WASHINGTON -- A proposed deal between Minnesota and Northwest Airlines to issue $699 million of lease-backed bonds could end in disaster if the airline goes bankrupt and leaves state and local authorities holding the bag to pay the securities, Standard & Poor's Corp. warns in an article scheduled for today's Credit Week Municipal.

Like a growing number of deals between state authorities and financially strapped corporations, the Minnesota deal is aimed at keeping and expanding the corporation's business in the state by offering to put the good credit pledge of the state and municipal organizations behind what essentially is a corporate "junk bond" financing, the agency says.

Such arrangements may create and protest thousands of jobs, "but at what cost?" questioned agency analysts Arthur J. Grisi, Lisa Danzig, and Jay Abrams. The article raises the Minnesota deal as a test case of the new industrial development-type bond offerings and asserts that it "could leave the tax-payers of the state and the Twincities area bearing a huge burden."

Under a tentative agreement announced Nov. 11, Northwest -- which is highly leveraged, with a B rating on its senior debt -- would provide lease payments for ne aircraft maintenance facilities, which would be used to retire the bonds.

The AA-plus rated state would issue up to $350 million of the bonds and provide its pledge of up to $175 million, while the Metropolitan Airports Commission, a triple-A credit, would issue another $349 million. While Minnesota authorities have made "reasonable" efforts to "ensure fiscal discipline," the credit agency says Northwest "remains vulnerable to bankruptcy" and its failure could lead to disaster for the authorities and put their own high ratings "under intense pressure."

If Northwest stops making lease payments through bankruptcy proceedings, the state would have to appropriate payments for its share of the bonds and could get stuck with largely worthless heavy maintenance facilities that the airline is posting as collateral, the agency said.

Meanwhile, to make payment on its share of the bonds, the airport commission most likely would have to supplement its three-year debt service reserve by raising property taxes in the seven-county region for the first time in years. That move would "wreak havoc with an already overly complicated property tax system in Minnesota -- particularly in the Twin Cities area," the agency said.

Like the state, the commission could become the unhappy owner of airline flight simulators and other assets, posed as collateral, which have little marketability, the agency said. And ultimately, Minnesota residents would "bear a tremendous burden in both misapplied revenues supporting debt payments on failed efforts and missed opportunities to direct those limited resources to more-needed public systems," the agency wrote.

Since many other states and municipalities are wrestling with the same economic problems as Minnesota, the agency concluded that the implications of the Northwest deal "are extremely broad and extend beyond" that state.

Denver for example, has been holding similar discussions with United Airlines, despite that company's recent decision to build a major maintenance facility in Indianapolis the agency noted.

John Gunyou, Minnesota finance commissioner, said the rating agency raised "legitimate concerns" about the proposed financing, but he downplayed the likelihood that the deal would end in failure.

"The risk that we would have to pay the entire $175 million is so small as to be unquantifiable," he said.

He insisted that the risks are mitigated by the potential benefits, since building the maintenance facilities in Minnesota would provide high-paying jobs and ensure that Northwest retains its corporate headquarters and airline hub in the state.

"Air transportation is crucial to the business climate in Minnesota. Businesses rely on the hub that Northwest provides," he said. "If the facilities were to go somewhere else, there would be a gradual erosion of the airline's commitment to the state."

Hugh Schilling, chairman of the airports commission, said he was aware of the risks involved in backing $270 million of the bonds. The commission currently has only $155 million of outstanding general obligation debt.

"But when you take the risks and weigh them against the benefits, it's worth taking the risks," he said.

When the economy picks up, Northwest will prosper and be a financially strong carrier, he said. "If I thought there was a good probability that Northwest would go bankrupt, I wouldn't support this," he said. Northwest officials could not be reached for comment.

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