Airport borrowing soared in 2023 and will continue to stabilize in 2024 as air travel has returned to pre-pandemic levels, while mass transit systems are expected to face mixed outcomes depending on revenue streams, market sources told Reorg.
“The pandemic showed how resilient [airport] balance sheets were, now the sector is going back to being active issuers with a tremendous amount of deals for capital improvements,” said Karel Citroen, managing director and head of municipal credit research at Conning.
Capital projects for airports also tend to require multiyear borrowings, meaning a lot of projects that received the initial rounds of borrowing in 2023 would likely come back to market again in the new year, according to an active fund manager. Airports also were one of the recipients of direct aid from the federal government, and they have managed their balance sheets well, so it does not necessarily require peak demand for revenue growth to stay healthy, the source added.
Reorg has collected data on airport yields beginning the second quarter of 2023, when airport borrowers started to tap the market. Yields for each airport from our coverage are shown below in comparison with the corresponding average AAA MMD yields of each quarter.
Benchmark yields have notably shifted over the past year. The 10-year AAA MMD was 2.31% as of Dec. 19, down slightly from 2.5% in July, according to TM3. However, between those two time frames, the benchmark underwent a bout of volatility. It rose to 2.95% in August and then rose again, to 3.56% on Oct. 6.
In accounting for that shift, Reorg has visualized tax-exempt transportation offerings that came to market on a quarterly basis and compared performance with a yield curve of the average AAA MMD during the same period.
(Click HERE to enlarge and toggle between deals.)
Multiple airports took to insuring their offerings in the fourth quarter, as benchmark yields peaked for the year. For example, John F. Kennedy International Airport took a $2 billion offering to market for a terminal project, with both insured and uninsured tranches, as reported
. The Baa3-rated uninsured debt maturing in 2038 priced
to a yield of 4.7% on Nov. 29. Meanwhile, Asheville Regional Airport
, similarly rated Baa2 by Moody’s, priced debt maturing in 2038 at 4.1% on April 27.
Demand for toll roads and toll facilities has also rebounded and is expected to sustain in 2024, especially in regions experiencing growth and economic activity such as Texas, California and Florida. The market can expect healthy supply for this segment of the sector when “underlying conditions are good,” said Citroen at Conning.
But the story isn’t all rosy for mass transit systems - they make up a much more “bifurcated market,” according to Cooper Howard, fixed income strategist at Schwab Center for Financial Research. “It’s important to analyze what is backing the bonds and what the revenue source is,” he said. Some systems are backed by property taxes as the primary driver of revenue, while farebox revenue makes up the lion’s share in other cases. In such cases, declining or stagnant ridership would be a concern, Howard added.
Other sources agree with this assessment, emphasizing that systems with more of a state and local government dependency such as the Metropolitan Transportation Authority, or the MTA, rather than ridership dependency, such as the Bay Area Rapid Transit, or BART, and the Chicago Transit Authority, or CTA, would likely fare better.
The MTA is considered essential service to a vast and economically robust metropolitan area, and it receives strong political and financial support from New York state, New York City and the federal government, said Vikram Rai, head of municipal markets strategy at Wells Fargo. Even with slow ridership recovery as a lingering effect of the pandemic and hybrid work policy, the MTA has nearly closed its forecast budget gaps and stabilized its liquidity because of a significant increase in state tax support, Rai added. He also noted that the MTA’s tax-exempt and taxable paper had cheapened along with the rest of the fixed income market, which helped alleviate some of Wells’ “reservations about [the MTA’s] valuation in light of its organic revenue characteristics.”
In terms of a growing system with new inter-city routes, Brightline Florida has now opened all the way to Orlando, and it is heavily reliant on refinancing, with the most recent deal of $190 million
completed in mid-December.
Meanwhile, Brightline West, the prospective high-speed rail route connecting Las Vegas Valley and the Greater Los Angeles area, has not been built at all, but it issued $770 million
in nonrated bonds in September 2023 and secured $3 billion in federal grants
. This large of an equity grant “changes the economics” of a project like this, not to mention additional government oversight that would require a higher capture rate and more fiscal responsibility as the project progresses, according to a source who invested in the project.