CHICAGO — In what is being billed as a first of its kind public-private partnership, the Branson, Mo., Regional Airport Transportation Development District will sell nearly $117 million of tax-exempt airport revenue bonds tomorrow to finance the first for-profit commercial airport to be developed and operated by a private company.
Proceeds of the unrated deal, along with a roughly $25 million equity contribution from the airport developer and operator, Branson Airport LLC, would finance the $140 million cost of acquiring, constructing and equipping the new airport that would serve the city of Branson, a vacation destination for more than eight million visitors last year.
The group has Federal Aviation Administration approval to proceed with construction and all necessary local governmental approval, but final FAA approval would be needed for operations at the airport to begin as proposed in the spring of 2009 and no airlines have yet signed on to serve the airport. Citigroup Investment Banking is underwriting the deal while Gilmore and Bell LLP is bond counsel.
The deal includes two series. One series is $10.1 million that is not subject to the alternative minimum tax and will finance road improvements. The second is $106.7 million and will provide the bulk of financing for the one-terminal, one runway airport. UMB Bank NA is the trustee and Chapman and Cutler LLP is the underwriter’s counsel.
The bonds are secured by a pledge of the trust estate that includes rental payments owed under the operating lease. The company currently owns the land but will deed it to Taney County which in turn will lease the airport to the development district.
The district will then enter into a 45-year ground lease with the company.
The deal also includes several reserve funds holding about $18 million. The company will enter 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 is five years in the making and development of the financing has proved “challenging,” said Gilmore and Bell attorney Gary Anderson.
“It’s a new concept for a public-private partnership for a start-up airport that doesn’t involve any FAA funds,” he said. “This is being cut from whole cloth.”
The project qualifies for private-activity tax-exempt financing without a need for volume cap as a qualified exempt facility under the tax code. The deal meets the various restrictions imposed under the tax code’s subsection on airport facilities — the term of the lease is limited to 80% of the useful life of the asset and cost of issuance paid from bond proceeds is below 2%.
The Branson Airport group was first formed in 2000. It commissioned feasibility studies for the project and began working with local officials to promote the project.
“The city and county are participants and the principals are willing to invest $25 million,” Anderson said.
The project’s support aside, the project is a risky venture and repayment of the bonds is not a sure thing. “Investment in the Series 2007 bonds involves a high degree of risk and prospective investors” are urged to read the 18-page section outlining the various risk factors and to consult with their own legal and financial advisers.
Only qualified institutional buyers can 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 bonds will be issued in denominations of $100,000.
The gambit of risks includes traditional construction and design risk, potential regulatory issues, a potential decline in tourism and air travel, bankruptcy risks, and competition from the Springfield-Branson National Airport, which is about an hour away and in the midst of building a new terminal.
The airport also has yet to attract any airlines. Despite the limits on buyers and risks associated with the project, several market participants said they believe the deal will attract a good deal of interest given the market’s appetite for higher yielding securities.
“People are chasing after even a few extra basis points,” said Dick Larkin, senior vice president and analyst at JB Hanauer. “The project sounds risky but you are betting on Branson and from what I know it’s a growing tourism area. There’s a lot of traditional funds willing to take a bet for the extra yield.”
The airport would be built on 422 acres of land in the southern edge of the state in the Ozark Mountains. The plan calls for a 7,000-foot runway and 45,000-square-foot terminal with the capacity to handle up to 800,000 passengers annually.
The runway, which could eventually be extended up to 9,000 feet, could handle narrow-body commercial jets capable of handling non-stop flights anywhere in the continental U.S.
The company betting that the airport will succeed on a combination of steady local tourism growth of about 5% over the last two years and the low ratio of visitors that currently fly into the region.
The region is home to 50 theaters with 50,000 seats that focus on county-western music and the region boasts of other recreational activity like boating, fishing, golfing, and hiking, with more than 24,000 hotel rooms.
More than half of the region’s visitors travel over 300 miles to Branson. Under the current projections, the company anticipates 180,000 travelers will use the airport in 2009 on 3,400 flights, representing about 2.2% of annual visitors to the region.
That number is projected to rise to 275,000 for 3.3% of visitors on 5,000 flights the following year and 330,000 for 3.9% on 5,800 flights in 2011. The airport is projected to generate $7.8 million in revenues in 2009 and $12.3 million in 2010.
After operating costs are deducted the airport would have about $4.9 million available in 2009 to cover a $3 million debt service payment and $8.4 million in 2010 to cover a $5.5 million payment.
Revenues would generate enough to provide a minimum debt service coverage ratio of 1.4 times. Airport revenues include airline landing and operating fees; cargo and other general aviation related payments; an airport facility charge of $12.50 tacked onto ticket costs similar to a passenger facility charge; and rental car, parking, and other concession fees.
The city of Branson has also entered into a pay-for-performance agreement — subject to annual city appropriation — based on passenger levels. Under the various risk categories, the offering statement outlines potential scenarios that could occur during bankruptcy reorganization proceedings that could have a direct impact on bond repayment, presenting an overview of federal court rulings in United Airlines’ challenge of its lease-related debt.
The offering statements note that in the event of a Chapter 11 bankruptcy the court might be asked to determine whether the Branson operating lease is a true one or a financing arrangement.
If the lease were re-characterized, bondholders would be afforded some protection as the operating lease would represent a secured claim under the deed of trust pledged to bondholders.
However, the court would need to determine the value of the lease and there are not steadfast factors used in such determinations.
The difference between the “value” as determined by the court and the amount owed on the bonds would then be treated as an unsecured claim. If the company opted not to maintain operations of the airport, its ownership interest would be sold and the trustee would have a claim on the proceeds.
If the operating lease were upheld as a true lease, the company would be required to either assume or reject it. If assumed, all funds owed to bondholders would have to be paid. If rejected, bondholder payments could be subject to Chapter 11 caps on lease rejection claims that in this case would be equal to three years worth of rental payments due on the lease.
Under the structure of the deal, the trustee could attempt to foreclose and seek control of the property. The Branson lease has some similarities to the structure of United’s Denver lease that was upheld as a true lease but the final determination would likely be based on state law and such a case involving Missouri lease and contract laws has not yet been litigated.
The airport operator Branson Airport LLC includes AFCO Branson Investors, a group of 13 investors that contributed $5 million to the project and the development firm GEP Inc., which is contributing the land. Various investors are contributing another $20 million.
