Muni bonds – A gap in the market for aircraft financing, for now

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By TESTCustomwebLP TESTCustomwebLP October 28, 2010 13:50

Muni bonds – A gap in the market for aircraft financing, for now

Private aviation service provider Million Air Interlink has financed the $73 million refurbishment of three aircraft terminals through municipal bonds issued by two small Florida towns, Century and Gulf Breeze, according to reports in the Wall Street Journal.

The company opted to access the municipal bond market when it was turned down by several banks. Private firms are allowed to enter into a “conduit” bond issuance if the result of the financing fosters economic development in the state.

The $73 million will pay for the high-end refurbishment of three hangars for private jet owners which often include full plasma screens, top end bathrooms and BMW courtesy cars for the crew.

Under the terms of the bond, Million Air will be fully responsible for the debt but will pay lower than average interest rates. The issuer, in this case the two panhandle towns, receives the fees without taking on any legal or financial liability.

The deal has been criticised by US regulators, specifically the US Securities & Exchange Commission, which has been looking into the under-regulated muni-bond market. And the industry’s self regulating body, the Municipal Securities Rulemaking Board, has referred to the deal in the WSJ as “private financing sneaking into the tax-exempt market”. It also claims that Million Air’s facilities “are not an essential municipal service,” which the CEO of Million Air hotly denies. Roger Woolsey is quoted as saying his facilities are of extreme importance to local communities as they help bring in tourists and investors. He added that the public have nothing to risk, “it’s my debt”, he said.

Even so, the deal was financed in Houston, not Florida and a portion of the bond issue is required to finance projects in Florida. The Capital Trust Agency appears to be the only Florida public authority issuing debt for out-of-state private companies even though its executive director Ed Gray says others are following suit. But in this period of economic uncertainty, councils in areas of high unemployment are welcoming financing deals to raise funds. With financing deals drying up for all but the very best airlines, conduit bond issuance could be a way for smaller airlines to unlock a lucrative form of financing. $73 million could pay for at least two 737-900s at current average resale values. However, following the financial crisis politicians and regulators are scrutinising the financial system, specifically those areas that are lightly regulated such as the muni-bond market so this form of financing certainly wont be around forever but for now it is certainly worth exploring.

Meanwhile: The Indian cabinet committee on economic affairs (CCEA) has turned down a second equity infusion of Rs1,200 crore for Air India Ltd on grounds that it has failed to meet some promised targets, potentially leaving the state-run carrier in financial limbo (see APAC finance).

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By TESTCustomwebLP TESTCustomwebLP October 28, 2010 13:50
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