U.S. patent application number 11/202194 was filed with the patent office on 2007-02-15 for process and architecture for structuring facilities revenue bond financing.
This patent application is currently assigned to PILLSBURY WINTHROP SHAW PITTMAN LLP. Invention is credited to Ricky B. Antonoff, Hugh M. Dougan, Jane W. Dougan, Linda Grant Williams.
Application Number | 20070038537 11/202194 |
Document ID | / |
Family ID | 37743702 |
Filed Date | 2007-02-15 |
United States Patent
Application |
20070038537 |
Kind Code |
A1 |
Williams; Linda Grant ; et
al. |
February 15, 2007 |
Process and architecture for structuring facilities revenue bond
financing
Abstract
In accordance with at least one embodiment of the invention, a
process and architecture may be implemented to structure bond
financing or refinancing for facilities construction and/or
renovation to improve economic and business terms for involved or
interested parties.
Inventors: |
Williams; Linda Grant;
(Bedford, NY) ; Dougan; Hugh M.; (Ho-Ho-Kus,
NJ) ; Dougan; Jane W.; (Ho-Ho-Kus, NJ) ;
Antonoff; Ricky B.; (New York, NY) |
Correspondence
Address: |
DARBY & DARBY P.C.
P. O. BOX 5257
NEW YORK
NY
10150-5257
US
|
Assignee: |
PILLSBURY WINTHROP SHAW PITTMAN
LLP
San Francisco
CA
94105-2228
|
Family ID: |
37743702 |
Appl. No.: |
11/202194 |
Filed: |
August 12, 2005 |
Current U.S.
Class: |
705/35 |
Current CPC
Class: |
G06Q 50/16 20130101;
G06Q 30/0645 20130101; G06Q 40/06 20130101; G06Q 40/00
20130101 |
Class at
Publication: |
705/035 |
International
Class: |
G06Q 40/00 20060101
G06Q040/00 |
Claims
1. A process for obtaining financing, the process comprising:
forming a single-purpose business entity, with at least one
operating requirement that establishes separateness of the
single-purpose business entity from one or more separate business
entities; transferring the one or more separate business entities'
facility or equipment lease obligations to the single-purpose
entity; assigning rights to revenues of the facility or equipment
to the single-purpose entity; forming a lessee relationship with
the single-purpose entity; and securing bond financing for the
facility or equipment on a basis supported by revenue-producing
potential of the facility or equipment.
2. The process of claim 1, further comprising treating the
single-purpose business entity as a disregarded entity if there is
only one separate business entity or treating the single-purpose
business entity as a partnership if there is more than one separate
business entity.
3. The process of claim 1, wherein securing bond financing is
issued on a basis supported by the creditworthiness of the facility
or equipment.
4. The process of claim 1, wherein securing bond financing includes
refinancing existing bonds on a basis supported by the
creditworthiness of the facility or equipment.
5. The process of claim 1, wherein the process restructures a
ground lease/lease assignment/subleaseback architecture.
6. The process of claim 1, wherein the process restructures a
ground lease plus loan architecture.
7. The process of claim 1, wherein the at least one operating
requirement that establishes separateness of the single-purpose
business entity from the one or more separate business entities
establishes a board of managers including at least two independent
managers unrelated to the one or more separate business
entities.
8. The process of claim 7, wherein the at least one operating
requirement that establishes separateness of the single-purpose
business entity from the one or more business entities is that the
single-purpose business entity is not authorized to liquidate or to
file in bankruptcy without approval of all its managers, including
the independent managers.
9. The process of claim 1, wherein the single-purpose business
entity is an LLC.
10. The process of claim 1, wherein the single-purpose business
entity is a Delaware business trust.
11. The process of claim 1, wherein the financing is for purchase,
construction or renovation of a public use facility or
equipment.
12. The process of claim 1, wherein the financing is for purchase,
construction or renovation of an airport-related facility or
equipment.
13. The process of claim 1, wherein the financing is for purchase,
construction or renovation of a facility or equipment for a port
facility, competition or performance theater or arena.
14. The process of claim 1, wherein the financing is for purchase,
construction or renovation of a facility or equipment for road
transportation, rail transportation or a maritime port.
15. An architecture for obtaining financing, the architecture
comprising: a single-purpose business entity, with at least one
operating requirement that establishes separateness of the
single-purpose business entity from one or more separate business
entities; at least one transfer document that transfers the one or
more separate business entities' facility or equipment lease and
loan obligations to the single-purpose entity; at least one
assignment document that transfers the one or more separate
business entities' rights to revenues of the facility or equipment
to the single-purpose entity; at least one lease document that
forms a lease relationship between the single-purpose entity and
the one or more separate business entities, with the one or more
separate business entities as a lessee of the single-purpose
entity; and wherein bond financing for the facility or equipment
may be made on a basis supported by revenue-producing potential of
the facility or equipment.
16. The architecture of claim 15, wherein the bond financing is
issued on a basis supported by the creditworthiness of the facility
or equipment.
17. The architecture of claim 15, wherein the financing is for
purchase, construction or renovation of a public use facility or
equipment.
18. The architecture of claim 15, wherein the financing is for
purchase, construction or renovation of an airport-related facility
or equipment.
19. The architecture of claim 15, wherein the financing is for
purchase, construction or renovation of a facility or equipment for
a sports stadium, competition facility, performance theater or
arena.
20. The architecture of claim 15, wherein the financing is for
purchase, construction or renovation of a facility or equipment for
road transportation, rail transportation or a maritime port.
21. The architecture of claim 15, wherein the at least one
operating requirement that establishes separateness of the
single-purpose business entity from the one or more separate
business entities comprises a board of managers including at least
two independent managers unrelated to the airline.
22. The architecture of claim 21, wherein the at least one
operating requirement that establishes separateness of the
single-purpose business entity from the one or more separate
business entities is that the single-purpose business entity is not
authorized to liquidate or to file in bankruptcy without approval
of all its managers, including the independent managers.
23. The architecture of claim 15, wherein the single-purpose
business entity is an LLC.
