fil " a BOARD OF AIRPORT COMMISSIONERS REPORT TO THE torn-III". SUBJECT: Airport Revenue Bond Issuance - Subordinate Series 2018 D and E Bonds

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1 1 1 RW JH MJ BY KV..01 fil Los Angeles W o r l d Airports REPORT TO THE BOARD OF AIRPORT COMMISSIONERS Meeting Date: Item 0? Approved by: Neri Esguerra-Olivares, Director of Finance 10/18/ Reviewed by: Rlan P. Y. ubik, Chief Financial Officer, Deputy Executive Direc or torn-III" / r dap, - " a 7113P1 Chief Executive Officer CAO Review: El Completed Pending N/A lk IIMI Reviewed for Date Approval Status lby v Finance CEQA Procurement Guest Experience 10/4/2018 9/11/2018 9/11/ /2/2018 I 0_ Y N NA 1 MY N 1 NY ON Cond 1 MY ON 1 Strategic Planning 9/13/2018 NY N NA 1 SUBJECT: Airport Revenue Bond Issuance - Subordinate Series 2018 D and E Bonds Adopt the attached Documents Resolution authorizing the issuance and sale of the Department of Airports of the City of Los Angeles, California, Los Angeles International Airport, Subordinate Revenue Bonds 2018 Series D and E in an aggregate principal amount not to exceed $750,000,000 and approving documents related to the aforementioned actions and certain other related matters and actions. RECOMMENDATIONS: Management RECOMMENDS that the Board of Airport Commissioners: 1. ADOPT the Staff Report. 2. DETERMINE that this action is administratively exempt from the California Environmental Quality Act (CEQA) pursuant to Article II, Section 2.f of the Los Angeles City CEQA Guidelines. 3. ADOPT the attached Documents Resolution (Attachment A) 4. AUTHORIZE the payment of transaction costs from the proceeds of the revenue bonds including but not limited to underwriter's discount, bond insurance premiums (if any), rating Page 1 Report docx

2 agency fees, bond counsel fees, disclosure counsel fees, financial advisor fees, feasibility consultant fees, trustee fees, and verification agent fees, if any. DISCUSSION: 1. Purpose Adopt the attached Documents Resolution which authorizes the issuance of the Department of Airports of the City of Los Angeles, California, Los Angeles International Airport (Department), Subordinate Revenue Bonds, Series 2018 D and E (Subordinate Series 2018 D and E Bonds) in an aggregate principal amount not to exceed $750,000,000 and approve the execution and distribution of the financing documents related to the issuance of the Subordinate Series 2018 D and E Bonds. 2. Prior Related Actions July 11, Resolution (Authorizing Resolution) The Board of Airport Commissioners (Board) adopted the Authorizing Resolution which: (a) authorized the issuance and sale of one or more series of revenue bonds, notes and other obligations (LAX Revenue Bonds) in an aggregate principal amount not to exceed $2.4 billion to pay and/or reimburse the Department for capital expenditures incurred or to be incurred by the Department at Los Angeles International Airport (LAX) and to refund certain previously issued notes and bonds of the Department and the Regional Airports Improvement Corporation (RAIC) and was consolidated with remaining authorization pursuant to Resolution No to issue approximately $2.0 billion of LAX Revenue bonds to pay and/or reimburse the Department for capital expenditures incurred or to be incurred by the Department at LAX and to refund certain previously issued notes and bonds of the Department and the RAIC; and (b) approved the selection of underwriting firms for private negotiated sales of all or a portion of the LAX Revenue Bonds and the Department's entire underwriting pool as the selling group for the various bond transactions (other than for transactions involving a competitive sale of the bonds or the private placement of bonds in the form of a direct loan, revolving line of credit or other short term financing instrument from a lending institution). 3. Current Action Pursuant to Authorizing Resolution 26551, the Board authorized issuing up to $4.4 billion (which includes the remaining approximately $2.0 billion of authorization under Resolution No ) of LAX Revenue Bonds in multiple series to pay and/or reimburse the Department for capital expenditures incurred or to be incurred by the Department at LAX and to refund previously issued notes and bonds of the Department. As the first transaction to be undertaken by the Department under Authorizing Resolution 26551, staff recommends that the Board adopt the Document Resolution, which authorizes the issuance of the Subordinate Series 2018 D and E Bonds in an aggregate principal amount not to exceed $750,000,000 and the documents related to such bonds. The Department will issue the Subordinate Series 2018 D and E Bonds to, among other things, (a) pay or reimburse the Department for a portion of the costs of the Midfield Satellite Concourse-North Project, Midfield Satellite Concourse- North Apron Project, Terminal 1 Improvement Project, Terminal 1.5 Program, Automated People Mover System (APM) and (b) fund an escrow for Page 2

