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The Handbook of Municipal Bonds by FRANK J. FABOZZI, SYLVAN G. FELDSTEIN

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CASE STUDY 4
Tax-Exempt Airport Finance: Tales from the Friendly Skies
James E. Spiotto Partner Chapman and Cutler LLP
 
 
 
According to the Federal Aviation Administration (FAA), as of 2006, there are a total of 19,847 airports in the United States (up from 6,881 in 1960), of which 26% are publicly owned. Traditionally, the municipal- or government-owned airports have financed improvements through reliance upon forms of municipal finance.
The United Airlines bankruptcy resulted in several decisions by the Seventh Circuit Court of Appeals of particular interest to municipal bond professionals and investors. These decisions illuminate potential issues arising from popular methods of airport finance and provide important lessons for structuring future deals. Originally, general obligation bonds, backed by the taxing authority of the municipal issuer, were widely used for airport development. As efforts were made to streamline the municipal balance sheet, airport capital funding was modified to transfer the obligation for airport finance from the municipality itself. While traditional airport revenue bonds, whereby the airport’s revenue stream is pledged to repay bondholders, have been an important financing mechanism for capital improvements, the United Airlines decisions deal with the treatment of special facility revenue bonds, which are revenue bonds that are usually secured by the credit of the airport tenant. In contrast to the older, general obligation bond types of financing, ...

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