24. The architecture of claim 15, wherein the single-purpose
business entity is a Delaware business trust.
25. The architecture of claim 15, wherein the financing is for
purchase, construction or renovation of a public use facility or
equipment.
26. The architecture of claim 15, wherein the financing is for
purchase, construction or renovation of an airport-related facility
or equipment.
27. The architecture of claim 15, wherein the financing is for
purchase, construction or renovation of a facility or equipment for
a sports stadium, competition facility, performance theater or
arena.
28. The architecture of claim 15, wherein the financing is for
purchase, construction or renovation of a facility or equipment for
road transportation, rail transportation or a maritime port.
Description
BACKGROUND OF THE INVENTION
[0001] 1. Field of the Invention
[0002] The present invention generally relates to financing
structures/architectures associated with bond financing.
[0003] 2. Description of Related Art
[0004] Conventionally, in facilities revenue bond financing, bonds
issued to finance the construction or renovation of facilities, for
example, airport terminal facilities, have been either of two
types: (1) bonds supported by the revenues of the airport commonly
referred to as General Airport Revenue Bonds or "GARBs," or (2)
special facilities revenue bonds, supported by the credit of,
typically, one or more airline(s), which are the principal user(s)
of the facility. Historically, GARBs supported by the revenues of
the airport have not been subject to default, i.e., failure to pay
principal or interest when due. However, due to various U.S. and
global events and economic trends, special facilities revenue bonds
associated with facilities utilized by the airline industry are
more often the subject of default; this is because an airline whose
payment obligations support the payment of principal and interest
on the bond may be unable to timely repay its obligations due to
economic woes. Therefore, as fuel and labor costs continue to
escalate in the U.S. domestic airline industry, the frequency of
airline bankruptcies has increased; thus, it is likely that the
incidence of special facilities bond defaults will continue to
increase.
SUMMARY OF THE INVENTION
[0005] In accordance with at least one embodiment of the invention,
a process and architecture may be implemented to initially
structure or restructure bond financing for facilities construction
and/or renovation to improve the economic and legal terms for
involved or interested parties.
BRIEF DESCRIPTION OF THE DRAWINGS
[0006] FIG. 1 illustrates an existing, conventional "ground
lease/lease assignment/subleaseback" financing architecture.
[0007] FIG. 2 illustrates various operations performed in
connection with restructuring financing architectures in accordance
with at least one embodiment of the invention.
[0008] FIG. 3 illustrates various operations performed in
connection with restructuring financing architectures in accordance
with at least one embodiment of the invention.
[0009] FIG. 4 illustrates a restructured financing architecture
provided in accordance with at least one embodiment of the
invention.
[0010] FIG. 5 illustrates an existing, conventional "ground lease
plus loan" financing architecture.
[0011] FIG. 6 illustrates various operations performed in
connection with restructuring financing architectures in accordance
with at least one embodiment of the invention.
[0012] FIG. 7 illustrates a restructured financing architecture
provided in accordance with at least one embodiment of the
invention.
[0013] FIG. 8 illustrates various operations performed in
connection with structuring of financing architectures in
accordance with at least one embodiment of the invention.
[0014] FIG. 9 illustrates various operations performed in
connection with structuring of financing architectures in
accordance with at least one embodiment of the invention.
DETAILED DESCRIPTION OF INVENTION
[0015] Although various invention embodiments are disclosed herein
in the context of financing or refinancing airport related
facilities, it should be understood that the invention may be
implemented in connection with the financing or refinancing of any
infrastructure facility for public and/or multiple private user
benefit. An example of a further application of the invention is in
connection with the construction of port docking facilities for
cargo ships affiliated with various cargo lines and cruise ships
affiliated with various cruise lines. Invention embodiments may be
implemented in connection with the financing or refinancing of all
manner of transportation-related facilities including, but not
limited to air, rail, port, and road. Thus, it should be understood
that utility is provided by invention embodiments in any business
scenario wherein single or multiple transportation facilities are
constructed or renovated for use by the public and/or multiple
private entities using funds obtained through the issuance of
taxable or tax-exempt bonds.
[0016] In accordance with at least one embodiment of the invention,
the inventive concept may be implemented to perform airport
facilities financing to avoid or partially or fully remedy problems
associated with declining credit ratings of airlines. In that
particular implementation, the invention applies to so-called
"single facilities revenue bond financings", in which the financing
for a facility is supported by the credit of one or more sponsoring
airlines. In such an implementation, the process and architecture
apply both to new and existing financings, and may be implemented
to assist in insulating financing from a bankruptcy of the
sponsoring airline(s).
[0017] A key to any such financing or refinancing situations, is
that the revenue-producing potential of a facilities improvement,
e.g., a new or renovated terminal, should be well recognized. If
there is sufficient potential demand for use of such facilities by
parties other than the sponsoring airline, the demand may provide a
better credit than that of the individual airline whose payments
initially support the bonds. In such instances, asset-backed
financing techniques may be applied to finance or refinance the
facility on a basis that is supported only by the credit of a
Single Purpose Entity (SPE), which is able to sublet the facility
to the airline or other carriers or users. That SPE would have
rights to any present and potential revenues of the facility, e.g.,
an airline terminal. Transactions would be structured to provide
financing that would be remote, or insulated, from the bankruptcy
of the airline(s) or other users of the terminal.
[0018] This new financing process and architecture is applicable to
new facilities improvements and also the refinancing of existing
airline facilities improvements, including but not limited to
equipment and/or improvements for airport facilities including
terminal(s), cargo-handling, maintenance, parking, concession
areas, car rental services, baggage, security and other facilities.
It is also applicable to port docking facilities, which are also,
in some locations, typically in demand by a variety of cargo
companies and cruise lines.
[0019] To provide some context so as to better understand the
nature of the innovation provided by the invention, the state of
conventional financing practices will now be explained.
Conventionally, there are generally three common architectures that
have been used for special facility bond financing of airport
facilities.