3 the purpose of defeasing the outstanding Regional Airports Improvement Corporation Facilities Sublease Revenue Bonds (American Airlines, Inc. Terminal 4 Project), Series 2002C (referred to herein as the RAIC Bonds) issued on behalf of American Airlines (the Series 2018 D Bonds), including the Department's required share of the costs of defeasance of the RAIC bonds. The estimated sources and uses of funds for the Subordinate Series 2018 D and E Bonds (separately referred to as the Series 2018 D and Series 2018 E Bonds) are as follows: Sources* Series D (AMT) Series E (Non-AMT) Total Par Amount $ 500,865, $ 216,155, $ 717,020, Premium $ 43,404, $ 20,261, $ 63,666, Total $ 544,269, $ 236,416, $ 780,686, Uses* Construction Fund 291,561, ,291, $ 459,852, Escrow for RAIC Bonds Defeasance 190,000, $ 190,000, Capitalized Interest Fund 20,814, ,045, $ 70,860, Debt Service Reserve Fund 39,279, ,951, $ 56,231, Costs of Issuance 610, , $ 873, Underwriters Discount 2,003, , $ 2,868, Total 544,269, ,416, $ 780,686, *Estimates provided by LAWA's financial advisor, Public Financial Management Financial Advisors and are subject to change within approved not-to-exceed amount based on investor demand and market conditions. Public Financial Management Financial Advisors, LLC (PFM), has estimated that (i) the true interest cost for the Series 2018 D Bonds is approximately 4.17%, which includes a 0.50% cushion for changes in market condition at the time of pricing, and the true interest cost for the Series 2018 E Bonds is approximately 4.31%, which includes a 0.50% cushion for changes in market condition at the time of pricing and (ii) assuming a true interest cost of approximately 4.17%, the total net debt service paid on the Series 2018 D Bonds through maturity would be approximately $ million (net of capitalized interest) and assuming a true interest cost of approximately 4.31%, the total net debt service paid on the Series 2018 E Bonds through maturity would be approximately $ million (net of capitalized interest). All of these metrics are subject to changing market conditions and may be higher or lower than estimated. How this action advances a specific strategic plan goal and objective This action advances the following strategic goal and objective: Deliver Facilities & Guest Experiences that are Exceptional: Plan collaboratively to improve guest services while delivering capital improvements. The issuance of Subordinate Series 2018 D and E Bonds will provide partial funding for the Terminal Projects Program and the APM, a component of the LAX Landside Access Modernization Program. As a result, LAWA can (i) deliver first class terminal facilities to enhance capacity at LAX terminal gates and passenger hold rooms and elevate the guest experience through modernized terminals at the Midfield Satellite Concourse-North Project, Terminals 1, and 1.5 and (ii) the APM system will improve access options to planned intermodal transportation facilities, the CONRAC, and future Metro stations and is expected Page 3

4 to provide more travel time certainty, reduce traffic congestion and improve air quality in and around LAX. Action Requested Staff requests the Board adopt the Documents Resolution which authorizes the issuance of the Subordinate Series 2018 D and E Bonds and approve the following Documents and certain other related matters and actions: Attachment A: Financing Documents Incorporated in the Documents Resolution The attached Documents Resolution approves and authorizes: Sixteenth Supplemental Subordinate Trust Indenture (Attachment B) Subordinate Bond Purchase Agreement (Attachment C) Continuing Disclosure Certificate (Attachment D) Preliminary Official Statement (Attachment E) Attachment B: Sixteenth Supplemental Subordinate Trust Indenture Each time a new series of subordinate lien bonds is issued, it is necessary to supplement the Master Subordinate Trust Indenture, which is the primary legal document providing for the issuance of subordinate lien bonds for LAX. The Sixteenth Supplemental Subordinate Trust Indenture supplements the Master Subordinate Trust Indenture by establishing the terms and provisions for the Subordinate Series 2018 D and E Bonds. The Master Subordinate Trust Indenture sets forth the terms and conditions by which subordinate lien bonds may be issued by the Department for LAX and secured by the Department's pledge of LAX's Subordinate Pledged Revenues. The Sixteenth Supplemental Subordinate Trust Indenture specifically sets forth the pledge to pay debt service on the Subordinate Series 2018 D and E Bonds and establishes certain funds and accounts in connection with the issuance of the bonds. Attachment C: Bond Purchase Agreement The Department will enter into a Bond Purchase Agreement with J.P. Morgan Securities LLC (the book-running senior managing underwriter of the Subordinate Series 2018 D and E Bonds). The book-running senior managing underwriter enters into the agreement on behalf of itself and as representative of the other participating underwriters. For the Subordinate Series 2018 D and E Bonds, the underwriters are J.P. Morgan Securities LLC (senior manager); Loop Capital Markets, LLC (co-manager); and PNC Capital Markets LLC (co-manager). The Bond Purchase Agreement requires the underwriters to purchase all of the Subordinate Series 2018 D and E Bonds, provided certain terms and conditions in the agreement are met by the Department. Pursuant to the terms of the Bond Purchase Agreement, the underwriters will be paid an underwriting discount not to exceed.5% of the final par amount of the Subordinate Series 2018 D and E Bonds purchased by them. Attachment D: Continuing Disclosure Certificate The Continuing Disclosure Certificate establishes the Department's commitment to meet the requirements of Rule 15c2-12 of the Securities Exchange Act of 1934, as amended, which requires issuers to provide updated financial and operational information to the Municipal Page 4

