Official Statement Airport Commission City and County of San ...

Swap Policy
In 2002, the Commission adopted a written Interest Rate Swap Policy (the “Swap Policy”). The Swap
Policy is reviewed periodically by the Airport Director and revisions are submitted to the Commission for approval.
The most recent revision to the Swap Policy was approved by the Commission on August 4, 2009. Those revisions
clarified and improved the Airport’s response to downgraded swap counterparties as a result of the recent financial
crisis. The revisions also included provisions for terminating or replacing existing swaps due to adverse market
conditions, evaluating the risk of having sufficient liquidity to fund termination payments in the event swaps are
required to be terminated, and requiring that substitution or replacement of a swap must be on substantially the same
terms as the original swap as previously approved by the Commission.
The following is a summary of the current Swap Policy:
Prohibited Uses. The Swap Policy prohibits the Commission from entering into interest rate swaps, caps,
collars and floors, options with respect thereto and other similar instruments, on either a current or forward basis
(collectively, “Swaps”) that: (i) are for speculative purposes, such as for potential trading gains; (ii) create
extraordinary risk or leverage with respect to the related Bonds or investments; (iii) would result in the Commission
lacking sufficient liquidity to make payments that may be due upon termination of the Swap; and (iv) lack sufficient
price transparency to permit the Airport Director and the Swap advisor to reasonably determine the market valuation
of the Swap.
Qualified Swap Counterparties. The Commission is authorized under the Swap Policy to enter into Swaps
only with qualified Swap counterparties. As of the date of execution of each Swap, at least one of the ratings of
each counterparty (or its guarantor) from Moody’s, S&P or Fitch must be “A1,” “A+” or “A+,” respectively, or
higher and the other ratings no lower than “A2” or “A.” The Commission and its swap advisors actively monitor the
credit standing of the Airport's various swap counterparties.
Notional Amount of Swaps. The Swap Policy prohibits the Commission from entering into any Swap that
would cause the aggregate notional amount of all of the Commission’s Swaps to exceed 20% of the aggregate
principal amount of the Commission’s outstanding general airport revenue bonds.
Swap Counterparty Credit Exposure Limits. The Swap Policy requires the Commission to diversify its
Swap counterparty credit risk to limit the Commission’s credit exposure to any one counterparty. The following
limits apply to termination exposure to any one counterparty. The Commission is permitted to make exceptions to
the limits in its discretion after consultation with the Swap advisor and Bond Counsel to the extent that the execution
of swap achieves one or more of the objectives outlined therein.
The term “Maximum Net Termination Exposure” is defined as an amount equal to the projected aggregate
maximum net termination payment value at any one time of all of the Commission’s then existing and proposed
Swaps with such counterparty, as determined by a swap advisor taking into account the current market value of then
existing Swaps with such counterparty. Maximum Net Termination Exposure is (i) calculated taking into account
possible future changes in interest rates based on historical or projected measures applied over the remaining term of
each Swap, and (ii) based on a two standard deviation change in the relevant swap rate, or on such other
methodology that the Swap advisor determines is a reasonable assumption regarding potential future rate changes.
Maximum Net Termination Exposure is calculated as of the date of execution of each Swap. If the counterparty has
more than one credit rating, the lowest rating will govern for purpose of calculating the permissible levels of
exposure. There are separate limits for collateralized Maximum Net Termination Exposure. The limitations are as
follows:
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