[0020] A conventional "package ground lease" architecture involves
a government owner leasing ground directly to an airline and
undertaking to, itself, issue bonds to finance the facilities or
facilities improvements. Lease revenue compensates not only for the
use of the land but also the use of the improvement and provides
amounts to cover debt service on the bonds. The Denver airport
special facility revenue bonds for United Airlines were issued in
this manner.
[0021] A conventional "ground lease plus loan" architecture
involves a government owner leasing ground to an airline and having
the same or another government agency undertake to issue the bonds
and loan the proceeds to the airline to cover the costs of the
construction of facilities or facilities improvements. The bond
lien, if any, does not encumber the ground lease, and the ground
lease typically does not provide for default in the event of a
default under the loan. As a result, it is unclear whether default
on the loan can result in default under the ground lease, provided
the ground lease payments are otherwise being made. Such an
ambiguity can enable a bankrupt airline to stop making loan
repayments (putting the bonds in default) while still retaining
possession of the facility under the ground lease.
[0022] A conventional "ground lease/lease assignment/subleaseback"
architecture involves a government owner leasing ground to an
airline and the airline partially assigning ground lease rights to
a separate government agency bond issuer. The government agency
bond issuer issues bonds to finance construction of the facilities
and subleases the partially assigned ground lease rights and
facilities back to airline in return for sublease rent on terms
sufficient to support the creditworthiness of the arrangement and
to permit the conclusion that the sub-sublease is a "true lease"
for federal bankruptcy purposes. The sublease is keyed to the
maturity of the bonds; the ground lease partial assignment is
coterminous with the sublease. Additionally, both the sublease and
the partial ground lease assignment terminate on prepayment of
bonds. As a result, the purported issuer/sublessor has no residual
interest in financed facilities that survives retirement of the
bonds.
[0023] Recently, various bankruptcy court decisions (see United
Airlines, Inc. v. HSBC Bank USA, N.A., No. 04-4209 (7th Cir. Jul.
26, 2005) rev'g HSBC Bank USA v. United Air Lines, Inc., 317 B.R.
335 (N.D. Ill. 2005) (San Francisco International Airport) and In
re UAL Corp., 307 B.R. 618 (Bankr. N.D. Ill. 2004) aff'd in part by
UnitedAir Lines, Inc. v. HSBC Bank USA, 322 B.R. 347 (N.D. Ill.
2005) (Denver International Airport) and by The Bank ofNew York v.
United Air Lines, Inc., No. 04-2838 (N.D. Ill. Feb. 16, 2005) (JFK
International Airport)) have held that a "package ground lease," as
utilized at the Denver airport, was a true lease whereas "ground
lease/lease assignment/subleaseback" architectures of the type
described above were merely disguised debt financings, allowing an
airline to remain in possession and relegating the bondholders to
the status of creditors in the airline's bankruptcy, rather than
having the benefit of the more favorable lessor position. These
decisions have cast a cloud of ambiguity around the
creditworthiness of the "ground lease/lease
assignment/subleaseback" architectures in the event of a bankruptcy
of an airline (although not involved in the United Airlines cases
above, the "ground lease plus loan" architecture seems subject to
the same risk).
[0024] This perceived deficiency affects both the attractiveness
and plausibility of both new single facility revenue bond
financings and existing special facility revenue bond financings
structured as a ground lease/lease assignment and leaseback, where
an existing financing requires a new credit judgment (e.g., on a
proposed refinancing of the bonds, or on replacement of an expiring
credit support facility).
[0025] With this business context understood, invention embodiments
apply common asset-backed financing techniques to issue bonds, or
to refinance existing bonds, on a basis supported by the
creditworthiness of a facility. Thus, in a scenario involving
either the "ground lease plus loan" or "ground lease/lease
assignment/subleaseback" architectures, if the revenue-producing
potential of the facility may provide a superior credit risk than
the airline utilizing the improvements, common asset-backed
financing techniques may be applied to isolate the revenue stream
through use of a single purpose entity ("SPE") from a possible
bankruptcy of the affected airline.
[0026] For affected airlines, this inventive architecture and its
associated creation process could significantly lower the effective
costs associated with financing the facility. For
credit-enhancement providers on existing bond financings, this
inventive architecture and process could generate restructuring
fees and lower or eliminate their exposure to airline credit
ratings and associated issues. For bond underwriters, this
architecture and process could provide an opportunity for new
transactions and refinancing existing bond transactions providing
meaningful benefits to airlines and their existing credit-support
providers. For airports or the like, this architecture and process
could provide a mechanism to insulate their successful operations
from potential credit exposure to the bankruptcy risks associated
with major legacy carriers.
[0027] A first example of a potential implementation of the above
described embodiments is now provided. With reference to FIG. 1,
consider an existing, conventional "ground lease/lease
assignment/subleaseback" financing architecture, wherein a city 110
has entered into a ground lease 115 at airport 120 to airline 125.
Airline 125 has partially assigned 130 the ground lease 115 to bond
issuer 135 (e.g., an agency or instrunentality of city 110) for
which the issuer 135 may assume a portion of the ground lease
rents. Issuer 135 has issued revenue bonds 140 to finance the
construction of facilities 145, e.g., improvements at a terminal at
the airport 120. Issuer 135 has used the bond proceeds 195 to
construct the facilities 145, and has then subleased 150 the
assigned ground lease 130 and the associated improvements built
thereon to airline 125 in exchange for the undertaking of airline
125 to pay sublease rent payments 155 equal in aggregate amount to
a portion of the related ground lease rent payments 160 (if any),
the debt service 165 on the bonds 140, and administrative expenses
170 relating to the bonds 140. After application to pay related
ground lease rents 160, the balance of such sublease rents 155 is
provided to the revenue bond trustee 190 to pay administrative
expenses 170 and the debt service on the bonds 140. Debt service
payments 165 are directed to the revenue bond trustee to be
disbursed to bond holders.
