Earlier this month Los Angeles Department of Airports bonds worth $241.8M met with a strong response – retail investors bid for $194M, while institutions ordered for a billion dollars. According to the management, all-in interest costs came in at 4.66%.
Lead manager De La Rosa & Co called it a “a really nice reception,” and said the bonds were priced only 33 bp cheaper than a $240 million issue by Triple-A rated San Francisco Bay Area Rapid Transit District, showing that the market is again stable after the turmoil this summer.
Municipals Citi Research strategists George Friedlander, Mikhail Foux and Vikram Rai also take a fancy to airport bonds in their ‘Municipal Market Comment’ of November 22.
“For investors looking for bonds that offer yield and duration but without an overt threat of volatility, we recommend taking a look at airport bonds, which offer both despite essentially defensive characteristics,” say the Citi team.
They point out some attractive features of airport bonds in general:
- Backed up by airport revenues and a part of passenger revenues.
- Over 75% of airport bonds are rated A- or above.
- More than half of airport bonds are subject to AMT, offering somewhat higher yields.
- Conservative financial management by airports, similar to municipal market discipline makes these bonds less risky.
- Ample liquidity considering the sector typically sees issues of $10-12B per annum. Citi estimate that the airport bond sector could be as large as $150B.
Airports have fairly stable cash flows and therefore their bond issues are less volatile. Their revenue models and business arrangements allow for collection of charges even though traffic volume may fluctuate, and besides, they are able to receive a steady cash stream from airport facilities such as dining and business. Returns on airport bonds have kept pace with HG Munis, as shown below:
Why airport bonds present an opportunity
“Despite recent richening, long dated single A airport bonds continue to offer yields well north of 5% and with a pick-up of 20-40bp on switching to AMT bonds. Thus, we believe these remain an attractive investment for tax-exempt and total return investors looking for yield and duration,” say the Citi analysts.
They also point out that there is a dearth of high-yield paper from municipal issuers, which could add to the scarcity value of the airport bonds. These bonds also present low volatility risk and are more defensive in nature. In the context of persistent municipal fund outflows, “airport bonds satisfy the criteria of both longer dated and higher yielding paper and thus their stable performance in the face of continued fund outflows is commendable,” say the Citi analysts.