Contribution to Debate on a Resolution to Assume $50 million of the Debt of the Nassau Airport Development Company (NAD) for the Redevelopment of the Lynden Pindling International Airport:

PRIME MINISTER INGRAHAM: The Parliament will recall that there was a Transfer Agreement and Lease Agreement signed between the Government, the Airport Authority and the Nassau Airport Development (NAD) Company.

The Transfer Agreement transferred from the Airport Authority to NAD all of the assets of LPIA generally, except land and buildings, which were covered by the Lease Agreement. A component of these assets was the right to charge and collect fees for the services provided at the LPIA including the Passenger Facility Charge (PFC).

In consideration for these rights NAD was obligated to pay to the Airport Authority $50 million . This $50 million was the outstanding balances of the various loans held by the Authority at the Royal Bank of Canada. These were a $40 million loan for the refurbishment of Runway 14/32 (actual cost $11 million higher); a $7.5 million loan for capital works improvement and a $2.5 million overdraft. The overdraft facility was the only component of this debt in B$.

The source of the funding for NAD was a US$65 million loan. This loan was organized by Citibank as the underwriters of the LPIA financing and was funded simultaneously at the handover in April 2007. This loan was an interest only bridge loan secured by the future collection of the PFC. The banks participating in this transaction included Citibank, Royal Bank of Canada, First Caribbean, Scotiabank and BPD Miami (Banco Popular Dominican Republic).

In November 2007, NAD refinanced this loan by a US $80 million seven-year facility secured by the actual PFC collection. The banks participating in this transaction include Citibank, Royal Bank of Canada, First Caribbean, Scotiabank and the Export Development Canada (EDC).

The overall financing for the LPIA?s redevelopment is projected to be some $305 M, structured as to $140 M revolving debt, $90 M Senior Debt and $80 M Participating Debt. This financing structure was deemed by the financial advisors, Citibank, to be the best means of securing an investment grade rating and thereby improving the financing terms.

It was NAD?s intent to secure the necessary funding through the capital markets. However, as we all are aware, adverse developments in the financial markets have reduced investor demand, particularly in relation to the Participating Debt component.

I note, Mr. Speaker that it was NAD?s further intent to use the proceeds from the $80 M Participating Debt to retire all of its outstanding debt, which amounts to $80 M. Indeed, securing the $80 M Participating Debt is a necessary pre-condition to the successful conclusion of the overall project financing. This is so because the participating debt allows for the cash flows to be almost entirely dedicated to servicing the other debt components, as it either defers any interest payments until later or requires only minimal payments to be made during the construction period.

While NAD is confident that it can secure local investment of $30 M in the Participating Debt, there still remains $50 M to be funded.
Overview. NAD assumed management responsibility for the Lynden Pindling International Airport on the first of April 2007, and has completed eighteen months of operation.

NAD is a Bahamian company with a 30-year airport lease, currently managed by a Canadian company, Vancouver Airport Services (YVRAS). YVRAS won a competition to manage the airport in 2006. YVRAS and NAD have fulfilled all first year contractual obligations.

NAD is tasked with operating the airport on a commercial basis while providing opportunities for business and investment to Bahamians. In the past eighteen months NAD has completed two financings, one for $67 million and one for $87 million, which enabled the Airport Authority to repay a $50 million loan and established a solid financial basis for the airport.

NAD has also paid almost $1 million in rent and has spent over $36 million BSD in The Bahamas in the past 18 months. NAD has accomplished this by increasing non-aeronautical revenue at the airport and through the implementation of the Passenger Facility Charge last July. This has eliminated the need for government subsidies, which totaled over $45 million in the past seven years, giving the Government space to provide other things like additional social assistance.