[0028] The facilities 145 may be, for example, a terminal, or a
related concourse, or fuel storage and supply facilities, cargo or
baggage handling facilities, foreign inspection service (customs)
facilities, personnel training facilities, aircraft maintenance and
repair facilities, car rental facilities or cruise/cargo docking
facilities or some or all of the above. Airline 125 makes available
a portion of the facilities 145 (by way of sub-sublease 175) to
other airlines and concessionaires 180 on a profitable basis in
return for sub-sublease rent payments. It is reasonable to expect
that airline 125 could make substantially all of the facilities 145
available on a profitable basis, to the extent that airline 125 did
not itself make use of them. However, if airline 125 is presently
using substantially all of the facilities 145 itself, that same
credit judgment may be more difficult to make, but still may be
possible, on appropriate facts.
[0029] In accordance with at least one embodiment of the invention,
airline 125 might undertake restructuring transactions as described
with reference to FIG. 2. As illustrated in that figure, at 205,
the airline may form an SPE and elect to treat that SPE as a
"disregarded entity" for federal income tax purposes. Subsequently,
at 210, the airline may cause the SPE formation documents to
include various customary and standard provisions for maintaining
"separateness" from the airline appropriate for bankruptcy-remote
status including, for example, establishment of a board of managers
including at least two "independent managers," unrelated to the
airline, and providing that SPE is not authorized to take certain
actions (for example, to liquidate or to file in bankruptcy, to
dispose of substantial assets or to amend its formation documents)
without the approval of all its managers, including the independent
managers, etc. (as discussed herein) Subsequently, at 215, the
airline may contribute the airline's interest in the ground lease
and in the facilities sublease to the SPE. The contributed
facilities sublease interest may include the constructed facilities
and the airline's interests in all sub-subleases to other airlines
and other parties. The airline may then, at 220, cause the SPE to
assume the obligations of the ground lease, the facilities
sublease, and all other sub-subleases. Subsequently, or
concurrently, at 225, the airline may enter into a sub-sublease of
the facilities with the SPE for the airline's own use of the
facilities. That sub-sublease may entail, for example, terms
sufficient to support the creditworthiness of the arrangement and
to permit the conclusion that the sub-sublease is a "true lease"
for federal bankruptcy purposes. All rights and revenues of the SPE
including sublease rental amounts paid by the airline may then be
pledged to secure the SPE's assumed sublease obligations, and thus,
the bonds (and the obligations to the credit support provider, if
applicable).
[0030] It should be understood that the actions performed in FIG. 2
are merely illustrative of particular implementation options in
accordance with at least one embodiment of the invention.
Therefore, it is not necessary that the actions be performed in the
order illustrated in FIG. 2; rather, each of those actions may be
performed in various orders including simultaneously. Moreover, it
should be understood that practice of the invention may not require
performing all of the operations set forth in that figure or that
those operations be performed specifically by the airline.
[0031] Moreover, throughout the explanation of various invention
embodiments, reference is made to an SPE, which may be, for
example, any business entity such as a Limited Liability Company
(LLC) or a Business Trust organized in any jurisdiction that
enables favorable treatments for the purposes of bankruptcy and tax
(e.g., Delaware).
[0032] To establish a higher credit rating (e.g., investment grade)
and, therefore markedly more favorable financing terms, the SPE may
not be vulnerable to unrestricted voluntary liquidation or
dissolution in the event of a bankruptcy of the airline, or subject
to substantive consolidation in such a bankruptcy. For the former
purpose, the SPE's formation documents may provide for a managing
board including at least two independent managers, to be appointed
by a party other than the airline (e.g., it could be a
credit-support provider, a company providing corporate trust
services, the airport or the city, if applicable). The SPE
formation documents may further provide that the SPE could not take
certain actions (for example, to file in bankruptcy or undergo a
voluntary liquidation or dissolution, dispose of substantial
assets, or to amend its formation documents) without the approving
vote of its managers, including the independent managers.
[0033] To avoid substantive consolidation in bankruptcy, the SPE
should establish its "separateness" from the airline based on
various customary standards that have been outlined by the rating
agencies involved (e.g., Standard & Poors). These standards
would be incorporated into its formation documents, which control
its operation--e.g., the SPE will restrict its activities to only
those necessary or incidental to its leasehold interests,
management and operation of the facilities, and not engage in other
businesses or activities, the SPE will hold itself out to the
public as a legal entity separate and apart from its members or any
other person, having its own assets, liabilities and
operations--not constituting a branch or division of any of its
members, affiliates or any other person, and not being liable for
the debts of any such person.
[0034] Other such provisions may include the SPE undertaking (e.g.,
in the formation documents of the SPE) that SPE will act to (i)
segregate its funds, property and other assets from those of any
member or any other person and hold them in its own name, and not
commingle them with those of any member or any other person; (ii)
make any investments solely in its own name; (iii) not form any
subsidiaries; (iv) act solely in its legal name in the conduct of
its business, and conduct its business so as not to mislead others
as to the identity of the entity or assets with which they are
concerned; (v) keep and maintain separate records, books of
account, bank accounts and financial statements; (vi) ensure that
its capitalization is adequate in light of its business and
purpose; (vii) not (a) guarantee, become obligated for, or
otherwise hold itself out as being liable for, the debts and
obligations of any member or any other person; (b) pledge its
assets for the benefit of any other person; (c) make loans or
advances to any person other than in the ordinary course of its
business; and (d) acquire obligations or securities of any member;
(viii) not enter into any transaction with any member, except upon
terms and conditions that are intrinsically fair and substantially
similar to those that would be available on an arms length basis
with unrelated third parties. (ix) maintain an arm's-length
relationship with its members and any affiliates; (x) allocate
fairly and reasonably any overhead including for office space and
employees shared with any member; (xi) use its own separate
stationery, invoices, checks and other business forms and have its
own telephone number, facsimile number and Internet domain; (xii)
take commercially reasonable steps to correct any known
misunderstanding regarding its separate identity; (xiii) file its
own tax returns, if applicable, as may be required under applicable
law; (xiv) pay its liabilities out of its own funds, including the
salaries of its own employees, if any; and (xv) not engage in any
dissolution, liquidation, consolidation, merger or sale of
assets.
