Bonds Shake, Not Stir

June 26, 2006
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GRAND RAPIDS — The Kent County Board of Aeronautics, along with the Board of Commissioners, may bet up to $130 million this October that long-term interest rates will rise in the coming years.

And the proposition of entering into an interest-rate swap for a bond package that would finance the construction of a new parking ramp at the Gerald R. Ford International Airport left a few members of the county’s Finance Committee more shaken than stirred.

“We have always been careful about risk. The project is good, but the risk factor sticks out. I hope we get more information before we act on this,” said Commissioner Tom Postmus.

Airport Director of Finance Brian Picardat said the transaction would be similar to the way the county financed the incinerator for the Department of Public Works in 1993.

The proposal that bond underwriter JP Morgan and Co. presented to the committee last week calls for the aeronautics board to enter into a fixed-rate agreement with the financial services firm. In return, JP Morgan would pay aeronautics a variable return that would reflect the actual long-term rate at the time.

Representatives of JP Morgan told the committee the proposal wasn’t a speculative trade, but a hedge against paying a higher interest rate. They explained that aeronautics needs to determine in which direction rates will go and how well the fixed and variable rates would match up in order to go ahead with the deal.

They said the current indication is that short-term rates will continue to rise, and long-term rates, which haven’t risen in tandem with the short-term so far, will also rise later. If that happens, aeronautics could get a higher rate from the underwriter than the department would pay JP Morgan.

“These swaps can be negotiated and made more flexible,” said Terry Donnelly, a member with Dickinson Wright in the Bloomfield Hills office and the board’s bond counsel, in an attempt to address the committee’s concerns.

“In October, if you don’t think interest rates are going to rise, then you don’t want this deal,” he added. “Hopefully, all you will be paying is 5 percent on your money.”

County commissioners agreed earlier this year to issue bonds worth up to $130 million for a new airport parking ramp and other improvements. The ramp will offer about 4,800 parking spaces. Construction for the entire project has been estimated at $120 million. Airport revenue is expected to meet most of the bond payments and the package is not to exceed 30 years.

Although the aeronautics board hasn’t officially ratified the project yet, JP Morgan plans to meet with that group on Sept. 20 to learn whether it favors a fixed or a swap-interest rate package. The firm also plans to appear before the full board of county commissioners on Oct. 12 to hear their decision.

The next step is for Dickinson Wright to prepare the four swap documents necessary for the transaction. Donnelly said that work would begin next month.

“All this would be presented to you for the board’s approval in the fall,” he said.

Commissioner Harold Voorhees asked if County Treasurer Kenneth Parrish, who makes the investments decisions for the county, is involved in the bond process. Daryl Delabbio, county administrator and controller, said he isn’t involved, because the proposal doesn’t include any dollars from the county’s general fund. But Delabbio said Fiscal Services Director Robert White has been part of the discussions.

Donnelly, JP Morgan and the PFM Group, which is working with the airport, plan to pay another visit to the Finance Committee on Sept. 19. Commissioner Gary Rolls said he would like to see them come up with a contingency plan for the financing package just in case something major happens to disrupt the financial market, such as another terrorist attack.

Picardat told the committee that construction bids should go out early next year and that work on the project should get started next spring.

“The risk is, you think interest rates are going to be higher than they are today,” said Dick Vander Molen, county commissioner and past board chairman. “Right now, my gut tells me it’s going to be higher. But I don’t know about October.” 

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