Phase 1. One of NAD?s major priorities has been to bring the existing facilities up to a much higher standard in its first two years. Dozens of projects have been completed, including the following:

• The installation of a $2 million dollar baggage system in the US departure terminal, which has eased passenger baggage problems by taking checked luggage away prior to the initial security screening. Very shortly, when the Airport Authority implements certain other steps, the upstairs screening point can be eliminated, which will significantly improve the customer experience. The US terminal has been painted, carpet replaced and the Public Address system has been upgraded at a cost of $41,000.

• Almost $2 million has been spent on refurbishing the washrooms in the various terminals. These have made a tremendous difference in customer satisfaction, with ratings going up a full 25%, from 3.1 to 3.9 out of 5. Speaking of which, NAD has instituted twice yearly customer satisfaction surveys and a customer comment card program in order to track satisfaction levels and react appropriately.

• Flight Information Displays were added in the terminals, which provide airline arrivals and departure information to travelers and others. The NAD website has been operational for one year, where passengers and the public can also view the arrivals and departure information, in addition to operational information like parking and job openings. New counters in the arrivals baggage hall have been opened to both make it easier for passengers to reclaim their luggage and to remove bags off the floor.

• Almost $1 million has been spent on a new inbound baggage carrousel in the customs hall to improve the reliability of baggage delivery to arriving international passengers.

• Parking lot improvements include the addition of 200 parking stalls, the development of the overflow lot, which includes bus service, short term parking, new collection booths and a realignment of the curb, which has greatly improved vehicle flow in front of the international arrivals area.

• NAD has six retail kiosks operating in the US departures lounge and they have been a great success, providing a great retail opportunity for Bahamian entrepreneurs while presenting a last minute shopping opportunity for tourists. Six additional, slightly smaller carts will be rolled out shortly in the international and US holdrooms

• Following a lengthy and complex negotiation with the existing exclusive food and beverage operator, many more opportunities will be available for the passengers within the next few months. Two new coffee bars will be in place shortly, as well as several new franchise food outlets in the US and domestic terminals.

• General repairs and maintenance projects have included everything from $300,000 roof repairs to prevent leaks to thousands of dollars on new paint, carpets, plants, garbage bins and signs, both inside and outside the terminals. The covered walkways for both International and Domestic passengers have been refurbished and repainted. Many improvements have been made that are not visible to the traveling public: $86,000 has been spent to bring the fire alarm system in the US terminal up to code, $60,000 has been spent on up to date aviation charts that were 3 years out of date, and $570,000 has been spent to buy new maintenance equipment, from tractors and grass cutting gear to vehicles.

• The Airside Maintenance team has cleared back trees and brush that were a safety issue for the air traffic controllers, as well as performing a general cleanup airside, with ditch rehabilitation and grass cutting. Over 2,500 feet of fence line was replaced and brush was cut back from the entire perimeter.

  A four-year, very progressive collective agreement was recently signed with the BPSU, which includes a new pension plan and disability insurance, as well as performance based pay.

NAD has promoted over 15 people, in a company of 145 staff, including establishing 4 Bahamians in director level positions. When the terminal redevelopment is complete, 3 of the 5 executives will be Bahamian, so training is a vital part of NAD?s yearly business plan, and ten staff have already been to other YVR Airport Services airports this past year for airport instruction and orientation. In addition over 4,700 documented hours of staff training has been accomplished in the past year.

Phase II. A primary goal of NAD is of course the terminal redevelopment project. In 2006 YVRAS conducted a Terminal Review Study to determine the rationale for new terminals. The terminals will be required in order to meet the expected organic growth of tourism in The Bahamas, to bring the terminals up to an acceptable international standard and because of the rising cost of maintenance of the old infrastructure and associated equipment.

The study also determined the most logical site for the new terminals. As part of the Project Management Agreement, NAD developed a Project Definition Report for the new terminals, which set the budget at $405 million. This report was delivered to the Government of The Bahamas on 17 September 2007.

