SAN FRANCISCO — San Francisco International Airport last week used a tender offer to refinance as tax-exempt about $120 million of private-activity bond debt that had been subject to the alternative minimum tax, making it the first airport to successfully pull off the maneuver.
The federal stimulus package, the American Recovery and Reinvestment Act, allows private-activity bond issuers to sell tax-exempt debt instead of AMT debt for two years. The legislation also allowed issuers to refund AMT bonds issued from 2004 to 2008.
With much of that debt uncallable because of traditional muni 10-year call features and no provisions for advance refunding of the AMT bonds,refunding with cheaper tax-exempt debt has required issuers to buy their AMT bonds back through tenders, and they’ve had limited success.
“We believe we’re the first airport in the country to carry out such a transaction,” said Kevin Kone, assistant deputy airport director for capital finance.
The Port of Los Angeles conducted a successful AMT refunding via an optional tender to take advantage of the stimulus package in June, when it bought back about half of the $490 million that was eligible for refunding under its tender.
But airports in St. Louis, Sacramento, and Dallas have found that it is hard to get holders to part with their bonds at prices that yield enough savings to make the deals worthwhile.
“We weren’t sure what we would get,” Kone said.
San Francisco International, also known as SFO, targeted about $450 million of bonds from a universe of $620 million of AMT debt that was eligible for the tender offer.
De La Rosa & Co. and Morgan Stanley managed the modified Dutch-auction process, and Bondholder Communications Group helped the airport identify 1,300 investors to contact with the tender offer.
The airport refinanced the tendered AMT debt, about a quarter of the targeted debt, with two series of fixed-rate, tax-exempt debt.
Series 2009C-1 included $67.6 million of Financial Security Assurance Inc.-insured bonds maturing through 2019, and Series C-2 included $65.3 million of uninsured bonds maturing through 2025.
The 2019 insured yield was 4.05% and the uninsured 2025 yield was 4.62%. Officials estimate present-value savings of about $2.5 million.
Perhaps more importantly, the tender allowed SFO to remove put risk from its debt portfolio because it allowed refunding of significant amounts of two- and three-year notes that the airport sold to repair poorly performing variable-rate bonds in the aftermath of the Lehman Brothers failure last year, Kone said.
The short-term debt was meant as a temporary fix to get the airport through the financial crisis, but the tender allowed the airport to replace the AMT debt with longer-term tax-exempt debt at economical rates much sooner than expected.
“Those [maturity] dates were outside of the AMT holiday, so the tender allowed us to basically reach out and capture them and convert them to non-AMT,” said Vincent McCarley, chief executive officer of Backstrom, McCarley, Berry & Co., the airport’s financial adviser. “It increases the flexibility for the airport going forward because there’s less risk when those dates come up.”
SFO also sold Series 2009D last week to refinance $88 million of 13-month notes that it issued in the tumultuous weeks after Lehman Brothers collapsed. The new debt has a three-year term, but it cuts the interest rate on the debt to 2.25% from 3%.
“You can certainly see how things have improved in a year,” Kone said.
