BRADENTON, Fla. — With a deal uniquely structured to meet investors’ demands, a Florida conduit issuer has sold one of the largest tax-exempt bond financings to date for an airport fixed-base operator.
Capital Trust Agency and the Houston-based Million Air FBO closed the $48.4 million, 30-year deal Aug. 2 for projects at airports in Tallahassee, Fla., Gulfport-Biloxi, Miss., and Hobby Airport in Houston. It’s believed to be the first rated FBO transaction.
The offering, subject to the alternative minimum tax, was oversubscribed and five qualified institutional buyers plucked it up in minimum denominations of $100,000.
“The investors had specific demands,” said D.J. Mehigan, a managing director at Morgan Keegan & Co., the sole underwriter on the deal. “The investors helped dictate what they wanted to see but at the same time these demands had to be acceptable to Million Air.”
Though it took a year to structure the deal with additional safety features investors wanted, the bonds — with a Ba3 rating from Moody’s Investors Service and a single term in 2041 — sold with a yield of 7.75%.
“The Ba3 underlying rating, while non-investment grade, is above that of most airport tenants such as airlines and rental car companies and we achieved this rating based on the tight structure and strong bondholder pledge,” Mehigan said.
The deal was structured with a joint and several pledge of revenue from the financed facilities as well as additional revenues that build up over time and will be captured in a supplemental reserve fund, Mehigan said. Million Air provided a construction guarantee to pay for cost overruns. In addition to property insurance, the facilities are covered by business interruption and flood insurance.
What did investors demand? To start, there are six call features.
“That was something I have never seen,” Mehigan said.
In addition to typical call provisions, there are mandatory and optional extraordinary redemption requirements, including optional redemption if facilities are destroyed or certain damages occur, and mandatory redemption if excess proceeds are deposited in the special redemption account of the debt service reserve.
Mandatory redemption at 106% of the principal amount is required if the bonds are determined to be taxable, and if a company or subsidiary sells a property. The bonds are subject to optional tender if Million Air owner Roger Woolsey no longer owns 51% of the company.
There are also added disclosure features beyond those required by Securities and Exchange Commission Rule 15c2-12, such as quarterly investor calls, financial statements and debt-service coverage reports. An operating plan and detailed budget with monthly revenue and estimates is due 30 days before the end of each fiscal year.
The company has pledged to file annual financial reports within five months of the fiscal year end, and to file material event notice in 10 business days after an event occurs.
“There was really a comprehensive continuing disclosure so that [bondholders] could be informed and have frequent updates on the operations and performance of the bonds,” Mehigan said. “To me, our disclosure document was unique and very thorough.”
Though there has been criticism about cross-state conduit financings, particularly for private businesses, Mehigan said Capital Trust Agency was sought out because it could finance all three projects in a single deal.
Mehigan, whose specialty is airport financing, said FBOs are just one of many private users of publicly owned airports.
Fixed-base operators provide aircraft fueling, parking and storage, pilot services and aircraft maintenance primarily but not exclusively to general aviation.
Million Air is not the first municipal bond deal sold on behalf of FBOs and recent deals have been unrated.
Three separate conduit issuers in different states simultaneously sold bonds in 2009 on behalf of Airport Property Partners LLC for FBOs in California, Florida and Virginia. In 2006, conduit issuers in Texas and Illinois simultaneously sold $8.63 million of bonds on behalf of AFCO Fixed Base Operations Obligated Group.
Woolsey, owner of Million Air and several other related businesses including an air medical transport company, argues that fixed-base operators are an essential element of an airport just like commercial airlines and air cargo companies.
Businesses, large and small, often use FBOs to scout new locations, he said, and facilities at a community can make or break a corporation’s decision where to locate.
Million Air was founded in Houston in 1984 by makeup mogul Mary Kay as a single FBO.
Woolsey bought it in 2002 and created a network of 21 franchised fixed base operators and nine company-owned or operated facilities. The company is among the top 10 FBOs in the nation.
Public financing is suitable for FBO facilities for several reasons, Woolsey said, including the fact that bank loans have been difficult to obtain the last few years because of the credit crunch.
The nature of FBOs makes it more difficult to obtain long-term financing from local banks, because the buildings being constructed with the loans are owned by the FBO but subject to a lease with the airport.
“At the end of the lease, everything we build reverts to the community,” he said. “Banks have a difficult time understanding that.”
Another problem is that FBOs often seek smaller loans that aren’t attractive to larger investment banks.
Though Woolsey said he could get bank construction loans at a lower interest rate, it would have been for a much shorter term.
“The trade-off, or advantage [of bond financing], is the fact that it was long-term,” he said. “Now I have financing in place to build these three facilities and I can go run my business. I can now really focus on customers producing a good service.”
Woolsey said the bond transaction was more expensive and time and labor intensive than private financing because it required feasibility studies and educating investors, but said he intends to use the model again and has other projects in development.
“My job is to keep my new bond purchasers informed and keep payment streams running,” he said. “It kind of allows everybody to go on auto pilot.”