Joseph Krist

Publisher

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ISSUE OF THE WEEK

CITY AND COUNTY OF DENVER, COLORADO

FOR AND ON BEHALF OF ITS DEPARTMENT OF AVIATION

AIRPORT SYSTEM SUBORDINATE REVENUE BONDS

$2,200,000,000

The issue will provide financing for the public private partnership undertaking the renovation and reconfiguration of Denver International Airport. It is hard to believe that DIA opened in 1995 but the passage of time, increased security issues, and ever increasing passenger volumes have led to the plan to update the main terminal at the airport.

Major components of the project include: Enhancements to security by removing today’s exposed checkpoints on level 5; Increased Transportation Security Administration (TSA) throughput; Increased capacity and life of the terminal for the future, allowing the airport to grow its operations in the terminal and concourses to match increasing passenger demand; Better utilization of airline ticket spaces, including increased check-in counter space; An upgraded meet and greet area at the south end of the terminal, and a new “front door” to the airport, including a children’s play space and flight info displays; Improved food and retail offerings throughout the Jeppesen terminal; Curbside improvements for increased passenger drop-off capacity, including a quick drop-off location directly at the TSA checkpoints.

The Jeppesen Terminal was built to serve only 50 million annual passengers, and it served over 58 million passengers in 2016. TSA checkpoints are at capacity. The airport also has an underutilized and inefficient ticket lobby space and is lacking the adequate amount of concessionaires to accommodate projected passenger growth. Today, DEN has 30 standard checkpoint lanes that accommodate about 4,500 passengers per hour. The Great Hall project will include 34 state-of-the-art automated screening lanes, which can each serve an estimated 8,500 passengers per hour.

The P3 established for this project (The Great Hall Partners) is comprised of Equity Partners:  Ferrovial Airports International Ltd., JLC/Saunders joint venture, which includes Saunders and Magic Johnson Enterprises & Loop Capital. The Design & Build partners: Ferrovial Agroman and Saunders Construction, Inc. The Architects: Luis Vidal + Architects, Harrison Kornberg Architects and Anderson Mason Dale. Local Engineers/Contractors: Intermountain Electric, Civil Technology, Gilmore Construction, Sky Blue Builders. Equity Partners Legal Advisors: Gibson, Dunn & Crutcher.

The City and the airport still maintain the ownership and the private partner is in a long-term lease. The Great Hall Partners were granted an exclusive license to develop and manage terminal concessions and will contract directly with individual concession operators. The agreement requires that 70 percent of concession locations must be competitively procured; so existing concessionaires will have the opportunity to bid on concession opportunities in the terminal area.

The initial plan calls for the project to be completed in four main construction phases. Phase one of the project will primarily focus on work in Mod 2, east and west, including airline ticket lobbies, baggage claim areas, the food court (which will be demolished), as well as the area of the A bridge from the terminal to the Airport Office Building, Phase two will focus on Mod 3, with similar ticket lobby and baggage claim area work. Phase three will be in Mod 1, preparing for the current Mod 1 ticket counters for conversion into new passenger security screening area, and the final phase will entail work in the tented space of the terminal on level 5, along with median and curbside work on level 6 on both the east and west sides of the terminal. Milestones for the project include opening of the ticket counters in early 2020, opening the checkpoints in late 2020, and the entire project will complete in late 2021.

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PR MOVES TO SETTLE COFINA DEBT

The news that the government and a number of bondholders reached a deal to restructure the instrumentality’s debt secured by sales taxes (the COFINA debt) was generally greeted favorably. Contrary to many who postulated that the sales tax debt had been legally structured to be immune to the travails of the general obligation debt, the proposed settlement will require COFINA debt holders to take a substantial haircut. The deal provides for more than a 32% reduction in COFINA debt, providing Puerto Rico about $17.5 billion in future debt-service payments.

It provides for 53.65% of the Pledged Sales Tax Base Amount (“PSTBA”) cash flow through and including 2058 to be dedicated to the new COFINA bonds which are proposed to be issued to the debt holders. The new bonds will result effectively in an extension of maturity (no surprise). The new debt will come in the form of both current interest and capital appreciation bonds.

As it exists now, the proposal allows the issue of final judicial review of the strength of the statutory lien of COFINA bonds against the constitutional lien which the general obligation bond holders contend supersedes it. Because this point has yet to be adjudicated, we expect that general obligation bondholders will seek to intervene in the proceedings and to challenge the claim on revenues by COFINA bond holders.

We do not pretend to know how this conflict will eventually be resolved. It has long been our view that a constitutionally established lien is stronger than a statutory lien. We understand why the Commonwealth did not seek to have the lien judicially validated (it very well might not have been upheld) but it is not as clear why investors did not consider the issue of a statutory vs. a constitutional lien. Regardless of the outcome, our view is that the issue validates our long held belief that economics always trump legal provisions if one wants to feel secure in one’s investment.

One market cohort which is undoubtedly pleased by the terms of the proposed settlement is the monoline bond insurers. National Public Finance Guarantee Corporation is estimated to have nearly $1.2 billion of par exposure to COFINA senior bonds. Assured Guaranty Municipal Corp. is estimated to have $264 million of net par exposure to subordinate COFINA bonds. Moody’s estimates that National will incur ultimate losses on its total COFINA insured debt service obligations of around $80 million on a present value basis, while AGM’s will be around and $130 million.