5 Securities Rulemaking Board, or its designee, on an annual basis and to provide notices of certain enumerated events. Attachment E: Preliminary Official Statement The Subordinate Series 2018 D and E Bonds Preliminary Official Statement is the disclosure document used by the Department to market the Subordinate Series 2018 D and E Bonds to prospective purchasers. The Preliminary Official Statement for the bond transaction describes, among other things, the security for the Subordinate Series 2018 D and E Bonds, how the bond proceeds will be used, financial and operating information pertaining to the Department and LAX, certain information regarding the airline industry, risk factors and pending litigation against the Department. As part of the disclosure to the bond market, the Preliminary Official Statement contains the Report of the Airport Consultant (Report of the Airport Consultant) prepared by WJ Advisors LLC, the Department's bond feasibility consultant. The purpose of the Report of the Airport Consultant is to examine the Department's ability to support debt service on the Subordinate Series 2018 D and E Bonds in light of current and projected airport revenues. The Report of the Airport Consultant 1) discusses the economic base for air transportation in the Los Angeles area, 2) discusses historical and projected air traffic activity at LAX, 3) reviews existing airport facilities and planned capital improvements, and 4) provides financial projections of airline rates and charges, airport revenues and expenses and debt service coverages. The Report of the Airport Consultant makes certain assumptions about which projects will be built, how much those projects will cost and the sources of funding for the projects during the Fiscal Years These assumptions reflect the direction of management's priorities for building capital projects at LAX. The Report of the Airport Consultant does not reflect debt service savings, if any, for the Department's refunding of any Senior Bonds and/or Subordinate Obligations during the forecast period. The Department is required to provide full and complete disclosure of material information to the prospective purchasers and must certify that the Preliminary Official Statement used for the bond transaction contains the same disclosure information. Upon pricing the Subordinate Series 2018 D and E Bonds, the Department will be required to complete a final Official Statement for the bond transaction, which is the final version of the respective Preliminary Official Statement updated to include the final terms of the respective Subordinate Series 2018 D and E Bonds (including, maturity dates, par amounts, interest rates, redemption provisions and underwriting costs), as well as any matter of material importance that may have occurred since the publication of the Preliminary Official Statement. Costs of Issuance Costs of issuance are paid out of the proceeds of the bond issuances. These costs include, but are not limited to the fees and expenses of bond counsel and disclosure counsel, financial advisors, feasibility consultant, rating agencies, bond insurance premiums (if any), trustees, printing, publications and mailing expenses. Staff projects the cost of issuance for the bond transaction not to exceed 0.15% of the final par amount of the Subordinate Series 2018 D and E Bonds. Page 5

