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Branson Hits Turbulence

CHICAGO — Branson Airport LLC dipped into reserves to cover its July 1 debt-service payment on $113 million of unrated tax-exempt bonds as it struggles to meet traffic projections for the privately built and operated Missouri facility.

Private developers put together a public and private financing package in 2007 to pay for construction of the airport, which opened in May 2009 to serve growing tourism in Branson, the self-proclaimed live music capital of the country. The bonds were issued through the Branson Regional Airport Transportation Development District established for that purpose.

The airport has added service this year, bolstering its prospects, but its travel projections remain far behind original estimates as the tourism and airline industries still lag. The city, facing its own budget crunch, has opted not to honor its 2010 subsidy under its pay-for-performance agreement. The annual subsidy, based on passenger levels, is subject to appropriation. Former city leaders agreed to provide the aid to support development of the airport.

The trustee UMB Bank reported last month that it drew $3.14 million from a supplemental reserve, leaving about $3.2 million remaining. Airport officials yesterday held a meeting with bondholders to discuss final construction costs, current operating activities, financial results, the fall service schedule, and efforts to expand air service.

“The near-term objective is to generate sufficient volumes to cover operating expenses, bond debt service, and investor note debt service,” a bondholder notice reports. “Over the longer term, we are driven to deliver volumes significant enough to enable profits distributions to the investor group.”

The bonds traded most recently last month at 54 cents on the dollar, down from 60 cents earlier in July. The bonds traded at 64.5 cents on the dollar late last year, falling from 90 cents on the dollar in trades conducted in early 2008, according to the Municipal Securities Rulemaking Board’s EMMA site.

The airport held total debt-service reserves of $15.8 million at the end of the second quarter on June 30, before its July draw. 

Branson suffered a $2.2 million operating loss for the first six months of the year and the investor group behind the airport has had to pump in an additional $22 million to support operations. While its travel numbers are picking up, the reliability of funding from its city agreement is uncertain.

The city had initially withheld its 2009 payment of $153,000, but last month made the payment after the Board of Aldermen approved a revised pay-for-performance agreement that will pay the airport $8.24 per passenger based on federal records and subject to annual appropriation.

The revisions resolve city management’s concerns that payments made to a private company violate Missouri law and its worries over how the subsidy would be calculated and that it go directly to debt service. The city will now make its payments directly to the nonprofit transportation district instead of the airport, and the payments will be forwarded directly to the trustee for debt service.

The airport submitted a request for $95,000 in 2010, but the city has not appropriated that money and has no immediate plans to do so, according to city finance director Lori Helle. “The city will fulfill the agreement as long as there is money available,” she said. “We did not appropriate any funds in the 2010 budget.”

The appropriation must compete with city services and other expenditures annually. The city disclosed its decision to skip the 2010 appropriation ahead of the sale earlier this year of $14 million of new-money and refunding revenue bonds. Helle said the city received inquiries from airport bondholders who she said misunderstood the legality of the city’s obligation.

Airport officials have not publicly commented on whether they will challenge the city’s decision on the 2010 appropriation, disclosing in bondholder notices the revised agreement and payment of the 2009 appropriation. In an interview earlier this year, the airport’s project planning coordinator, David Jones, said: “We have an enforceable agreement.”

Meanwhile, officials hope to persuade bondholders that the airport’s future is looking up based on increased service beginning next month. Last month, the airport announced additional nonstop flights to and from Hartsfield-Jackson Atlanta International Airport by AirTran Airways beginning in September.

“The new departure and arrival times will not only open up some fantastic connections, but will offer more options for the frequent flyer,” airport executive director Jeff Bourk said in a statement.

Beginning next month, the airport’s public charter service, Branson AirExpress, which began operating last May, will offer flights from Midway International Airport in Chicago and Indianapolis International Airport. The charter previously offered service from Austin, Houston, Des Moines, Shreveport, La., Biloxi, Miss., and Nashville. Frontier Airlines offers service to Milwaukee and Denver. No major additional expansion is expected until next spring.

The airport also reported that it expects this month that charter service passengers will be able to book through travel websites like Expedia, Orbitz, and others.

The airport reported that passenger levels improved to more than 9,200 in May and 9,600 in June — compared to 3,500 last May and 5,800 last June — with about 47 flights a week offered in July and 60 expected by mid-September.

Weighted average load factors for AirTran and Frontier have been about 82% since March and are expected to remain strong, according to airport filings. Branson AirExpress load factors during its first six weeks of activity were about 50%, as expected, and trending higher. The airport reported that its actual revenues per enplanement have exceeded a management target of $55 and the $43 figure projected in the bond offering statement.

Under projections in the offering statement, the company believed 180,000 travelers would use the airport in 2009 on 3,400 flights, and that number was projected to rise 275,000 on 5,000 flights in 2010. Airport revenues were expected to provide 1.4 times debt-service coverage.

The airport has much ground to make it as it served just 39,000 passengers in 2009 and 30,600 so far this year, with another 76,000 projected for the rest of the year. It originally was projected to generate $12.3 million this year, but had revenues of just $2.6 million in for the first half of 2010.The development of a $140 million for-profit commercial airport by a private company with proceeds of the unrated bond deal, along with a roughly $25 million equity contribution, marked a first of its kind in 2007. When the bonds sold, no airlines had yet signed on to provide service. Citi was the underwriter and Gilmore and Bell LLP was bond counsel.

The bonds are secured by a pledge of the trust estate that includes rental payments owed under the operating lease. The company owned the land but deeded it to Taney County, which then leased the airport to the development district.

The district then entered into a 45-year ground lease with the company that entered into an agreement with UMB, guaranteeing repayment of principal and interest and providing a secured interest in the property, giving the trustee grounds to file a claim independent of the operating lease in the event of a default.

As spelled out in the offering statement, the worth of that guarantee could be severely limited in the case of a bankruptcy filing. The project was five years in the making and development of the financing was challenging, officials said at the time.

The project qualified for private-activity tax-exempt financing without a need for volume cap as a qualified exempt facility under the tax code. Only qualified institutional buyers could purchase the securities with initial buyers and re-purchasers meeting the criteria as defined in Securities and Exchange Commissions rules regarding their ability to undertake a risky investment and absorb the potential loss.

The airport’s closest competitor is the Springfield-Branson National Airport about 35 miles north of Branson.

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