WASHINGTON -- Most obstacles to issuing tax-exempt bonds in conjunction with the new airline passenger fee were cleared away by the Federal Aviation Administration's revised rules issued last week, but bond lawyers and a rating agency official said one problem remains.

The latest regulations, now considered final, still allow the administration to end an airport's ability to levy the fee, which airports are expected to use as the revenue stream to back tax-exempt bond issues.

Although the FAA added safeguards to the rules to make sure termination is used as a last resort in disputes between the FAA and an airline, the right to terminate the fee "is still there, so programatically you can't dismiss it" when evaluating the credit rating for an airport bond issued in connection with the fee, said Al Medioli, a vice president and assistant director in the public finance department of Moody's Investors Service.

"That's probably the weakest area that remains," said Matt Lewin, a partner in the law firm of Chapman & Cutler, which acts as bond counsel or underwriter's counsel to a number of airports around the country.

When the regulations were first proposed in February, officials of Moody's Investors Service and Standard & Poor's Corp. warned that the administration's power to terminate the fee went against most standards of bondholder protection.

The only perfect solution would have been to eliminate the provision giving the FAA the termination power, but that was not possible because it was a requirement under the legislation passed by Congress setting up the fee.

Instead, to allay the industry's concerns, the administration added a new section to the regulations setting up procedures under which it would terminate the levy. The procedures were designed to give the airport and the FAA a chance to work out any problems that might cause the administration to want to revoke the fee. They also contain a hearing and comment period intended to alert bondholders to those problems.

The addition of the procedures improves the original rule, but how much protection they afford bondholders can only be determined on a case-by-case basis, Mr. Medioli said.

A number of factors will have to be examined to determine whether the possibility of termination is a real threat to the safety of the bonds, he said.

"A lot of information and a lot of project analysis can be done to further mitigate the problem of termination," he said.

Rating agencies will be looking to see, for example, if the airport in question has a "very clear intent of the project," as well as to what degree the FAA supports the project and how much the airport is willing to work with the administration to iron out differences, Mr. Medioli said.

Officials at Standard & Poor's said they were not prepared to comment on the regulations.

Another problem also could crop up with the termination provision, according to Tom Devine, legal director for the Airport Operators Council International. The new procedures do not apply in cases where the administration decides to terminate the charge if an airport has violated noise abatement standards. Procedures for those cases presumably will be covered in regulations to be released in July to implement the standard.

"It's not that something in the [passenger facility] rule is wrong, it's just that they say [noise abatement] is not covered," Mr. Devine said. "We would be very happy if the final rule had termination provisions essentially parallel" to those in the facility charge rules.

But beyond the issue of termination, bond lawyers and airport industry officials said they were extremely pleased by the way the administration revised the rules to facilitate bond issuance.

"There was a remarkable change in the rule between the preliminary and final version," said J. Gordon Arkin, a partner with Foley & Lardner, which represents the Greater Orlando Aviation Authority. "The people who took time to make comments should feel gratified that they were listened to."

Another problem in the original regulations stemmed from the way the charge will be collected. Airlines will levy the charge on their passengers and then pass the revenues back to the airports.

Several industry officials had said they were concerned about what would happen to facility charge revenues held by an airline that goes bankrupt. They suggested airlines should be forced to escrow the funds in a separate account to keep them from being tied up in bankruptcy proceedings.

The FAA stopped short of requiring a separate account for the funds, but it did "put in some good language about the monies having to be held in trust" for the airport, Mr. Medioli said.

That language states that the airline must "treat [passenger facility charges] as trust assets of the public agencies in which the carriers hold only a possessory interest and not an equitable interest."

That language is "as good as you can get without requiring them to segregate the accounts," Mr. Devine said.

Another problem resolved by the FAA surrounded the requirement in the original regulations that airports trace, on a dollar-for-dollar basis, where their facility charge revenues went, to ensure that those dollars were spent on the approved project.

That requirement was at odds with the way many airports handle their bond financing. Most operate under master bond indentures that require funds from various sources to be pooled and used to pay debt service on outstanding bonds. "We think the FAA did a great job" in revising that portion of the regulations, Mr. Lewin said. He said the final rules allow funds to be commingled, as long as an amount equal to the amount collected in facility charge revenues is spent on the approved project.

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