Atlanta, Georgia /Department of Aviation
Synopsis of Results: Absent from the capital markets since November 2004, the City of Atlanta’s Department of Aviation (“DOA”) re-entered the marketplace by executing a series of two (2) transactions totaling over $1.1 billion between November 2010 and December 2010. By executing this program, FirstSouthwest, acting as co-financial advisor assisted the City in achieving the following results; (a) obtained low-cost completion financing for the Airport’s new $1.5 billion Maynard H. Jackson International Terminal (“MHJIT”) project, (b) eliminated all the variable rate and counterparty exposure for the Airport, (c) reduced debt service by over $49 million (on a present value basis) and (d) achieved bondholder consent to indenture changes that allowed the Airport to release over $78 million in excess cash from its debt service reserve fund (“DSRF”). The combined total financial benefit to the City exceeded $127 million which will allow for lower charges to the City’s airline partners and thus continue to make the Airport one of the lowest cost airports in the U.S. Moreover, through the completion of these transactions, FirstSouthwest was able to significantly improve DOA’s balance sheet and ensure that funds were available to complete MHJIT, the largest capital project in the southeastern U.S.
Summary of Financial Transactions: As the capital markets experienced severe disruptions in 2008 through 2010, the City and DOA confronted significant financial challenges. Due to the downgrade of the liquidity banks and bond insurer on the DOA’s variable rate bonds, the DOA’s normally low cost variable rate program experienced short-term rates as high as 8% and several failed remarketing periods. Certain tranches of the variable rate program became bank held bonds and reset at a default rate using an accelerated 5 year amortization. Additionally, the downgrade of most of the DOA’s surety providers below investment grade required the DOA to refill the DSRF by making monthly cash deposits out of its cash reserves. The combination of paying higher interest rates and making monthly cash deposits strained the DOA’s cash reserves at the same time the DOA was in the midst of constructing and funding the $1.55 billion MHJIT. In order to address this, FirstSouthwest helped the City and DOA develop a comprehensive strategic financial plan to simplify and improve the Airport’s debt structure and eliminate its variable interest rate risk and counterparty exposure. The strategy was implemented through multiple bond transactions in a short timeframe, as detailed below:
Completion Financing (Series 2010A&B) for MHJIT: In November 2010, FirstSouthwest worked with the City and the Airport, in close cooperation with its airline partners, to successfully fund the completion financing for MHJIT through the issuance of $177,990,000 of General Airport Revenue Bonds (GARBs) and $409,810,000 of Passenger Facility Charge Revenue Hybrid Bonds (PFC bonds). As the fastest growing major international gateway in the United States, the MHJIT project is critical to the Airport’s maintaining of its competitive edge. As a result of receiving these bond proceeds, the project cost was fully funded and on-schedule to open in the spring of 2012. The completion financing was a very successful transaction as illustrated by its low all-in true interest cost of 4.18% and the impressive demand for the Airport’s bonds. The overall transaction was more than 2x oversubscribed in the aggregate and certain maturities were more than 5x oversubscribed. Additionally, the Airport’s spreads to MMD ranged from 73 to 108 basis points – one of the tightest spreads of all major airport transactions in the 4th quarter of 2010.
Another key feature of the financing involved the Airport negotiating a successful extension and modification of the Lease Agreements with Delta Air Lines and the other major airlines at the Airport. The agreement was set to expire on September 20, 2010. However, it has been extended by 7 years with generally favorable amendments. The amended agreements detailed the terms under which MHJIT was funded and operated and provided pre-approval for certain additional Capital Improvement Plan (CIP) projects and contractual payments to the airlines in FY 2013-2016 in an aggregate amount up to the $30 million. This was done in order to maintain a minimum 1.5 times debt service coverage ratio. Based upon the new Lease Agreement and other credit characteristics, FirstSouthwest helped the City and the DOA obtain a rating upgrade, from A2 to A1 from Moody’s for the Hybrid Bond credit, which was the first upgrade of a major airport credit in 2010, and affirmation of its other ratings.
Refunding of the Series 2003RF-B/C Variable Rate Bonds to Fixed Rates: In December 2010 (a month after closing the MHJIT completion financing), FirstSouthwest structured the issuance of $524.045 million in long-term fixed rate bonds to refund all the outstanding principal of its Series 2003RF-B/C variable rate bonds. This action was precipitated by the downgrade of the insurer on the bonds and the termination of the Standby Bond Purchase Agreement by the Liquidity Providers. The termination asserted by the Liquidity Providers resulted in an immediate suspension of all bondholders rights to optionally tender the bonds. Pursuant to the provisions of the Master Bond Ordinance (“MBO”), interest on approximately 85% of the bonds reset at SIFMA plus 2% per annum. Approximately 15% of the bonds were being held as Bank Bonds and reset at an even higher periodic rate. Moreover, Bank Bonds were subject to accelerated redemption on each interest payment date. Prior to the refunding, the Airport was fully exposed to interest rate fluctuations. The refunding of these variable rate bonds mitigated and removed the interest rate exposure for the Airport. As a result of implementing this refunding, the City reduced the Airport’s variable rate debt from 40% of its outstanding debt profile to zero and eliminated all counterparty risks.