CHICAGO -- Northwest Airlines and Minnesota officials announced a tentative agreement yesterday on a $699 million bond-financed deal to expand the airline's operations in the state.
The complex deal, put together after an initial financing proposal was scuttled by Northwest last month, still needs the approval of two independent state-created boards that have been asked to paticipate in the financing -- the Iron Range Resource and Rehabilitation Board and the Metropolitan Airports Commission. The state Legislature's Commission on Planning and Fiscal Policy must also approve the deal.
Gov. Arne Carlson said he expected all three panels to ratify the agreement in the next 10 days.
"All of the public bodies that will participate in this package have been closely involved throughout the negotiating process, and we are confident they will not hesitate to approve the agreement as written," Gov. Carlson said in a release.
Because of the Veterans Day holiday, no representatives of any of the three groups could be reached for comment yesterday.
Under the agreement, the state and the airports commission would issue up to $699 million of general obligation and revenue bonds to finance expansion by the airline, according to John Gunyou, the state's finance commissioner. The major change contained in the agreement centered around how much the airport commission would issue and how those bonds would be secured.
The role of the airports commission in the financing has been a stumbling block in the negotiations that began after the Legislature passed a law in May authorizing the state and the commission to explore jointly issuing up to $740 million of bonds to finance Northwest's expansion plans.
Under the agreement, the state would issue up to $350 million of bonds to finance the construction of an airplane maintenance facility in Duluth and an engine repair facility in Hibbing. Up to $175 million of the state bonds would carry Minnesota's GO pledge. Rating officials say the deal would mark the first time a state will lend its GO pledge to fund capital construction for a major airline.
The airports commission would issue up to $349 million of bonds -- $270 million of GO bonds and $79 million of lease-backed revenue bonds -- and lend $320 million of the proceeds to Northwest to finance future expansion.
The original plan was for the airports commission to issue $270 million of GO bonds and $120 million of lease-backed revenue bonds. But during negotiations with Northwest, commission staff members said they could not issue revenue bonds at that high a level without reducing the coverage on the commission's $154 million of outstanding GO bonds and endangering its triple-A rating from Moody's Investors Service and Standard & Poor's Corp.
That move caused Northwest to break off talks on the deal on Oct. 15. But bargaining resumed within a few days, and Gov. Arne Carlson persuaded the Iron Range Resource and Rehabilitation Board -- a panel promoting economic development in northeast Minnesota -- to participate in the financing.
Under the new agreement, the entire proceeds of the airport commission's GO bond issue would be lent to Northwest. But only $50 million of the proceeds of the $79 million revenue bond issue would be lent to the airline, with the remaining $29 million placed in a reserve fund, Mr. Gunyou said.
In addition, the rehabilitation board would purchase a letter of credit to provide security for the airports commission's reserve fund for the 10-year life of the bonds.
Mr. Gunyou said the plan is to build the reserve fund up to at least $40 million, representing three years of debt service payments on the revenue bonds.
The agreement calls for Northwest to pledge assets equal to two-times coverage of the $79 million issue as collateral.
Mr. Gunyon added the use of up to $29 million of the proceeds of the bond issue for the reserve fund could mean that the revenue bonds would be taxable due to arbitrage considerations.
