The Port Authority of New York and New Jersey and officials at LAX Airport, are being courted to implement a patented airport finance method that securitizes the lease payments that airlines make to the airports in order to use their terminal gates.
The patent-pending business method does not have a name and no solid plans have been laid for a deal, but an attorney who developed the method and is awaiting patent approval on it is working with a large bank to structure a deal by next year.
As much as $10 billion in outstanding airline debt could be refinanced through the use of securitization, and proponents are hoping to that operators of some of the nation's busiest airports on both coasts will implement the method in a financing by mid 2008.
Traditionally, airports finance upgrades and expansions to their facilities by issuing special facility revenue bonds, which are secured by terminal and gate lease payments that they receive from the airlines. In use since the 1980s, SFRBs typically rely on airlines' corporate credit and their ability to repay the bonds. As such, the bonds fluctuate wildly in value, making them the most lucrative type of municipal bond, from the perspective of investors and traders in that sector. Some securitization professionals, however, see no reason for such a critical form of financing to rely on the fortunes of a chronically troubled industry.
"This is not necessary," said Linda Grant Williams, a partner at Dreier LLP. "They ought to use standard securitization techniques to isolate the valuable real estate - which is the lease of the gates - from the potential harm of the bankrupt airline."
Seeing an opportunity, Grant Williams developed another approach. Under the new method, the airline would establish a bankruptcy-remote, special purpose entity - the very heart of securitization - as the obligor of airport SFRBs.
"Think of [the SPE] as a leasing agency sitting on the property between it and the airline," said Grant Williams.
Then the SPE subleases the use of the airport gates to the airlines, thereby relieving airport authorities from having to deal with bankrupt airlines that have trouble making their gate lease payments and bondholders from wringing their hands in anticipation of payments. If an airline goes into bankruptcy and falls behind on its lease payments, the SPE can draw down on a 12-month lease reserve fund to continue servicing the bond debt, while they evict the airline for failure to pay rent, said Grant Williams.
The Bigger, the Better
Only the nation's busiest airports could make the most of the ABS-powered SFRBs, because the SPE would need to find another airline as a sublease tenant, and continue making payments on the bonds, said Grant Williams. Demand for airport gates is high and growing, because of a preference from the Federal Aviation Authority to see airports use all available departure gates and demand from international carriers.
"Let's say American Airlines went belly up," she said. "Do you have any question that there would still be airlines flying in and out of LaGuardia, John F. Kennedy, Liberty Newark International and LAX? The location and the geographic needs of the people in that location ... are far more important than which airline is there."
The airport sector has never used special purpose entities in the structure of SFRBs, she said, and the new method could be priced 200 to 300 basis points cheaper than traditional SFRB financing, amounting to tens of millions of dollars a year in debt servicing costs, she said. Dreier recruited triple-A-rated banks and pension funds to provide credit enhancement for the bonds and price them more attractively. The difference in current pricing and ABS-enhanced yields would be the difference between B-minus, the corporate debt rating of several airlines and credit enhancement from triple-A-rated wrappers.
One example of the product's sustainability is the financing of Terminal Two at LAX, said Grant Williams. The terminal leases gate space to about 13 airlines, and is primarily leased to Northwest Airlines, Hawaiian Air and Air Canada, according to the airport's Web site. All three of those airlines have been in bankruptcy, but the outstanding bonds on Terminal Two have never defaulted.
"It shows you that if you really need the terminal and if it's structured properly, bankruptcy can be irrelevant. It is demand-based financing," she said.
Also, as the nation's busiest airports upgrade their facilities, the method will be looked to as a much more affordable form of financing than existing methods.
Representatives from the Port Authority declined comment about a potential deal, although Grant Williams said that a deal at one of the New York area's three airports is feasible, because officials there have enough structured finance perspicacity to flatten the learning curve about the product.
If finalized in a deal next year as hoped, the new method could also be used to finance seaports that dock cargo and passenger ships, said Grant Williams.
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