[0035] Further, in order to establish and maintain "separateness",
it may be important that any sub-sublease of a portion of the
facilities from the SPE back to the airline be on an "arms-length"
basis. From an economic standpoint, an airline may undertake to
make payments on terms sufficient to support the creditworthiness
of the arrangement and to permit the conclusion that the
sub-sublease is a "true lease" for federal bankruptcy purposes. As
noted below, it appears that there should be no adverse federal
income tax effect of such a restructured architecture.
Additionally, apart from any cash that might need to be accumulated
at the SPE in support of its credit, there would appear to be no
adverse economic effect to the airline of such payments. It would,
therefore, seem that such an arrangement could be effected on a
basis that would be viewed as representing a "true lease."
[0036] Assuming that the facts would support the creditworthiness
of the actions illustrated in FIG. 2, various actions may be taken,
as illustrated in FIG. 3. For example, at 305, an issuer could then
refinance the bonds, supported only by the SPE obligations and the
pledge of its rights to leases and revenue associated with use and
occupancy of the facility. Subsequently, at 310, SPE is substituted
for the airline on any related credit-support arrangements for the
bonds. A determination may then be made, at 315, as to whether the
SPE should reserve some portion of its revenues in a lease reserve
fund to provide greater assurance of its ability to pay sublease
rent payments on a timely basis, e.g., to cover rental payments
during any relet period. If it is determined that such a fund
should be created, associated actions would be performed at 320 and
operations would continue at 325. That practice may, however, be
subject to arbitrage yield restrictions applicable to pledged
funds. For that purpose, it may be sufficient simply to debit the
fund to pay operating costs, if needed. If it is determined that no
such lease reserve fund is necessary, the appropriate documentation
of the actions performed in FIGS. 2 and 3 may be made at 325.
[0037] Again, it should be understood that the actions performed in
FIG. 3 are merely illustrative of particular implementation options
in accordance with at least one embodiment of the invention.
Therefore, it is not necessary that the actions be performed in the
order illustrated in FIG. 3; rather, each of those actions may be
performed in various orders including simultaneously. Moreover, it
should be understood that practice of the invention may not require
performing all of the operations set forth in that figure or that
those operations be performed specifically by the party identified
above.
[0038] As illustrated in FIG. 4, subject to appropriate
documentation, this restructured architecture might permit the
bonds 140 to be refinanced on the strength of the demand for the
facility and credit and resources of the SPE 485. Additionally,
although the bonds 140 could be subject to the exposure of a
possible bankruptcy of the SPE 485 (the risk of which could be
evaluated by the rating agencies, bondholders or the credit-support
provider, if applicable), the bonds 140 should be sufficiently
remote from a bankruptcy of airline 125 as to be priced and rated
on the demand for the facilities 145, and the rights and revenue
and the credit of the SPE and not the airline 125.
[0039] In FIG. 4, the SPE 485 has acquired the airline's interest
in the ground lease and in the facilities sublease. The contributed
facilities sublease interest may include the constructed facilities
and may also permit the SPE to sub-sublease interests to other
airlines. The SPE 485 has assumed the obligations of the facilities
sublease (and the ground lease). The airline 125 has entered into a
sub-sublease of the facilities 450 with the SPE 485 for the
airline's own use of the facilities 145. The sub-sublease by the
airline for facilities may entail, for example, the airline
agreeing to pay a rent on terms sufficient to support the
creditworthiness of the arrangement and to permit the conclusion
that the sub-sublease is a "true lease" for federal bankruptcy
purposes. All rights and revenues of the SPE may then be pledged to
secure the bonds (and the credit support provider, if applicable).
To the extent permitted by the transaction documents and applicable
law, the SPE could make periodic distribution of surplus revenues
to the airline.
[0040] As a result of such a restructured architecture, there
should be a corresponding reduction in the interest charges for
which the SPE 485 is responsible, through its facilities sublease
debt service payments to the issuer 130. Alternatively, if the
bonds 140 are supported by a letter of credit, bond insurance or
other credit support, this restructured architecture should result
in a substantial reduction in the charges of the credit-support
provider.
[0041] A second example is provided regarding how at least one
embodiment of the invention may be used to restructure a
conventional "ground lease plus loan" architecture. With reference
to FIG. 5, consider an existing, conventional "ground lease plus
loan" financing architecture 500, wherein city 510 has entered into
a ground lease 590 at airport 520 to airline 525 in return for
ground lease rent payments 595; a city airport authority 535
undertakes to issue revenue bonds 540 to finance the construction
of the facilities 545, with the bond proceeds 550 loaned to airline
525 under a loan agreement 565.
[0042] For federal income tax reasons, airline 525 must elect to
forego tax depreciation deductions for the facilities 545. As a
result, a second loop arrangement is included in the architecture.
The airline 525 conveys ownership 575 of the facilities 545 to the
city 510. In return, the airline 525 takes back a facilities lease
580 (in return also for facilities lease rent payments 585), with a
term equal to the term of the bonds 540. The rent payments 585
under the facilities lease 580 include basic rent and additional
rent. Basic rent is considered prepaid by the facilities conveyance
to be applied ratably over the term of the facilities lease.
Additional rent is equal to annual property taxes and other annual
airport charges, and costs.
[0043] It is possible that the loan agreement 565 to airline 525
may be unsecured. Alternatively, the loan obligation of airline 525
to the bond issuer may be secured by a pledge of its facilities
lease 580 interest (e.g., a "leasehold mortgage"). In this
architecture, the ground lease interest of the airline 525 may not
need to be pledged. The ground lease payments 595 may be fairly
modest. In some cases, the ground lease 590 may include a
cross-default provision, under which a default of airline 525 under
its loan agreement 565 with the city airport authority 530 is
automatically an event of default under its ground lease 590 even
if payments under that agreement are current.
