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