City and County of Denver Municipal Airport System ANNUAL ...

City and County of Denver
Municipal Airport System
NOTES TO FINANCIAL STATEMENTS
December 31, 2010 and 2009
Description of the Swap Agreements and Associated Debt
The 1998 Swap Agreements and Associated Debt – On January 1, 1998, the Airport System entered into interest rate
swap agreements (“the 1998 Swap Agreements”) in order to take advantage of and secure prevailing interest rates in
contemplation of the future refunding of certain senior bonds through the Airport System’s issuance of variable rate
bonds on or before October 4, 2000. Each 1998 Swap Agreement has a notional amount of $100 million and provides
for certain payments to or from each financial institution equal to the difference between a fixed rate payable by the
Airport System under each Agreement and the prevailing variable rate on certain of the Airport System’s variable rate
bonds payable by the respective financial institutions. Upon the occurrence of certain events, counterparty to a 1998
Swap Agreement may elect to apply an alternative variable rate, 70% of the London Interbank Offered Rate for onemonth
deposits of U.S. dollars (LIBOR) plus 0.10%, instead of the variable rate payable on the associated debt. Events
that could trigger the right of the counterparty to apply the alternative rate include, among other things, a downgrade of
the short-term ratings of the associated debt to below A-1+ by S&P, VMIG-1 by Moody’s or F-1+ by Fitch or the
long-term ratings of the bonds are downgraded to below one of the highest two rating categories of any two of S&P,
Moody’s or Fitch, or an event of taxability. An event of taxability includes, among other things, a change in tax law
that causes the relationship between the Securities Industry and Financial Markets Association index (SIFMA) and
LIBOR such that the daily average SIFMA Index as a percentage of daily average LIBOR exceeds 80% for a period of
90 consecutive days or 75% for a period of 120 consecutive days. The effect of a counterparty applying the alternative
rate would be to increase the basis risk for the swap. There would be a greater likelihood of differences between the
variable rate paid by the Airport System on the associated debt and variable payments received from the counterparty
under the swap. There was no such taxability event for the years ended December 31, 2010 and 2009. As of
December 31, 2010, the short-term ratings of Series 2008C1were A-1 by S&P, VMIG-1 by Moody’s and F-1+by
Fitch. The short term ratings of Series 2008C2-C3 Bonds were A-2 by S&P, VMIG-1 Moody’s and F-1+ by Fitch. On
January 20, 2010, S&P withdrew ratings on LBBW, the liquidity provider for the Series 2008C2-C3 Bonds, at
LBBW’s request. Consequently, S & P’s short-term rating on the Series 2008C2-C3 Bonds was also withdrawn.
In August 2000, the Airport System issued the Series 2000B and the Series 2000C Bonds in order to refund a portion
of the Series 1990A Bonds, and treated such 1998 Swap Agreements as relating to the payments due on the
Series 2000B Bonds and the Series 2000C Bonds (the associated debt), thereby effectively converting the floating
rates of the Series 2000B Bonds and the Series 2000C Bonds to a fixed interest rate. The Series 2000B and Series
2000C Bonds were refunded in 2008, by the Series 2008C1-C3 bonds. The Series 2008C2-C3 Bonds are currently
associated debt with the 1998 swaps. The aggregate weighted average fixed rate payable by the Airport System under
the 1998 Swap Agreements is 4.7463%. The 1998 Swap Agreements became effective on October 4, 2000, and
payments under these 1998 Swap Agreements commenced on November 1, 2000.
The 1999 Swap Agreements and Associated Debt – On July 28, 1999, the Airport System entered into interest rate
Swap Agreements (“the 1999 Swap Agreements”) in order to take advantage of and secure prevailing interest rates in
contemplation of the future refunding of a portion of the Series 1991A Bonds and Series 1991D Bonds through the
Airport System’s issuance of variable rate bonds on or before October 4, 2001. The 1999 Swap Agreements have
notional amounts of $100 million, $50 million and $50 million, respectively, and provide for certain payments to or
from each financial institution equal to the difference between a fixed rate payable by the Airport System under each
Agreement and the SIFMA Index payable by the respective financial institutions. Historically, SIFMA Index averages
have been lower than the variable interest rate the Airport System pays on the associated debt. The Airport System
attributes this difference largely to the fact that the associated debt is subject to the alternative minimum tax. This
means that, on average, the Airport System pays more in interest on the associated debt than it receives under the 1999
Swap Agreements. This basis risk is modified when the 1999 Swap Agreements and associated debt are considered
together with the 2002 Swap Agreements and 2007A Swap Agreements.
On October 4, 2001, the Airport System issued the Series 2001 C1-C4 to refund a portion of the Series 1991A Bonds
and Series 1991D Bonds. The Series 2001C1-C4 Bonds were refunded by commercial paper and Series 2008A1-A4
Bonds in April 2008. Because the Series 2008A1-A4 were initially issued in a fixed rate mode, the 1999 Swap
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