April 23, 2018

Bond sale sheds light on private Everett air terminal

EVERETT — The company developing a rare privately run commercial U.S. airport terminal in Everett sold $50 million in bonds earlier this year to finance construction, according to data obtained by The Associated Press.

Propeller Airports sold the debt through the Washington Economic Development Finance Authority, according to data from the agency.

In the non-publicized February sale, Barclays Capital bought all of the bonds and immediately transferred half the amount to Franklin Templeton Investments, said Rodney Wendt, the finance authority's executive director.

The sale sheds light on finances of the company, which has never run airport infrastructure before and has not previously revealed details about the financial backing behind its terminal plans.

It has commitments from Alaska Airlines, Southwest Airlines and United Airlines for up to 24 daily flights, mostly to destinations in the West and Southwest. The terminal at the Everett airport where Boeing tests its new jets is due to open this fall.

While privately run airports are common in Europe, they are rare in the U.S.

Brett Smith, Propeller's chief executive officer, is the majority owner of Propeller Investments LLC, the biggest shareholder in Propeller Airports. The company is also backed by one “very large” Seattle-based investor, which he declined to name.

Propeller will invest about $40 million to build the terminal, Smith said. The remaining bond proceeds will finance other capital costs and interest during construction, according to Wendt.

The company secured a 50-year agreement with Snohomish County three years ago to build and operate the terminal at the two-runway Paine Field airport in Everett — a location that would be convenient for suburban Seattle residents.

Smith previously tried to secure deals to establish commercial air terminal operations in Georgia's Gwinnett and Paulding Counties but faced opposition from the communities and Delta Airlines, which dominates traffic at nearby Hartsfield-Jackson Airport in Atlanta.

Dave Somers, the Snohomish County Executive who chaired the County Council in 2015, said the agreement will help create jobs and boost economic growth.

He said the county vetted the company through its attorneys, but has no projections for job creation or revenue to be generated by Propeller. It didn't ask for written operational or financial proposals or the identities of the company's investors.

“There are different levels of due diligence. If we were risking significant county resources for somebody to do a project, that might be one thing. But we're leasing land,” said Somers. “It's like renting a room. This is what we charge, these are the terms and conditions”

There was no competitive bidding for the terminal because Propeller Airports proposed the idea, Somers said. The country was “obligated” to make airport property available “under reasonable terms” for anyone because that's a condition attached to the federal grants the airport receives, he added.

Paine Field has received almost $120 million from the Federal Aviation Administration's Airport Improvement Program since 1949, according to county data. The FAA funds the program with about $3 billion a year to implement upgrades at airports throughout the country.

About $41 million of Propeller's 30-year debt is exempt from taxes, paying investors 6.5 percent, while the remaining taxable amount pays 7.12 percent.

Those borrowing costs are more than 3 percentage points higher than similar-maturity U.S. Treasurys. The riskier a bond, the higher interest rate its issuer typically has to pay because investors would not buy it otherwise. Borrowers with weak or no credit ratings generally pay the highest interest rates, while bonds issued by high-quality issuers pay the lowest. Propeller doesn't have a credit rating.

Since the bonds were sold during construction, the interest rate “is less important to us than the long term rate on the permanent financing once the facility is up and running,” Smith said. “The rate is more reflective of the small size, limited liquidity and flexible terms and not the quality of the project.”

The company will be required to pay the debt in 2024 or obtain long-term financing conditions. Neither the county, nor the state or the finance authorities hold liability for the bond issuance.

Propeller will pay the county about $450,000 a year to use 10.5 acres (4.2 hectares) of airport land for its terminal, plus 2.5 percent of the project's revenues for the first four years and 5 percent from the fifth-year forward, according to the lease agreement.