Bondholders' objections ground airport facility buyback plan

Aug. 19--In the midst of a heated gubernatorial campaign in 2004, then-Gov. Joe Kernan stood outside Indianapolis International Airport's massive -- and vacant -- maintenance facility to make a big jobs announcement.

A new tenant -- Illinois-based aircraft maintenance firm AAR Corp. -- would begin leasing a portion of the $600 million facility that a bankrupt United Airlines had abandoned 14 months earlier.

"This is good for Indiana's workers," he said. "It's good for Indiana's economy. It's good for the state."

But it turned out the deal wasn't so good for another group -- the bondholders.

To help finance the 1.6 million-square-foot facility in 1995, the Indianapolis Airport Authority floated $220 million in special facility revenue bonds on behalf of United. The money was supposed to be repaid, along with 6.5 percent interest, through United's rental lease with the airport.

But after United Airlines filed for bankruptcy in 2002, the state-of-the-art maintenance hub reverted back to the airport authority, and payments to bondholders ceased. Today, more than $170 million in principal -- plus interest -- is unpaid.

Now, amid an attempt by the airport authority to buy back the bonds for just pennies on the dollar, some bondholders are accusing the airport of putting politics ahead of fiscal responsibility. They say the airport's 2004 lease with AAR Corp. is far too generous, depriving the airport of revenue that could someday repay bondholders.

"Financially it stunk, but they wanted to say there are 1,000 people employed here," said Scott Connelly, a California investor who owns 500 bonds. "They entered into leases without any thoughts for the bondholders."

If job creation was the goal, it worked. About 1,500 jobs were eliminated when United left the facility. Today, the facility is nearly fully occupied and once again employs about 1,500 people. About 900 of those work for AAR, according to company spokesman Chris Mason.

Under AAR's lease, which includes 10 of the 12 hangar bays at the facility, the company pays $2 a square foot, plus $6.20 a square foot for operating costs. It also has the ability to "deactivate" up to six of the hangar bays, in which case it doesn't pay rent on them. The company must also share revenue with the airport if its profits exceed a certain amount. The 2004 lease was for 10 years and gives AAR a 10-year renewal option.

Connelly, who works for San Jose-based real estate developer Barry Swenson Builder, said no responsible landlord would commit to a 20-year lease with no price increases.

"You don't enter into an agreement that's not even good enough to pay operating expenses for 20 years," he said.

Barry Swenson, who owns Barry Swenson Builder, holds nearly 30 percent of the 220,000 bonds. He agreed with Connelly.

"They are leasing the space for less than costs to create jobs," he said. "The bondholders built the building, and they deserved to be paid pack.

Airport officials defended the AAR lease, saying it was the best deal they could get in the post-Sept. 11 environment. Many of the nation's airlines had filed for bankruptcy, and carriers were increasingly outsourcing maintenance operations, often to places outside the country. The airport authority's resolution approving the lease says more than 150 potential tenants were contacted before it rented to AAR.

"That AAR lease was the best offer for the space," airport authority Treasurer Jerry Wise said in a phone interview last week.

Former Gov. Kernan also defended the deal.

"Obviously, it's not something anyone wants to see happen," he said of the defaulted bonds. "But in a circumstance like that, if the alternative is for the facility to remain vacant, then the bondholders are going to be facing a significant loss. Here was an opportunity to do something that would put the airport authority in the position to fulfill the obligation by having activity there."

Ultimately, though, the obligation would not be fulfilled. Wise said the airport authority had no experience in operating the facility, a responsibility previously assigned to United. The cost of operating the facility continued to outpace rental revenue until 2010, costing the airport $23.4 million.

Although the property has finally brought in surplus revenue of about $1 million during the past two years, the terms of the United bankruptcy settlement require that those funds first go to repay the airport for past operating costs of the facility before going to bondholders.

Given the unlikelihood that bondholders will be paid any time soon, the airport has tried to buy back the bonds, which would allow the airport to make badly needed capital improvements at the 17-year-old facility, Wise said. It would also free up about 180 acres of excess land around the maintenance hub, some of it for development. The bondholders currently hold the right to any revenues from future development on that land.

The airport's first offer last month to buy the $1,000 bonds for $38.06 garnered the approval of only 18 percent of the bondholders, far less than the majority the airport needed. The airport increased its offer to $52.14, but even fewer bondholders -- about 14 percent -- voted to accept that offer last week. Wise said the airport authority has no plans to make another offer.

Bondholders say one reason for their skepticism is a lack of information from the airport. During a conference call between bondholders and airport officials earlier this month, Michael Zinman, an asset manager at Goldman Sachs, questioned why the airport hadn't obtained an appraisal for the vacant land.

"From my perspective, the numbers that are being offered -- the tender price numbers -- are somewhat arbitrary," he said.

Connelly is also critical of the airport for auditing AAR only once, even though its lease with the company allows for annual audits.

"Your facility is losing money and you have an instrument to audit your tenant, and you're not using it," he said.

Wise said the airport uses a "risk-based" schedule to audit tenants and has found additional revenues in some cases. The airport audited AAR in 2007 but did not find that the company owed the airport any additional revenues, he said. No new audits are planned, he said.

In the meantime, the airport is worried that it won't have enough money to fund improvements to the maintenance facility, which could cause some tenants to look elsewhere. The airport authority expects it will need $1.5 million this year and next for roof repairs and other improvements.

Copyright 2012 - The Indianapolis Star