6 Authorization of Additional Actions In order to complete the issuance of the Subordinate Series 2018 D and E Bonds, Staff requests that the Board designate its President of the Board, the General Manager (referred to within the Department as the Chief Executive Officer), the Chief Operating Officer, the Chief Financial Officer or a written designee of the Chief Executive Officer (each a "Designated Officer" and collectively, the "Designated Officers") to execute and deliver any and all documents, certificates and other instruments and to take any and all actions which they deem necessary or advisable in order to provide for the issuance, sale and delivery of the Subordinate Series 2018 D and E Bonds, carry out the purposes of the Documents Resolution and the Authorizing Resolution, including the funding of an escrow to defease the RAIC bonds with the proceeds of the Subordinate Series 2018 D Bonds and the acquisition of assets financed with the RAIC bonds, and the authorization to redeem any portion of the 2018 D and E Bonds, when they become currently callable, from funds of the Department if such redemption will generate refunding savings. Fiscal Impact LAX currently has approximately $6.05 billion of outstanding debt. The issuance of the Series 2018 D and E Bonds will increase LAX's outstanding debt by approximately $717 million, resulting in additional average annual debt service payments of about $40.8 million. Actual results will vary depending on market conditions. Principal and interest payments on the Series 2018 D and E Bonds will be paid from cost recovery user fees and general airport revenues. Projections provided in the Report of the Airport Consultant (which is incorporated into the Preliminary Official Statement), confirms that LAX should be able to generate sufficient revenues to meet the debt service coverage requirements set forth in the Master Subordinate Trust Indenture to support the current and additional debt service from the issuance of the Series 2018 D and E Bonds. The Report of the Airport Consultant does not reflect debt service savings, if any, for the Department's refunding of any Senior Bonds and/or Subordinate Obligations during the forecast period. The Report of the Airport Consultant contains a number of detailed revenue and expense forecasts, debt service projections and passenger growth projections for LAX based on the completion and financing of the above described projects and other future projects, all of which total approximately $11.9 billion. The forecast financial results in Fiscal Year 2025 produce the following key metrics: Cost per Enplaned Passenger (CPE): Debt per Enplaned Passenger (DPE): Total Debt Service Coverage (calculated per indenture): $29.65 $ Staff believes the above metrics are consistent with maintaining LAX's competitive position among other large hub international gateway airports. Staff requests the Board approve this staff report, the attached Documents Resolution and attached financing documents that will enable the issuance of Series 2018 D and E Bonds. Page 6

7 4. Alternatives Considered Foregoing the issuance of the Subordinate Series D and E Bonds Funding capital improvement projects requires using multiple funding sources such as cash, Passenger Facility Charge (PFC) collections and debt, because the total amount required to fund the capital projects is far greater than the amount that is available from any single funding source. If the Subordinate Series 2018 D and E Bonds are not issued, the Department would need to draw down on existing reserves to complete the capital projects. This alternative would reduce financial flexibility and possibly impair the Department's ability to undertake future capital projects. Therefore, staff determined that foregoing the issuance of the Subordinate Series 2018 D and E Bonds is not a viable alternative. APPROPRIATIONS: Transaction costs such as underwriting and consultant fees associated with issuing the Subordinate Series 2018 D and E Bonds will be paid from bond proceeds. Staff requests the appropriation of an amount not-to-exceed $880,000 from the LAX Revenue Fund to pay the costs of issuance of the Subordinate Series 2018 D and E Bonds, and the costs of defeasance of the RAIC bonds. Some fees may be initially funded from the operating budget, but will be reimbursed with after the bonds have been issued with bond proceeds. STANDARD PROVISIONS: 1. This item, as a continuing administrative, maintenance and personnel-related activity, is administratively exempt from California Environmental Quality Act (CEQA) requirements pursuant to Article II, Section 2.f of the Los Angeles City CEQA Guidelines. 2. The proposed documents are subject to approval as to form by the City Attorney. 3. Actions taken on this item by the Board of Airport Commissioners will become final pursuant to the provisions of Los Angeles City Charter Section This action is not subject to the provisions of the Living Wage / Worker Retention Ordinances. 5. This action is not subject to the Small Business Enterprise Program. 6. Selected Proposers will comply with the provisions of the Affirmative Action Program. 7. Financial institutions are exempt from obtaining a Business Tax Registration Certificate. 8. Selected Proposers will comply with the provisions of the Child Support Obligations Ordinance. 9. This action is not subject to the insurance requirements of the City of Los Angeles. Page 7

8 10. Pursuant to Charter Section 1022, staff determined the work specified on the proposed contract can be performed more feasibly or economically by an Independent Contractor than by City employees. 11. This action is not subject to the provisions of the Contractor Responsibility Program pursuant to CRP Rules /Regulations, Section K.1.b - Contracts for the investment of trust moneys or agreements relating to the management of trust assets. 12. This action is not subject to the provisions of the Equal Benefits Ordinance pursuant to EBO Rules /Regulations #4, Section B.1(a) - Bond Issuance. 13. This action is not subject to the provisions of the First Source Hiring Program. 14. Selected Proposers have submitted the Prohibited Contributors (Underwriters) CEC Form 56 and will comply with its provisions. Page 8 Report.docx