Austin deal brings debt-service relief for airport car rental facility

With air travel recovery prospects still befogged by the lingering COVID-19 pandemic, Austin, Texas, will give its airport rental car facility some breathing room through a $149.4 million refunding.

The taxable bonds. with underlying ratings of A3 by Moody’s Investors Service and A-minus by Fitch Ratings, are scheduled for pricing Tuesday, with closing on March 2.

Moody’s has a stable outlook on the debt, but Fitch cites “uncertainty around the timing and magnitude of recovery” in assigning a negative outlook.

“While the facility’s liquidity levels are strong heading into fiscal 2021 and the refunding transaction provides relief in meeting debt service obligations in the near-term, longer-term concerns remain given AUS’s requirement to cover considerable subordinated obligations, leaving the surplus fund at risk for partial depletion,” Fitch analyst Jeffrey Lack wrote in a Feb. 1 report.

Book runner Wells Fargo Securities leads an underwriting syndicate that includes JPMorgan, Jefferies and Siebert Williams Shank & Co.

Dennis Waley, managing director at PFM Financial Management is municipal advisor on the deal. McCall Parkhurst & Horton is bond counsel, with Norton Rose Fulbright as disclosure counsel.
Austin Treasurer Belinda Weaver is supervising the deal.

The refunding of 2013 bonds will lower debt service on the consolidated rental car facility through 2025, during which time the airline industry is expected to recover from deep losses caused by the COVID-19 pandemic.

The consolidated rental car facility — or CONRAC — opened Oct. 1, 2015 along with a garage with 790 public parking spots. The facility also serves as a staging area for taxis, ride-share cars and bus transportation.

Debt service coverage from pledged revenues in 2020 dropped to 118% from 217% the previous year. Customer facility charge collections levied on car rentals fell to below $10 million in 2020 from $16.8 million the year before.

The new bonds come with a pledge of 125% debt service coverage.

The new trust indenture allows liquidity in the customer facility charge surplus fund to be used for up to 25% of debt service to meet the rate covenant.

“The ability to use CFC surplus funds has been credit positive to CONRACs to allow for the use of accumulated restricted CFC balances during the pandemic, but the practice could lead to credit weakness over an extended period of time through lower liquidity,” Lack said.

“Bondholders are insulated by protective features such as subordination of transfer payments, contingent rent provisions, healthy cash-funded reserves and continued remittal of CFCs to the trustee in the event of project lease termination,” Lack wrote. “However, surplus funds may be subject to partial depletion in periods of severe underperformance and subordinate obligations may restrict the ability to maintain or grow liquidity during the pandemic.”

Sacramento, California, opened the first CONRAC in 1998, and since then at least 42 airports have financed the rental-car hubs, mostly with taxable revenue bonds backed by customer facility charges on each rental. Six more are under construction including a $2 billion facility at Los Angeles International Airport.

Austin’s customer facilities charges, levied per day on car rentals, rose this year to $8.50 per day from $5.95 in 2020. City officials are aiming to lower that CFC through this bond transaction.

The deal will carry Assured Guaranty insurance, according to a spokesman for the insurer.

“Despite delaying maturities, the proposed restructuring achieves net present value savings while also reducing long-term debt service maturities, which is important given the long-term risks to rental cars posed by emerging ground transportation technologies,” said Moody’s analyst Earl Heffintrayer.

Austin voters last November approved a $7 billion transportation system that would include a light rail line connecting the airport to downtown. That represented the first successful vote on light rail in three attempts. The rail line could take up to a decade to complete.

“Moody’s expects that will pose more of a competitive threat to taxi and transportation network companies (like Uber and Lyft) than to rental cars,” Heffintrayer said. “Rental cars will still be demanded for the geographically dispersed local service area and tourism to the outer Hill Country region.”

Austin-Bergstrom International Airport was built in 1999 at the site of the former Bergstrom Air Force Base southeast of downtown and replaced the landlocked Robert Mueller Municipal Airport to the northeast. The airport is the second largest medium hub airport in the United States.

From January through November 2020, the airport’s passenger traffic fell nearly 63% compared to the same period in 2019.

Traffic on Southwest Airlines, Austin’s largest carrier, was down by the same percentage. American Airlines, the No. 2 carrier, saw traffic fall 56%.

Southwest lost $3.5 billion in 2020, excluding special items, as it grounded many of its jets due to lack of business. Revenue for the year plunged $13.4 billion, or 60%, to $9 billion for the year. It was the Dallas-based carrier’s first loss in 48 years.

Fort Worth-based American, the world’s largest airline, reported an annual loss of $9.6 billion, excluding special items, on Jan. 28. Revenue fell 62% to $17.3 billion.

Global air traffic in 2020 fell 66% from 2019, the sharpest drop in traffic in aviation history, according to the International Air Transport Association. Full-year global capacity dropped 56.5% year over year, and load factor plummeted 17.8 percentage points to 65%.

“Last year was a catastrophe. There is no other way to describe it,” said IATA director general and CEO Alexandre de Juniac in a press release.

December’s global air traffic was down 69% year over year, broadly in line with declines in November, according to IATA.

According to the market research firm Statista, rental car revenue fell 61% in 2020 and is not expected to reach 2019 levels until 2025.

In its most recent filing, the bankrupt rental car giant Hertz Corp. reported a monthly loss of $102 million for November 2020. The latest results were much worse than those of October 2020.

Hertz also operates Dollar and Thrifty vehicle rental brands in North America.

Advantage Rent A Car, which filed bankruptcy shortly after Hertz, recently won court approval to sell 10 airport locations to Munich-based Sixt Rent-a-Car for $16.1 million.

In a Jan. 29 letter to Congressional leaders shared with other airport-related industries, the American Car Rental Association sought approval of $3.64 billion in federal assistance to allow airports to provide “minimum annual guarantees” and rent relief for airport concessionaires.

“The impacts on airports and the businesses that serve them have been severe, and the prospects for a quick recovery are dim,” the letter said. “Air passengers, upon whom airports and concessionaires depend, are not projected to return to pre-pandemic levels for several years at best.”