[0044] In the event of a bankruptcy of airline 525, this
architecture is likely to suffer unacceptable events. In
particular, if the airline 525 files in bankruptcy and ceases
making payments under loan agreement 565, the bond trustee would be
delayed from foreclosing on any leasehold mortgage interest in the
facilities lease 580 by the "automatic stay" rules. Thus, even
though the city airport authority 535 would be a secured creditor
in airline's 525 bankruptcy, it would be unable to compel a sale of
the facilities lease interest to other potential users of the
facilities 545. The authority 535 might eventually receive some
restructured monetary amount in settlement of its loan claim, on
the resolution of airline's 525 bankruptcy proceeding; the
airline's 525 possessory leasehold interests might then be sold off
to another airline, which might assume such rights on payment of
some amounts in respect of unpaid ground lease rents and facilities
lease rents.
[0045] Additionally, if the Airline assumes the facilities lease
and ground lease 580, 590 and continues to make the annual payments
585, 595 required thereunder, there would be no basis on that
account for the city 510 to evict the airline 525 and make the
facilities 545 available to some other solvent party (which could
also assume the loan payment obligations 570). Further, it is
questionable whether an automatic cross-default provision in the
facilities lease or the ground lease 580, 590 (if it were triggered
by a default under the airline's loan agreement 565 based solely on
the airline's bankruptcy) would be enforceable. It may be that the
cross-default provision would be a violation of the "ipso facto"
rule, and therefore unenforceable, or would be subject to the
"automatic stay" provisions of the bankruptcy law.
[0046] If an airline 525 files in bankruptcy, and stops performing
its obligations under the loan agreement 565 (resulting, after the
exhaustion of any operating cost or debt service reserves, in a
default in payments on the bonds 540 of the authority 530), it may,
in some instances, at the same time retain its possession and use
of the financed facilities 545. This would suspend any recovery
rights of the bondholders (pending the eventual resolution of the
bankruptcy proceedings), and in the meantime block the exercise by
the city 510 or the bond trustee (e.g., the authority 535) of any
right to dispossess the airline 525 and make the facilities 545
available to other airlines that might be willing and able to pay
for usage rights to the facilities 545 in amounts sufficient to
provide for current payments of debt service on the bonds 540.
[0047] In accordance with at least one embodiment of the invention,
airline 525 might undertake restructuring transactions as described
with reference to FIG. 6. As illustrated in that figure, at 605,
the airline may form an SPE of which it is a member, and in some
situations, be its only member. Subsequently, at 610, the airline
would then assign to the newly created SPE, its rights under the
ground lease and the facilities lease (including its rights to any
rent prepayment credits thereunder, and any existing sublease
agreements it might have with other airlines, or other parties);
the SPE would then assume all of the airline's obligations under
these agreements and the loan agreement at 615. Next, at 620, the
SPE would enter into a sub-sublease agreement with the airline,
covering the airline's usage of the facilities.
[0048] The sub-sublease rent from the airline would be on terms
sufficient to support the creditworthiness of the arrangement and
to permit the conclusion that the sub-sublease is a "true lease"
for federal bankruptcy purposes. Subject to the transaction
documents and applicable law, the airline would be entitled to
periodic distributions of surplus revenue from the SPE.
[0049] At 625, the formation documents of the SPE would be drafted
to include provisions for at least two independent managers
(appointed by the bond trustee, a credit support provider, if
applicable, or a named neutral party, e.g., a trust company), and
would include provisions precluding the SPE from taking certain
actions including a voluntary filing in bankruptcy or a dissolution
or liquidation, disposing of substantial assets, or amending its
formation documents without the affirmative approval of the
independent managers. Those formation documents may also include a
requirement that the SPE maintain compliance with various customary
standard "separateness" characteristics (as explained above).
[0050] Again, it should be understood that the actions performed in
FIG. 6 are merely illustrative of particular implementation options
in accordance with at least one embodiment of the invention.
Therefore, it is not necessary that the actions be performed in the
order illustrated in FIG. 6; rather, each of those actions may be
performed in various orders including simultaneously. Moreover, it
should be understood that practice of the invention may not require
performing all of the operations set forth in that figure or that
those operations be performed specifically by the party identified
above.
[0051] As illustrated in FIG. 7, subject to appropriate
documentation, this restructured architecture might permit the
bonds 540 to be refinanced on the strength of the demand for the
facility leased, revenues of the facility and projected credit of
the SPE 705. The airline 525 is a member, and may be, in some
situations, the only member of the SPE 705. The rights under the
ground lease and the facilities lease are assigned to the SPE 705
by the airline 525. The SPE 705 assumes all of the airline's
obligations under the ground lease 790, the facilities lease 780
and the loan agreement 765. The SPE 705 enters into a sublease
agreement 755 with the airline 525, covering the airline's usage of
the facilities (in return for sublease rent payments 760). The SPE
may pledge 715 all of its rights and revenues under this sublease
and other sources to secure its assumed obligations under the loan
agreement 565 (and the SPE's obligation to the credit support
provider, if applicable).
[0052] The sublease rent payments 760 from airline 525 plus any
revenues derived by the SPE 705 with respect to the facilities 545
from other sources include amounts sufficient, in the aggregate, to
cover the SPE's cost of operation of the facilities, including any
administrative expenses, the SPE's continuing obligations under the
ground lease 790 and facilities lease 780 and the SPE's assumed
obligations under the loan agreement 765. The SPE may pledge 715
all of its rights and revenues to secure its obligations under the
loan agreement 565 (and the SPE's obligations to the credit support
provider, if applicable).
[0053] The formation documents of the SPE 705 may include
provisions for at least two independent managers (appointed by,
e.g., the bond trustee, a credit support provider, if applicable,
or a named neutral party, e.g., a trust company), and provisions
precluding the SPE 705 from taking certain actions (including a
voluntary filing in bankruptcy or a dissolution or liquidation,
disposition of substantial assets, or amendment of its formation
documents), without the affirmative approval of the independent
managers. The formation documents may also include a requirement
that the SPE 705 maintain compliance with various, customary
standard "separateness" characteristics (as explained above).
[0054] Assuming compliance with the "separateness" provisions, this
restructured architecture should warrant a conclusion that the SPE
705 would be restricted from filing bankruptcy itself without the
approval of its independent managers and "remote" from any
substantive consolidation risk in a bankruptcy of the airline 525.
