registered Investment Advisor in El Segundo, California. Alexander Anderson and Envision Capital Management are not a broker/dealers, and therefore do not sell bonds. However, they are a registered investment advisor and will buy and monitor fixed-income securities on behalf of their clients in managed accounts. Envision Capital owns the San Francisco Airport bond 79765A4Q6 mentioned previously for the benefit of clients.