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"Bondholders' objections ground Indianapolis airport buyback plan"

Monday, August 20, 2012

Bondholders' objections ground airport buyback plan
Investors blast airport's lease with AAR
By Tony Cook
The Indianapolis (IN) Star

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

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

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

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.

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