In addition, the SPE 705 could not be dissolved and liquidated into
bankruptcy without the approval of its independent managers. As a
result, in the event of a bankruptcy of airline 525, and a default
in payment of the airline's sublease rent obligations, the SPE 705
(at the direction of its independent managers, the authority, the
bond trustee, or any credit-support provider for the bonds, if
applicable, as specified in the SPE's formation documents) should
be entitled to demand that the airline 525 assume and perform its
sublease 755 obligations to the SPE 705 in accordance with the
applicable provisions of the U.S. Bankruptcy Code, or reject the
sublease 755 and relinquish rights (e.g., possession) under the
ground lease 790 and the facilities lease 780 in favor of the SPE
705. In the latter case, the SPE 705 should then be in a position
to make the ground lease 790 and facilities lease 780 available to
other airlines, on a basis that may enable the SPE 705 to continue
making payments under the assumed loan agreement 765.
[0055] Additionally, the debt documents will obligate the SPE to
enforce its rights against the lessee. And, if the SPE 705 fails
for some reason to enforce these rights, and the SPE's assumed
obligations under the loan agreement 765 are supported by leasehold
mortgages on the SPE's interest in the ground lease 790 and
facilities lease 780, the bond trustee should be able to foreclose
on such mortgages because the SPE is not in bankruptcy, free of any
"automatic stay" restrictions imposed by the bankruptcy of the
airline 525, and either sell the leasehold interests or re-sublease
the ground and facilities to other airlines and users on a
potentially profitable basis, for the benefit of the
bondholders.
[0056] It should be understood that various embodiments of the
invention enable the structuring of a financing architecture for
new money as well as the restructuring of an existing financing
architecture. Thus, the structuring of a new financing architecture
such as those illustrated in FIGS. 4 and 7 or the like, is
described.
[0057] In accordance with at least one embodiment of the invention,
an airline and other interested parties might also undertake
structured financing for new money in such a way as to provide a
financing architecture that corresponds to a conventional "ground
lease/lease assignment/subleaseback" financing architecture (see,
e.g., architecture 100 in FIG. 1) but with the benefits associated
with providing a bankruptcy-remote organization responsible for
issued revenue bonds. For example, such actions may be performed as
illustrated with reference to FIG. 8. As illustrated in that
figure, at 805, an SPE may be formed and be treated as a
"disregarded entity" by the airline for federal income tax
purposes. Subsequently, at 810, the SPE's formation documents may
include provisions for maintaining "separateness" from the airline
appropriate for bankruptcy-remote status, and preventing certain
actions from being taken without the approval of its independent
managers (as explained above). Subsequently, at 815, the SPE enters
into a ground lease and a facilities sublease with the relevant
parties (e.g., the city and/or city airport authority). Then, at
820, the airline may enter into a sub-sublease of the facilities
with the SPE for the airline's own use of the facilities. At 825,
the SPE also enters into sub-subleases of the facilities with other
airlines and other interested parties as well. Those sub-subleases
may entail, for example, the airlines and other interested parties
agreeing to pay a rent sufficient to support the creditworthiness
of the arrangement and to permit the conclusion that the
sub-sublease is a "true lease" for federal bankruptcy purposes.
Then, at 830, all rights and revenues of the SPE may be pledged to
secure its lease obligations supporting the bonds (and the
obligations to the credit support provider, if applicable).
[0058] Subsequently, at 835, an issuer issues the bonds, supported
only by the SPE obligations. The SPE may then, at 840, be
identified as solely responsible on any related credit-support
arrangements for the bonds.
[0059] A determination may then be made, at 845, as to whether the
SPE should reserve some portion of its revenues in a lease reserve
fund to provide greater assurance of its ability to pay sublease
rent payments on a timely basis, e.g., create a lease reserve fund
to cover rental payments during any relet period. If it is
determined that such a fund should be created, associated actions
would be performed at 850 and continue to be performed at 855. That
practice may, however, be subject to arbitrage yield restrictions
applicable to pledged funds. If it was determined that no such fund
is necessary, the appropriate documentation of the actions
performed in FIG. 8 would be made at 855. As a result, of such
actions, a financing architecture may be provided as illustrated in
FIG. 4.
[0060] It should be understood that the actions performed in FIG. 8
are merely illustrative of particular implementation options in
accordance with at least one embodiment of the invention.
Therefore, it is not necessary that the actions be performed in the
order illustrated in FIG. 8; rather, each of those actions may be
performed in various orders including simultaneously. Moreover, it
is not necessary that the SPE be organized in a particular
jurisdiction. Moreover, it should be understood that practice of
the invention may not require performing all of the operations set
forth in that figure or that those operations be performed
specifically by the party identified above.
[0061] Similarly, in accordance with at least one embodiment of the
invention, an airline and other interested parties might undertake
structuring financing transactions in such a way as to provide a
financing architecture that corresponds to a conventional "ground
lease plus loan" financing architecture (see, e.g., architecture in
FIG. 5) but with the benefits associated with providing for a
bankruptcy-remote organization to be the ground lessee and the
borrower under the loan agreement responsible for repayment of the
revenue bonds. For example, such actions may be performed towards
such an end as illustrated with reference to FIG. 9. As illustrated
in that figure, at 905, an SPE is formed of which the airline may
be the only member. Subsequently, at 910, the SPE enters into the
ground lease, facilities lease and loan agreement with the
appropriate parties (e.g., city and/or city airport authority). The
leases may include rights to any rent prepayment credits
thereunder.
[0062] At 915, the SPE enters into a sublease agreement with the
airline, covering the airline's usage of the facilities. The
sublease rent from the airline together with any revenues derived
by the SPE with respect to the facilities from other sources,
including other sublease rental income from other airlines and
other service parties (e.g., concessionaires, etc.) would, in the
aggregate, be on terms sufficient to support the creditworthiness
of the arrangement and to permit the conclusion that the
sub-sublease is a "true lease" for federal bankruptcy purposes.
