US Airways, American deal seen as positive for airport debt

Reuters

By Michael Connor and Lisa Lambert

(Reuters) - The deal American Airlines and U.S. Airways Group struck to sell gate slots at half a dozen airports in exchange for government clearance for a merger could lift a cloud that has hung over a popular corner of the municipal bond market since late summer.

The two carriers agreed on Tuesday to sell gate slots at Reagan National, LaGuardia and five other U.S. airports in order to allay anti-trust concerns raised by the U.S. Department of Justice, which had sued to block the two from combining to form the world's largest airline.

The DOJ's intervention in August rattled an $80 billion sector within the $3.7 trillion muni bond market.

Gate fees and passenger volumes supply funds to pay off airport bonds that finance terminals and other facilities. For instance, many airport bonds fell during the Great Recession, when passenger traffic declined along with the economy.

In the three weeks after the DOJ suit was filed on August 13, an index of highly rated airport bonds tracked by Bank of America Merrill Lynch fell by 4.2 percent, more than twice the decline of just 1.8 percent for the bank's broad muni index. The airport index's weighted-average yield to maturity shot to as high as 4.08 percent by early September from 3.56 percent on the day before the suit was filed.

Bond prices and yields move in opposite directions.

The green light for the merger will likely be positive for airport finances, with industry consolidation bolstering the surviving carriers, the analysts said.

"It removes some uncertainty," said Randy Gerardes, senior analyst at Wells Fargo Securities.

Airport bond performance was mixed on Tuesday after the deal was announced, with the yield on a 2035 Dallas/Fort Worth airport refunding bond with a 5 percent coupon trading as low as 5.03 percent, according to Municipal Securities Rulemaking Board data. A 5 percent Miami-Dade County aviation bond due in 2028 ended unchanged, its yield at 3.99 percent, according to MSRB data.

Since the Justice Department first outlined its settlement plan, prices on the heavily traded Dallas debt have fallen. The average yield on the bonds, rated A by Fitch Ratings and A+ by Standard & Poor's, was 5.16 percent by mid-afternoon on Tuesday. That compares with 5.09 percent on November 4, the day the compromise was announced, and 5.03 percent a week earlier.

Muni bond market analysts are not expecting trouble finding takers for the slots being divested by US Airways and American.

"These are high demand markets. The slots will sell quickly," said airports analyst Seth Lehman at the Fitch Ratings credit group. "We don't expect it to negatively impact the airports."

The settlement calls for the two airlines to divest landing spots at Reagan outside Washington and at New York's LaGuardia. They also agreed to free up gates in Boston, Chicago, Dallas, Los Angeles and Miami. Low-cost rivals were likely buyers, the government said.

"You can't say there are any problem children among them," said Wells Fargo's Gerardes. "Each has strengths and weaknesses, and there's probably good demand for them."

(Reporting By Michael Connor in Miami; Additional Reporting by Lisa Lambert in Washington. Editing by Andre Grenon)

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