SAN FRANCISCO — Kevin Kone, assistant deputy airport director for finance at San Francisco International Airport, manages a major variable-rate bond portfolio that’s helping to fund a 10-year, $1.35 billion capital improvement project at the West Coast’s second-busiest airport by passenger traffic.
He hopes to see significant savings from the stimulus bill’s alternative-minimum tax holiday. He’s struggled over the past year with reduced demand for bonds that are subject to the AMT, and he plans to lock in the savings that non-AMT debt offers on as much of his debt portfolio as possible. The airport is also pushing hard for federal grants.
Q: What elements of the stimulus bill do you think you may be able to put to use?
A: We are looking to take advantage of the AMT holiday. The challenge is that there’s not clear direction coming out of Treasury on how entities can take advantage of the AMT holiday in converting different types of securities. How do you in effect do a conversion? What constitutes a conversion or a refunding?
Orrick, Herrington & Sutcliffe is our bond counsel, and their tax group is working very hard — within their firm as well as with the Treasury — to get comfortable on what the mechanisms might be to do a conversion. The first thing I’m looking at is converting variable-rate demand bonds from AMT to non-AMT [without doing an actual refunding]. So we are waiting for guidance from our bond counsel on what is the step-by-step process to do something like that.
Q: Why is that your first priority?
A: Conceptually — without getting into tax codes — you would bring in those variable-rate demand bonds and then remarket them back out as non-AMT. I would save approximately 50 basis points in interest costs between AMT and non-AMT. I have about $440 million in variable-rate demand bonds that are AMT that I would like to convert. We’re waiting for guidance exactly how that happens.
Q: If your lawyers can’t figure that out, can’t you just refund them?
A: You can, but then you’ll lose the liquidity facilities and insurance because it will be construed as a traditional refunding. That would defeat the whole purpose of doing this. Even if you could get new liquidity and insurance, you would cancel out the 50-basis-point savings that you were trying to achieve.
Q: Do you have other debt that might benefit from stimulus provisions?
A: The other piece we’re looking into as well as relates to the stimulus package is that we’ve got about $413 million in fixed-rate bonds that are not callable that are AMT that we would like to see if we might be able to tender those bonds. So we’re looking into the steps and educating ourselves to see what might need to take place to try to do a tender program and try to convert those bonds from AMT to non-AMT as well.
Q: What about upcoming new-money bonds?
A: We had always planned to issue new-money bonds. We’re in the review process of reviewing our construction cash flows and we’re thinking that we might be planning a transaction for late summer or early fall. That would fall under what would normally have been almost all AMT. That transaction will go now with the stimulus bill non-AMT.
Q: Will the stimulus’ grant provisions reduce your borrowing needs?
A: Yes. There are stimulus grants — we are working very aggressively on stimulus stuff. The grants are coming from a couple of different agencies. We’re going to get $5.5 million from the Federal Aviation Administration for routine infrastructure-type of runway work, and we’re working on getting $10 million to $15 million from the Transportation Security Administration for explosive-detection systems for the new Terminal 2 project that we’re working on. We’re also looking at another $12.9 million for a runway overlay reconstruction project from the FAA .… That reduces borrowing costs.
Those are the things that we’re working on to try to get money to come this way. All of the city and county of San Francisco’s departments are working collectively in trying to apply for and lobby for as much stimulus money as possible, and the airport is trying to get its share as well.
The city’s leaders and department heads, as well as the airport director [John Martin], were back in Washington last week to meet with our congressional delegation, the TSA, the FAA and other agencies …. It’s still pretty early [to say exactly what grants the city and the airport will get].
Q: It sounds like the grants available to the airport are small in relation to the possible savings you could get under the bond provisions of the stimulus bill. Is that right?
A: It is. The grants are definitely nice. We appreciate what we can get on the grant front, but the debt management issues are much bigger in magnitude. For example, if we sell fixed-rate bonds, the savings we would achieve over the life of those bonds are much greater than a few million of grants here or there on projects. The debt issues have a much greater impact over the long term, which is helpful.
