SAN FRANCISCO — San Jose, Calif., has been forced to piece together bank backing for short-term notes that have helped pay for a more than $1 billion airport terminal.
As a result of tight credit markets, the city has been scrambling to find banks to support its $600 million commercial paper program that has funded construction of a new terminal at Norman Y. Mineta International Airport.
As of October, $435 million of the short-term paper was outstanding and the city had $590 million in letters of credit, according to the city’s finance department.
But as the majority of the letters expire in December, Dexia Credit Local bank has decided to withdraw its backing and JPMorgan Chase Bank has tipped its hat that it will cut its commitment in half, while Lloyds TSB Bank has been noncommittal about extending credit.
“The current state of the liquidity markets and credit markets is very challenged given that many providers have exited the business, they suffered downgrades, or they have not been issuing new credit facilities, leaving a smaller number of banks,” San Jose finance director Scott Johnson said during a City Council meeting Tuesday.
Johnson said the remaining banks are operating at maximum lending levels.
“This leaves little room for alternatives, but we have alternatives,” he said.
The commercial paper is backed by a $200 million letter of credit from JPMorgan, an $83 million LOC from Bank of America, and a $167 million one from Dexia, which is in the middle of a restructuring imposed on it by the European Commission. All of those credit lines expire in December.
The city also has a $140 million letter of credit from Lloyds that expires in May.
Since August, the city has been searching for banks to extend or contribute to the $450 million of backing to cover the short-term debt, but it was only able to get commitments from four banks for $340 million.
In an effort to gain time before the LOCs expire, the City Council voted unanimously Tuesday for a two-month extension with JPMorgan and Bank of America.
Due to the extension, the base fee for the credit will be raised to 1.4% from 0.15%, an increase of $548,000 in fees over the two-month period.
Johnson told the council that Bank of America has indicated that it could increase its amount of participation, but he said JPMorgan indicated it could cut its commitment in half, to $100 million. Lloyds’ contribution is up in the air.
The finance director said it’s too early to tell where Lloyds stands, adding: “Quite frankly, I don’t know if Lloyds knows where it is going.”
To close the gap, San Jose has lined up Citi and Wells Fargo to cough up credit and has squeezed money from other areas.
“We are short $10 to $20 million,” Johnson said. “I think we have this covered. We are working very well with the financial institutions.”
The extension is scheduled to close on Nov. 17 and the City Council may consider a final agreement for the letters of credit in January, according to Johnson.
He said in an e-mail that he expects to finalize terms on the longer-term replacement credit soon.
This is not the first trouble the program has faced. In 2008, the city restructured the debt program after the collapse of bond insurance companies. That also resulted in the city obtaining the letter of credit from Lloyds as it sought to refund auction-rate securities amid troubles in that market.
But Johnson noted during the meeting that the notes have always been seen as a short-term financing strategy that would eventually turn into longer-term bonds once construction on the airport project was completed.
Under questioning from council members, Johnson affirmed that San Jose is waiting for a better financial picture from the airport to aim for a better credit rating before going to the bond market to replace the short-term notes.
“We are currently looking at a long-term option; we have been looking at that for a while,” he told the council.
Moody’s Investors Service has an A2 rating with a negative outlook on San Jose’s airport debt. The agency noted that passenger levels dropped significantly during the recession while the airport was in the middle of the major construction project.
Bill Sherry, the city’s director of aviation, said during the meeting that the airport is seeing its finances improve.
He said the airport’s modernization program came in months ahead of schedule and is currently tracking $140 million under budget.
Sherry said the airport should be in the black in terms of passenger growth in January. “We believe we are very near, if not at the bottoming out of this downcycle,” he told the council. “My message to you today is that the sky is not falling.”