NORTH CAROLINA TAX CAPS

North Carolina’s allowable maximum income tax rate is currently 10%. The state moved to a flat tax rate of 5.8% in 2014. On Jan. 1, 2019, the state budget lowers the personal income tax rate to 5.25% from 5.499%. Now, the legislature has approved initiatives to be submitted to the voters this November which would “limit future, legitimately-elected legislatures’ power to set state income tax rates higher than 7%, which could limit funding for programs.

The action comes as multiple studies have been released which raise issues of equity among various income cohorts which result from the establishment of taxing limitations. In addition, North Carolina’s politics have become substantially more partisan and polarized. This has led to the filing of a lawsuit by the Governor of North Carolina against, among others, the President pro Tem of the Senate and the Speaker of the House in North Carolina.

The Governor seeks to have the initiatives annulled as violations of the separation of powers. The Governor charges that the initiatives were crafted for the purpose of deceiving the electorate. He is concerned that the proposed amendments could allow the legislature to enact laws which then had to be enforced by the Governor even if he vetoed them. The proposed veto exception for judicial vacancy bills is not expressly limited to bills on that subject “and containing no other matter.”

LONG RELIEF FOR THE YANKEES GARAGE

Since Opening Day of 2009, the new Yankee Stadium has been the home of the 26 time world champions. While their performance on the field has been generally favorable, the financial performance of the garage at Yankee Stadium has been seriously deficient. There have been a variety of proposals made for development which might provide revenues to support a restructuring of the bonds issued by the New York Industrial Development Corporation.

The bonds were issued in 2007 on behalf of the Bronx Development Corporation (BDC). The garage is the only asset pledged as security for the bonds and the only source of revenues. From the start, below expected demand has been a constant feature of operations. This, coupled with a high $35 per game parking fee, served to permanently suppress demand as the Stadium is quit accessible via public transportation.

Now the other tenant at Yankee Stadium, Major League Soccer’s New York City FC, may be part of a solution to the financial conundrum faced by the BDC. The is a four-level parking structure that sits immediately south of the old stadium site. The garage along with two other structures would be demolished to create a roughly eight-acre plot of land just big enough to squeeze in a soccer-specific stadium.  The city would sell or lease it to a private developer. The developer would sublease the garage site to NYCFC, which would erect on it a 26,000-seat, $400 million soccer stadium.

Certainly enough moving parts are here to interest investors. One wild card (the Yankees are competing for that spot) is that the garages only become available if the Yankees agree to lift the requirement, agreed to in 2006, that the city provide a minimum of 9,500 parking spaces for fans — a provision that even the team owners no longer care about, but which they can decline to do away with unless the city agrees to use the garage property for a project of their liking.

One thing in favor of the project going through – NYCFC is owned by the Steinbrenner family and Abu Dhabi’s Sheikh Mansour bin Zayed Al Nahyan.

CA JULY REVENUE UPDATE

During the first month of the 2018-19 fiscal year, California took in less revenue than estimated in the budget enacted at the end of June according to the State Controller. Total revenues of $6.63 billion for July were lower than anticipated by $294.7 million, or 4.3 percent. While sales taxes missed the mark, personal income tax (PIT) and corporation tax – the other two of the “big three” revenue sources – came in higher than projected.

For July, PIT receipts of $5.22 billion were $231.7 million, or 4.6 percent, more than expected. July corporation taxes of $446.4 million were $82.2 million, or 22.6 percent, above 2018-19 Budget Act assumptions. Sales tax receipts of $818.4 million for July were $659.1 million, or 44.6 percent, less than anticipated in the FY 2018-19 budget. Most of the variance was due to when the money was recorded.

At the beginning of FY 2018-19, the state’s General Fund had a positive cash balance of $5.54 billion. Receipts were $3.62 billion less than disbursements in July, which left a cash balance of $1.92 billion at the end of the month. There was no internal borrowing, which was $2.19 billion less than the 2018-19 Budget Act estimated the state would need by the end of July. Unused borrowable resources were 7.5 percent higher than projected in the budget.

NEW YORK STATE SALES TAX GROWTH

Sales tax revenues in New York secure a variety of debt issues in the state. So it is good news that the State Comptroller’s Office announced that first-half of calendar year 2018 sales tax collections grew 6% over 2017, the highest six-month increase since 2010. In addition to individual bond issues, sales taxes are a significant revenue source to local governments across the State. They are also a good current indicator of the trend of economic activity. Sales tax growth was strong in virtually every region of the state.

The Comptroller cited a number of factors to account for this strong growth trend. They include low unemployment (the lowest in more than a decade), improved consumer confidence, steady wage growth and the highest inflation rate since 2011. Also driving the increase, particularly in counties bordering Pennsylvania, was increased collections of motor fuel tax. The comptroller noted that this was likely because of gas prices being lower in New York than in neighboring Pennsylvania.

The trend becomes more solid when viewed in the context of where sales tax revenues are generated. New York City has a strong tourist economy which lends itself to relatively outsized sales tax revenues. It is telling that counties which do not rely on tourism also exhibited strong growth lending credence to the view of a strong and expanding economy.

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