Cleveland Sets $160M for Airport; $50M of Variable Rates to Follow

CHICAGO - Cleveland today will begin to price $160 million of fixed-rate airport revenue bonds and later this month follow with a $50 million variable-rate transaction.

The refinancings allow the airport to take advantage of a provision in the federal stimulus package that allows issuers to convert some debt whose interest was subject to the alternative minimum tax into non-AMT bonds.

The city will hold a retail order period today with institutional sales held tomorrow. Siebert Brandford Shank & Co.'s new transportation finance team is the senior manager, leading a team of eight additional banks.

Squire, Sanders & Dempsey LLP is bond counsel. Government Capital Management LLC and Phoenix Capital Partners LLP are co-financial advisers.

Ahead of the sale, Moody's Investors Service revised its outlook to negative on the A3-rated debt. Fitch Ratings affirmed its A rating with a negative outlook and Standard & Poor's affirmed its A-minus rating with a stable outlook.

The fixed-rate bonds will be insured by Assured Guaranty Corp. All the bonds are secured by revenues of the city's airport system, which includes Cleveland-Hopkins International Airport and Burke Lakefront Airport.

Proceeds from today's $160 million sale will refinance $148 million of 2008 variable-rate bonds, pay $9 million to terminate a trio of swaps associated with the 2008 debt, make a deposit into the airport's debt service reserve fund, and pay costs of issuance.

On Aug. 25 the city will sell $50 million of variable-rate airport revenue bonds, keeping an existing floating-to-fixed-rate swap in place, as well as the Ambac Assurance Corp. insurance on the swap. A letter of credit on that debt has two years remaining.

The city's decision to refinance the 2008 variable-rate debt into a fixed-rate mode came in part after officials encountered difficulty securing new credit, said Elizabeth Hruby, Cleveland's debt manager.

"We were able to take advantage of the federal stimulus package allowing us to go to non-AMT debt, and then we came to the conclusion - after having difficulty obtaining letters of credit - that it worked out to be more cost effective to do fixed-rate," she said.

When the city refinanced about $150 million of auction-rate airport debt last year it obtained a one-year letter of credit from Wachovia Bank NA.

As the letter neared its expiration date, Wachovia only offered to enhance about half of the bonds, said Steven Hoffman, the city's financial adviser with Government Capital Management.

After contacting other banks, Cleveland was only able to secure credit covering another roughly $25 million.

"We looked at the cost of the letter of credit, which, when combined with the annual fixed rate on the swaps, brought the rate up very high, so we decided that it was economical to fix out the bonds," Hoffman said. "Also we weren't sure going forward whether there would be availability for an airport to obtain letters of credit in the future."

The problem is partly industry-wide, Hoffman said, noting that both Moody's and Fitch maintain negative outlook on the airport sector.

"Airports are very stressed entities," he said. "Credit providers are not anxious to provide credit to airports and if they are, it is very expensive."

In their reports on the Cleveland airport, analysts noted declining enplanements, which dipped about 3.1% in 2008 to 5.5 million in 2008 from 2007 are expected to continue to decline. The airport management is working on a plan to increase non-airline revenues to blunt some of that impact, according to Hruby.

"If successful, that may change the [negative] outlook," she said.

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