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
The 2007A Swap Agreements - On December 21, 2007, the City entered into interest rate swap agreements (“the
2007A Swap Agreements”) with two financial institutions to effectively change the amounts it receives under the 2002
Swap Agreements from a percentage of the London Interbank Offered Rate (LIBOR) for one-month deposits of U.S.
dollars (“one-month LIBOR”) to a percentage of LIBOR for ten-year deposits of U.S. dollars (“ten-year LIBOR”). The
2007A Swap Agreements have notional amounts of $150.0 million and $50.0 million, $100 million relate to the 2008C
commercial paper, $78.8 of Series 2008B bonds and $12.2 of Series 2002C bonds and provide for certain payments to
or from each financial institution equal to the difference between a percentage of one-month LIBOR payable by the
Airport System and a percentage of ten-year LIBOR payable by the respective financial institutions. The net effect of
the 2007A Swap Agreements, when considered together with the 2002 Swap Agreements, is that the Airport System
will receive 65.55% of ten-year LIBOR, rather than 76.165% of one-month LIBOR, to offset the actual rate paid on
the 2008 Commercial paper, Series 2008B bonds and a portion of the Series 2002C bonds (see “the 1999 Swap
Agreements and Associated Debt” and “the 2002 Swap Agreements and Associated Debt”).
The Airport System is exposed to basis risk under the 1999, 2002 and 2007A Swap Agreements, due to the differences
in indices between the variable rate it pays on the associated debt and 65.55% of ten-year LIBOR received under the
2007A Swap agreements. The 2007A Swap Agreements have an effective date of May 1, 2010 and payments under
these agreements have not commenced.
On February 5, 2010 and February 10, 2010, the City terminated the 2007A Swaps in order to monetize the economic
value of those Agreements and received $11,092,000 from the counterparties.
The 2008A Swap Agreement – On December 18, 2008, the City entered into an interest rate swap agreement (“the
2008A Swap Agreement”) with Royal Bank of Canada and simultaneously terminated a 2006A Swap Agreement with
Lehman Brothers Special Financing. The purpose of the transaction was to replace Lehman Brothers Special
Financing, which filed a voluntary petition for chapter 11 bankruptcy protection on September 15, 2008, as
counterparty to $120.233 million notional amount associated with 2007-G Bonds. The swap provides for certain
payment to or from Royal Bank of Canada equal to the difference between the fixed rate payable by the Airport
System under the Agreement and 70% of London Interbank Offered Rate (LIBOR) for one month deposits of U.S.
dollars payable to Royal Bank of Canada. The City received $21,100,000 from Royal Bank of Canada to assist in
paying the settlement amount of $21,353,831 due to Lehman Brothers Special Financing. As a result of receiving the
loan of $21,100,000 from Royal Bank of Canada, this loan, including interest at an implied rate of 6.519%, will be
paid through the fixed rate to be paid by the City to Royal Bank of Canada.
The net effect of the 2008A Swap Agreement, when considered together with the variable rate Series 2007F1-F4 and
Series 2007G1-G2 bonds, is that the Airport system will effectively pay a fixed rate, plus or minus the difference
between the actual rate on the Series 2007F1-F4 and Series 2007G1-G2 Bonds and 70% of LIBOR on $120.233
million of obligations.
The Airport System is exposed to basis risk under the 2008A Swap Agreement, due to the differences between the
variable interest rate it pays on the associated debt and 70% of LIBOR received under the 2008A Swap Agreement.
The fixed rate payable by the Airport System under the 2008A Swap Agreement is 4.0085%. The 2008A Swap
Agreement became effective on December 18, 2008 and payment under this Agreement commenced on January 1,
2009.
The 2008B Swap Agreement – On January 8, 2009, the City entered into an interest rate swap agreement (“the 2008B
Swap Agreement”) with Loop Financial Products I LLC and simultaneously terminated a 1998 Swap Agreement with
Lehman Brothers Special Financing. The purpose of the transaction was to replace Lehman Brothers Special
Financing, which filed a voluntary petition for chapter 11 bankruptcy protection on September 15, 2008, as
counterparty to $100 million notional associated with the 2008C1 Bonds outstanding in the amount of $92.6 million.
The swap provides for certain payment to or from Loop Financial Products I LLC equal to the difference between the
fixed rate payable by the Airport System under the Agreement and 70% of London Interbank Offered Rate (LIBOR)
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