In an era where airport infrastructure demands innovative funding solutions, Des Moines International Airport (DSM) is at the forefront.
With their ambitious $445 million terminal project, DSM is a prime example of how airports are tackling the complex interplay of interest rates and large-scale financing.
"A 1% shift in interest rates translates to an approximate $75 million difference in total debt service,” says Brian Mulcahy, Assistant Airport Director for the Des Moines Airport Authority. “It's a significant financial impact."
Financing Airport Improvements in an Era of High Rates
Seth Lehman, Senior Director of North American Global Infrastructure Rating for the Fitch Group said the last 18-24 months have seen elevated rates stalling some market activities. However, an anticipated dip in long-term treasury rates could open doors to a blend of new investments and refinancing options. This shift is pivotal for airports positioning them to leverage market conditions for both ongoing and future projects.
The financing of airport infrastructure is seeing a transformative shift. Lehman notes the cost benefits of public municipal bonds, due to tax benefits, often present the most cost-effective capital source.
However, he observes a growing reliance on private financing, especially for large-scale projects like terminal redevelopments. This trend signifies a move towards more integrated public-private partnerships, blending the financial strengths of both sectors.
The Bipartisan Infrastructure Law has also provided some relief for airports undertaking major investments.
"While federal grants offer some relief, they're often counterbalanced by escalating project costs,” Lehman said. “Thus, bond borrowing becomes a necessity."
This dynamic affects various airport sizes, with both large hub and mid-sized airports finding unique benefits and challenges in this financial ecosystem. There has been a trend of larger airports keeping more cash on hand in the past decade, which provides them additional financing opportunities.
"Most are advancing their projects, aiming to be shovel-ready for Bipartisan Infrastructure Law grants," said Earl Heffintrayer, Vice President of Credit for Moody’s. “This readiness for federal funding is a critical strategic move in today’s financial climate.”
The Indianapolis Local Public Improvement Bond Bank sold $205 million in bonds in December to fund improvements at Indianapolis International Airport (IND).
Robert Thomson, Senior Finance Director/Treasurer of the Indianapolis Airport Authority, said the authority focuses on a holistic and long-term approach, rather than short-term market reactions when issuing debt. Their bond transactions are planned and executed with an eye toward long-term sustainability and alignment with strategic goals.
While lower interest rates are possible, they are not the main factor when issuing debt.
"It's not going to drive the timing of when we would do this," he said. "The importance of the project is what's going to drive its timing."
Keep a Conservative Eye on Spending
Adapting to rate fluctuations and economic outlook insights on rate fluctuations are pivotal. Lehman said the expected decrease in long-term treasury rates heralds a period of new investment opportunities and refinancing for airports.
"We anticipate the cost of capital to remain relatively high through 2024, suggesting a gradual approach to rate cuts," he said.
The financial resilience of the airport sector was demonstrated during the COVID-19 pandemic. Lehman notes, "The sector's robust response, with few downgrades in credit ratings, indicates a stable future. We expect more predictability in the coming years."
Lehman's advice for airports is clear: Adopt conservative financial strategies with traditional borrowing structures.
He suggests balancing short-term and long-term debt, using short-term debt primarily during construction phases for flexibility.
"Airports should prepare for consistent growth, ensuring the infrastructure matches the demand," he said.
Heffintrayer echoed these sentiments pointing out, "Larger airports had already planned for higher interest rates, creating a buffer that aids in funding new projects."
Thomson acknowledges the potential benefits of refinancing existing debt in a low-interest-rate environment, but any decision to do so would be carefully considered within the broader context of the authority's long-term financial strategy and project priorities.
“Lower rates will cause us to continue to look at the economics of such an action and could cause us to try to capitalize in that area," he said.
Mulcahy said the construction timeline will remain the same for DSM as it approaches the project, but they could consider adjusting the borrowing schedule for the project as it proceeds. The authority will issue debt in phases from 2024-2026, with a keen eye on the prevailing interest rate environment. Voters in Polk County also recently approved a referendum authorizing the Polk County supervisors to issue up to $350 million of debt and loan the proceeds to the authority, giving DSM access to lower interest rates thanks to the county’s AAA bond rating.
The authority may also do some short-term borrowing directly through a bank to try to mitigate the impact of high interest rates. However, the continued economic outlook for the nation and interest rates as a whole will be continuous factors in approaching the future.
"If there's an economic slowdown, we hope it won't be for very long and it will allow us to continue to progress with the rest of the project," he said.