[0063] At 920, the formation documents of the SPE are drafted to
include provisions for at least two independent managers (appointed
by the bond trustee, a credit support provider, if applicable, or a
named neutral party, e.g., a trust company), and include provisions
precluding the SPE from taking certain actions (including a
voluntary filing in bankruptcy or a dissolution or liquidation, a
disposition of substantial assets, or an amendment to its formation
documents) without the affirmative approval of the independent
managers. The formation documents may also include a requirement
that the SPE maintain compliance with various, customary standard
"separateness" characteristics (as explained above). At 925, the
bonds are financed on the strength of the credit of the SPE.
[0064] As a result, of such actions, a financing architecture may
be provided as illustrated in FIG. 7, or the like.
[0065] Again it should be understood that the actions performed in
FIG. 9 are merely illustrative of particular implementation options
in accordance with at least one embodiment of the invention.
Therefore, it is not necessary that the actions be performed in the
order illustrated in FIG. 9; rather, each of those actions may be
performed in various orders including simultaneously. Moreover, it
should be understood that practice of the invention may not require
performing all of the operations set forth in that figure or by the
party identified above.
[0066] As alluded to above, it should be understood that various
embodiments of the invention have been disclosed herein and
interrelated issues and factors are worth consideration by one of
ordinary skill.
[0067] From a tax standpoint, there may be a number of federal
income tax issues relevant to structuring or restructuring
performed in accordance with embodiments of the invention.
Potential issues seem to arise in three areas: (1) consequences of
the structured/restructured transaction; (2) consequences of
operations under the resulting financing architecture; and (3)
implications for an existing or new tax-exempt bond financing of
the facilities.
[0068] An assignment of the rights of the airline under the ground
lease and facilities sublease to the SPE should have no federal
income tax effect, because the SPE is meant to be treated in effect
as a mere branch of the airline (if the airline is the only
member), or a partnership (if two or more airlines are members) for
federal income tax purposes. As a result, the assignments should
not be treated as a taxable transaction.
[0069] There may be some instances in which the facilities are
presently jointly-operated by two or more airlines, either as a
joint venture or through some common legal entity. In such a
situation, in accordance with at least one embodiment of the
invention, contributing existing rights to a conduit SPE, or
contributing interests in an ownership entity to one or more SPEs
may achieve the federal income tax effect noted above.
[0070] In the case of a single-member SPE, if the SPE is a
"disregarded entity" of the airline, its operations, revenue and
expenses should have no different federal income tax effect to the
airline as a result of the restructure architecture, even if the
contractual arrangements between the entities involve a
sub-sublease payment obligation from the airline to the SPE.
However, if multiple airlines are the sponsor parties, further
analysis would be required to determine the effects of
restructuring the financing architecture as described above;
nevertheless, the potential for partnership treatment of an
interposed SPE (or for interposed SPEs of each participating
airline) is possible under federal income tax regulations.
[0071] In the case of the structuring of a financing architecture
for new money, it does not appear that methods and architectures
designed in accordance with the invention would involve any
significantly different tax-exempt financing considerations than a
financing for the direct benefit of the airline. However, when an
existing, outstanding tax-exempt issue is involved, other
considerations may be relevant. In particular, the form of a
restructured architecture designed in accordance with at least one
embodiment of the invention may involve a refunding of any
existing, outstanding bonds.
[0072] In general, if the existing bonds were issued after 1986,
the refunding may not present any new or different federal income
tax issues for tax-exempt purposes.
[0073] If, however, the existing bonds were issued before the
effective date of the 1986 Tax Reform Act, there may be a question
whether the refunding bonds qualify under transition rules of the
1986 Act, without regard to the new standards for airport
facilities financings that were first imposed by that Act. This
conclusion might be more easily reached if the SPE is a
single-member entity of the airline, rather than a common entity of
more than one airline; however, if any change occurs through the
interposition of entities above that level, there may be no basis
for a distinction.
[0074] On the other hand, if the refunding of a pre-1986 bond issue
would not be eligible for transition-rule protection, evaluation
may need to be performed by bond counsel in light of the changes
that have since occurred.
[0075] Beyond these tax implications, there may be additional
issues posed by the structuring or restructuring of a financing
architecture and associated processes. In particular, for example,
if a restructured financing architecture requires some accumulation
of revenues/contributions at the level of the SPE, for the better
assurance of the credit of the bonds (or the credit-support
provider, if applicable), care may need to be exercised to assure
either that such funds do not constitute "replacement proceeds" of
the bonds, subject to an investment yield limitation not greater
than the yield of the bonds, or that they comply with such
limitations. It is possible that such limitations could be avoided
by providing that any such accumulated funds are not pledged for
payment of sublease rent, and are at all times subject to debit, if
necessary, to pay operating costs of the SPE. If depressed yields
are available for temporary investments, this may not be a
practical problem, but a method of assuring compliance may need to
be considered.
[0076] In addition, and wholly apart from the above, any particular
restructuring along the lines herein disclosed may require
evaluation of relevant state or local income or other tax
issues.
[0077] Further, it should be understood that the effect of
structuring or restructuring financing architectures in accordance
with various embodiments of the invention depends, in each case, on
the potential demand for use of the facilities by others. Thus, the
structuring or restructuring of financing architectures cannot
guarantee a successful result; that structuring or restructuring
may only enable such a result to happen.
[0078] Nevertheless, the financing processes and architectures
provided in accordance with embodiments of the invention may
effectively prevent a ground lease and a facilities lease from
being frozen in a possible bankruptcy of an airline, while
associated bonds are in default.
[0079] While the embodiments of the present invention may have been
explained with regard to particular examples of implementation of
various embodiments of the invention, it should be understood that
many alternatives, modifications and variations will be apparent to
those skilled in the art. Accordingly, the exemplary embodiments of
the invention, as set forth above, are intended to be illustrative,
not limiting. Various changes may be made without departing from
the spirit and scope of the invention.
[0080] For example, although implementations of particular
embodiments of the invention have been described in connection with
a single airline, it should be understood that the invention may be
practiced in connection with the financing or refinancing of
facilities for more than one airline, for example, a group or
consortium of airlines.
* * * * *