Maryland airport deal offers new twists involving passenger facility charges.

CHICAGO -- Airport bonds backed by passenger facility charge revenues will be given a unique twist in a nearly $163 million revenue bond issue scheduled to be solo tomorrow by the Maryland Transportation Authority on behalf of the Baltimore/Washington International Airport.

The issue marks the first double-barreled pledge of debt service that combines passenger charge revenues with non-airport revenues, according to officials working on the deal. In addition. the deal is structured to allow for the possibility of the bonds being backed solely by passenger charges in the future.

Because the issue is not backed by any general airport revenues, it also allows for the first passenger charge bonds that are not subject to the alternative minimum tax.

The special obligation revenue bonds are backed with revenues from a $3 charge per enplaned airline passenger*that the Federal Aviation Administration has approved for the airport. The charge will remain in effect until the airport collects $286 million, plus an additional 15% cushion of $43 million if needed to complete a planned expansion project.

While airport bond issues involving passenger charges have relied on a double-barreled pledge of those revenues and general airport revenues, the Maryland Transportation Authority's issue uses toll revenues unrelated to the airport to provide the second pledge.

Stephen L. Reich, the authority's executive secretary, said the authority has broad powers to finance transportation projects in the state beyond its primary responsibility to finance, operate, and maintain the state's toll roads and other toll facilities. Even though the airport is operated by the Maryland Aviation Administration, which is an arm of the Maryland transportation department, Reich said the authority is able to issue bonds for the expansion project.

He said the project could have been financed through the transportation department on a pay-as-you-go basis using department funds and passenger charges. No bonds have been issued for the airport since the Maryland Aviation Administration acquired the airport from the city of Baltimore in 1972, Reich said.

By issuing bonds, the authority is able to leverage the passenger charges while providing a backup pledge of toll revenues, Reich said.

The backup pledge allows the issue to circumvent rating agency concerns about bonds backed solely by passenger charges. The pledge was instrumental in getting Financial Guaranty Insurance Co. to insure the issue, according to officials working on the deal.

Reich said the authority's $294 million of A-rated outstanding transportation facility revenue bonds will have a senior lien on toll revenues. Once debt service and operating costs are satisfied, any remaining money will flow to a general account, where it could be tapped for the airport bonds, he said.

According to the preliminary official statement, coverage ratios for the authority's airport bonds from the general account balance alone would range from 6.55 times debt service in 1995 to 10.87 times in 2003. Revenues from passenger charges would provide coverage levels of 1.19 times in 1995 to 1.54 times in 2003.

The issue includes about $70.8 million of special sinking fund bonds that are due in 2019. The authority is planning to redeem them starting next year with excess revenues from passenger charges, according to Kenneth G. Pott, a vice president at Morgan Stanley & Co., the senior manager on the deal. Pott said that current projections of passenger charge revenues show the bonds having an average life of 6.5 years.

However, if those revenues should fall below projections, or if the FAA terminates the airport's ability to collect them, fewer bonds than anticipated or no bonds would be redeemed early, Pott said.

The deal also includes a provision that would allow the authority to release its lien on toll revenues to pay off the bonds. Pott said that could happen if the FAA and the U.S. Department of Transportation take action to reduce the risk that passenger charges could be terminated at the airport. The risk of termination is at the heart of rating agency reluctance to rate or to give an investment-grade rating to airport bonds backed only by such revenues.

Under the structure of the Maryland Transportation Authority's deal, the lien on toll revenues would be released if passenger charges provide at least 1.5 times coverage on the bonds and if FGIC consents to the release, Port said. He added that the Maryland Aviation Administration has also agreed not to do anything that would remotely trigger a termination problem with the FAA.

Kathy Evers, a vice president at FGIC, said that ideally the FAA would have to agree to exempt fees needed for debt service from possible termination before FGIC would give its consent.

"Short of that, I don't know what it would take for us to be comfortable," she said.

FGIC based its analysis of the bond issue on the creditworthiness of the authority and the availability of toll revenues because of the possibility that the airport's passenger charges could be terminated, Evers said.

"That termination potential is out there, and it remains an issue for us doing bonds on a stand-alone basis," Evers said, adding that bonds backed solely by passenger charges are not an insurable credit from FGIC's standpoint.

Another unique aspect of the deal is its inclusion of non-alternative minimum tax bonds, partly backed with passenger charges. Jim Cumbie, a partner at Venable, Baetjer and Howard, the deal's bond counsel, said that 28% to 30% of the bonds will be exempt from the tax because the use of bond proceeds and the payment of debt service fall within the public realm, skirting the private-activity provision that requires the tax.

Cumbie said that after consultation with the FAA and Treasury Department officials, both passenger charges and toll revenues are considered public revenues for the repayment of the bonds. In addition, he said, some of the planned airport expansion projects, such as roadways and a light rail line are considered "pure governmental public uses." Other projects, including a runway extension and an airplane de-icing facility, cannot be financed with private airline revenues, which allows them also to fall within the public category.

On the other hand, a planned new international terminal would meet the private use test, and those bonds will be subject to the alternative minimum tax, Cumbie said.

Pott said the deal, which is double taxexempt, should attract retail interest in the state of Maryland. Alex. Brown & Sons is the co-senior manager on the deal, and Ferris, Baker Watts Inc., Legg Mason Wood Walker Inc., and Pryor, McClendon, Counts & Co. Inc., are co-managers.

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