Miami-Dade County’s US$343m Aviation Revenue Refunding Bonds Set to Take Flight  

The U.S. municipal bond market generally continues to attract investor interest, with limited new supply luring buyers to the yield offered in the primary market.

Bond investors have generally retained their interest in munis, while fears of slowing global growth – underscored by recent gloomy economic data from Germany and China – along with long list of geopolitical headwinds, including ongoing and escalating trade-related risks between the U.S. and China, have contributed to a recent rise in volatility and plunge in U.S. Treasury yields.

The yield on the 10-year U.S. Treasury note was bid at about 1.572% intraday Wednesday— an inversion of roughly 48 basis points with the 3-month bill, which was trading at around 2.049%. Furthermore, the yield on the 2-year note had briefly risen above the 10-year last week, spurring jitters in the market of a near-term recession. 

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While the U.S. Federal Reserve’s Open Market Committee (FOMC) at its monetary policy meeting in July had cut interest rates by 25 bps – largely to insure against downside risks from weak global growth and trade policy uncertainty – Fed chair Jerome Powell apparently disappointed the Street with his views on the FOMC’s path forward.

Chair Powell had essentially referred to the cut – the first in about a decade – as a midcycle adjustment and not “the beginning of a lengthy cutting cycle,” which had stirred some unease in those market participants expecting multiple near-term rate cuts.

Still, market participants widely expect another 25 bp rate reduction by the FOMC at its meeting in September, with many eyeing Powell’s remarks at the Federal Reserve Bank of Kansas City’s symposium on “Challenges for Monetary Policy” in Jackson Hole, Wyoming ahead of the weekend.

Muni-Treasury Ratios

Barclays municipal credit strategists Mikhail Foux, Clare Pickering, and Mayur Patel recently noted that the inverted U.S. Treasury 2s10s curve has been a precursor of the bull-flattening of municipal yield curves, and they believe that long-dated municipals still have value in the current environment.

However, Barclays said that while “historically, with the onset of recessions and aggressive rate cuts by the Fed, the muni yield curves re-steepened thereafter,” they are “somewhat less sure” about MMD-U.S. Treasury ratios.

After their recent adjustment, higher tax-exempts munis, especially long-dated bonds, are much more attractive compared with U.S. Treasuries, but Barclays noted that past 2s10s yield curve inversions “did not significantly affect muni ratios. Moreover, the lower yields go, the harder it will be to justify investing in high-quality tax-exempts given that taxable money markets, as well as VRDNs, offer rather attractive returns.”

As a result, Foux, Pickering and Patel said that believe that MMD-U.S. Treasury ratios will “remain elevated for some time, although they might outperform marginally near term,” since 10-year and 30-year MMD-USTs are “cheap to their fair values.”

Municipal bonds had outperformed government debt obligations Tuesday, with the 10-year MMD-UST ratio down 1% from the start of the week to 79%, with the 30-year ratio following suit – ending at 98% from 99%.

Municipal Allure

Meanwhile, yield-hungry bond investors have generally been looking to the U.S. municipal bond market to put their cash to work.

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For the week ended August 14, Thomson Reuters/Lipper U.S. Fund Flows reported a net inflow of about US$1.5bn into municipal bond funds compared to roughly US$2.07bn of inflows in the prior week– not including ETFs such as the iShares National Muni Bond fund (NYSEARCA: MUB) and the Vanguard Tax-Exempt Bond fund (NYSEARCA: VTEB).

Recent deals have fared well, with the San Francisco International Airport’s more than US$1.2bn worth of revenue bonds sold with 1.10-2.57% yields, and Virginia’s Chesapeake Bay Bridge and Tunnel District’s US$378m worth of first-tier general resolution revenue bond anticipation notes (BANs) priced with 1.35% yields.

Moreover, while prices tick higher on U.S. government debt, investors have also been enjoying a fairly steady rise in MUB and VTEB. The ETFs have soared almost 10.2% and 8.4%, respectively, since their most recent 52-week lows in early November 2018.

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Market participants focusing on municipal bonds generally expect around US$9bn of new issuance this week, equal to the amount of 30-day visible supply as of August 16, and just south of the US$10bn average year-to-date in 2019.

Total deals to date in 2019 have amounted to about US$220bn, with net supply at close to -US$20bn.

On the Wings of Yield

Among the offerings on tap in the near-term, Miami-Dade County, Florida is set to issue nearly US$343m worth of aviation revenue refunding series 2019 bonds in three parts, including a little more than US$315.5m in taxable notes.

The negotiated sale, lead managed by Barclays, has received an investment-grade ‘A’ rating by both Standard & Poor’s (Stable Outlook) and Fitch (Positive Outlook), as well as an ‘AA-‘ credit rating by Kroll (Stable Outlook)

The county intends to use the net proceeds from the deal to refund certain of its related outstanding debt obligations, which have supported funding for its Miami International Airport’s (MIA) Capital Improvements Program (CIP). Its current CIP budget has almost US$1.2bn in unfunded capital project needs.

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Additional borrowings, including the series 2019 bonds, are expected to comprise about 60% of the program budget. Longer-term, the Aviation Department’s new CIP is likely to amount to between US$4bn-US$5bn through 2035, including the current plan.

According to the Miami-Dade Aviation Department’s (MDAD) business plan and outlook, preliminary figures as of December 2018 suggest that enplanement growth at MIA is expected to rise 2.3% for fiscal year 2019, then decline on an annual basis to an average of 1.5% thereafter.

MDAD said that while it will “continue to pursue new air service routes through new and existing airline partners” to remain competitive with other airports, it will also “continue to think outside the box in its efforts to increase non-aeronautical revenues and decrease costs for the airlines.”

MIA is largely dependent on South and Central American passenger and cargo traffic, with American Airlines (Nasdaq: AAL) and its affiliate American Eagle representing more than 65% of MIA’s total passenger traffic. The concentration poses a risk to MIA’s revenue, along with broader concerns for the airline industry, including Boeing’s (NYSE: BA) ongoing woes with its 737 Max and higher fuel costs.

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However, Fitch Ratings analysts Jeffrey Lack and Seth Lehman noted that through the first nine months of fiscal 2019, MIA’s enplanements were up around 2.6%, which “should provide a cushion against the impact of service reductions from the suspension of 737 Max planes and still deliver positive growth for the year.”

In terms of its financial profile, Fitch said that MIA operates with elevated debt levels – on the order of US$255 per enplanement, and over 11x leverage on senior bonds. This was mainly incurred in conjunction with past financings for a terminal driven capital program. The agency noted that despite additional borrowings, leverage “should slowly moderate over the next few years,” falling below 10x by fiscal 2022 and approaching 8x by 2025. Meanwhile, debt service coverage ratios remain stable at around 1.5x.

Fitch also highlighted that among the major hubs and international gateway airports that constitute MIA’s peers, Dallas-Ft. Worth (DFW, ‘A+’) and Chicago O’Hare (‘A’)each have “sizable traffic bases, significant hubbing operations and large debt burdens to support capital programs.” Both DFW and O’Hare airports currently have similar leverage in the 11x-12x range but lower costs per enplanement (CPE) levels (DFW at $11 and O’Hare at about $17).

Overall, MIA’s issuance is likely to receive decent demand, as bond investors continue to scramble for yield. Miami-Dade County said it expects the Series 2019 bonds will be available for delivery through the Depository Trust Company (DTC) on or about September 19.