In April 2008, Stantec, a leading airport design firm, was awarded a $20 million contract as the Prime Consultant for designing the new terminals. After several months of detailed work and many weeks of consultation with stakeholders, the design development was complete in August, and now construction documents are approximately 75% complete. Site preparation work began in November, but financing is required prior to continue moving forward, including ordering approximately $15 million in structural steel. Subject to timely financing, the US Terminal is anticipated to open in the fourth quarter of 2010. Issues

• Operating Deficit. While NAD is currently a viable financial entity, this is due to the PFC revenues which are intended for the terminal redevelopment program. NAD has an operating deficit, which must be eliminated within one year of the terminal redevelopment project?s completion. Currently, the deficit, excluding PFC, is approximately $7.2 million per year.

• Late Payments. There are several customers of NAD that are in serious arrears and NAD may have to take action in order to collect.

• Obsolete Equipment. NAD struggles with old and outdated equipment such as air conditioning and the baggage carousels. NAD has spent several hundred thousand dollars and hundreds of hours attempting to keep the air conditioning and the baggage carousels operating. However, they continue to be unreliable and extremely expensive to maintain (some parts must be manufactured in Europe). The age of the facilities and equipment are an ongoing problem, not easy to correct as they age further.

• Airline Schedules and Capacity. During peak periods the capacity of the terminals is insufficient to prevent long lineups at check-in, security and at baggage claim. Other than opening larger facilities, schedule adjustments and line control are the only methods available to alleviate these persistent problems.

• Passenger Decline. While long term growth in air travel remains relatively stable, short term cyclical declines, such as currently underway have a negative impact on cash flow and impact on NAD?s financing flexibility.

NAD Financing for Terminal Redevelopment Project Overview

• Three phases of construction:
• US departures terminal ? complete Q4 2010
• International arrivals terminal ? complete Q2 2012
• International departure / domestic terminal ? complete Q2 2013
• Total project budget of $409 million (excluding interest and financing costs)
• Approximately $100 million will be in Bahamian dollars. Market Competitiveness

Airline revenue on Nassau routes relatively strong:

• Average yield (revenue) on Nassau routes $0.18 per mile
• US domestic route average of $0.13 per mile (28% less)

• US carrier international route average of $0.12 per mile (33% less)

• Current airport charges are relatively low for international flights:

• 36% or $14 per passenger below the Caribbean average
• 59% or $36 per passenger below the average of Fort Lauderdale and Miami

Financing Required

• Approximately $430 million required to fund the terminal project and refinance current debt totaling $80 million (net new debt of approximately $350 million).

• Approximately $305 million required at the beginning of stage 1 (US departures terminal):

• $80 million refinancing of current debt

• $225 million for construction of stage 1

• Up to $80 million of participating debt is proposed for stage 1 in lieu of senior debt.

• Required rate increases are predicted to maintain LPIA at the average of airport costs in the Caribbean region.

Nominal increase in domestic passenger fees from $5 to $7.50 per passenger upon project completion planned.

Given the importance of this LPIA redevelopment project to the economic growth and development of The Bahamas, the Government has determined that it is necessary to assume responsibility for the unplanned cost increase of $11 million cost overrun on runway 14/32 refurbishment and assume the $50 M of NAD?s current outstanding debt by funding $50 M of the Participating Debt, the proceeds of which will go directly to retiring that amount of NAD?s current debt.

The Government believes that this proposition is a win-win situation for the Airport redevelopment project as well as the Government, as over time the $50 M investment will be repaid with interest.

In terms of impact on the Government?s debt profile this assumption is not relatively large. The assumption represents a 1.6% increase in National Debt using the latest available figures and 13% increase in foreign currency debt, which only accounts for 12% of overall debt.

This passage of this Resolution will remove one of the hurdles standing in the way of the financing of the redevelopment of LPIA.

The other hurdle is the current global financial crisis.

This redevelopment of LPIA is unquestionably in the public interest of The Bahamas. However, the borrowing proposed will only proceed concurrently with the completion of financial arrangements for LPIA?s redevelopment.

I so move.