Orlando Agency Gets 'Eye-Popping' Benefits from 2 Long-Term Swaps

By Katherine M. Reynolds

WASHINGTON - The Greater Orlando Aviation Authority and Gulf Breeze, Fla., have worked out a multi-step transaction involving two long-term interest rate swaps that authority officials say will save them millions.

"The numbers presented were eye-popping in terms of the economic benefit to the authority," said the authority chief financial officer Linda Lindsey in a telephone interview last week. "It's an extremely complicated deal but it has resulted in fabulous rates."

In conjunction with the first portion of a $1.2 billion capitol improvement program, the airport authority wanted to borrow $250 million. Consequently, it issued $170 million of bonds subject to the alternative minimum tax in November at a true interest cost of 5.45%, and took out a $90 million, floating-rate loan from Gulf Breeze's loan program last week.

For the city to fund that loan, it issued $90 million of revenue bonds Tuesday, at a fixed coupon of 4.50%, a yield of 4.95%, and an all-in true interest cost of 5.04%, according to Charles LeCroy, a vice president at Raymond, James & Associates.

The authority decided that a swap was a better alternative to straight variable-rate demand bonds, LeCroy said, adding that the authority saved approximately $16.9 million. Aside from the economic advantage of the swap-loan structure, variable-rate debt exposes issuers to the costs of a liquidity of facility and remarketing, as well as the risk that those costs might increase over the decades when the debt is outstanding.

"You always have the renewal risk, credit risk and remarking fees," he said. "You have all sorts of market risks that you can't control. Synthetic floating-rate debt is simply more efficient and often more cost effective."

During the first five years of the transaction's life, under the first swap, Gulf Breeze will pay J.P. Morgan & Co. the floating rate on the loan, and Morgan will pay the 4.50% coupon on Gulf Breeze's bonds. Meanwhile, the airport authority will pay the city a floating rate on the loan based on a composite index that will be slightly more than The Bond Market Association municipal swap index. The authority also pays nine basis points for a program fee.

Then, in year six, the second swap takes effect. Under this agreement, the aviation authority will pay Goldman, Sachs & Co. 4.45% and receive the TMBA index. Also the Gulf Breeze swap will change, with the city paying Morgan TBMA minus 26 basis point, and receiving 4.50%.

Year six will also see the floating rate on the loan change to TBMA minus 26 basis points. When taking into account the nine basis point fee the authority pays Gulf Breeze to administer the program, the variable rate will effectively rise to TBMA minus 17.

Thus, the authority will be paying TBMA minus 17 to Gulf Breeze, paying 4.45% to Goldman, and receiving TBMA from Goldman. The net effect will be a 4.28% fixed cost on $90 million of funds for 25 years.

"We've locked in 25 years of financing at a rate of 4.28%," Lindsey said. "That talks real money to the airlines and the authority."

From Gulf Breeze's point of view, the city receives 4.50% from J.P. Morgan, which pays the rate on the underlying fixed-rate bonds. But Gulf Breeze also pays TBMA minus 17 from GOAA, netting the city the nine basis point program fee.

Three of those basis points the city can't keep, but must spend on trustee, verification, and other costs associated with the loan administration.

"We were quite pleased with the transaction. When our customers are pleased, we're pleased, "said Ed Gray III, former mayor of Gulf Breeze, and a current special consultant to administer the program. Gray noted that the program fee is paid separately from the interest on the loan, and is not included in the arbitrage calculations for Gulf Breeze's bonds.

Lindsey stressed it took a collaborative effort to make the transaction work, from the authority's general council Gordon Arkin at Foley & Lardner to the airline partners to the authority's board and its chairman.

"A lot of people worked very hard," she said. "That chemistry and that professionalism and that leadership are really what make us able to do these types of deals."

The authority didn't want the transaction to fully take hold until after five years because it wants to pay floating rates for as long as possible to avoid negative arbitrage, LeCroy indicated. But "we didn't want to miss the market opportunity for today's fixed rates," he added.

The Greater Orlando Aviation Authority and Gulf Breeze, Fla., have worked out a multi-step transaction involving two long-term interest rate swaps that authority officials say will save them millions.