Private jet operator Million Air preps high-yield borrowing

Private jet servicer Million Air is preparing to tap the high-yield municipal market with a structure that will likely feature so-called Cinderella bonds as the borrower works to overcome a snag with securing tax exemption on the bonds.

The new-money piece will finance expansions at the company's existing facilities at the Austin-Bergstrom International Airport in Austin, Texas, and the Florida Keys' Marathon International Airport.

The unrated transaction marks the fourth borrowing over more than a decade for the Houston-based fixed-base operator, which operates at dozens of airports to provide private luxury jet services ranging from aircraft fueling and parking to lounge and theater space.

Million Air faced an obstacle securing tax-exempt status on a big chunk of the borrowing, and the finance team, led by underwriter Raymond James, had been gearing up for a challenging marketing process to win investor interest in taxable high-yield debt.

But after the airport unexpectedly indicated last week it would advance the tax exemption, the team was considering a new structure.

The bonds are tentatively expected to price the week of Nov. 18, with the finance team marketing the deal to investors this week.

As of last week, the financing featured $47.7 million of Series A tax-exempt refunding bonds and $72.7 million of Series B taxable bonds. The Series B bonds are now expected to include $56 million of Cinderella bonds with the remaining roughly $17 million remaining taxable due to the use of its proceeds, which will be to reimburse the borrower for expenditures it made at the Florida Keys airport.

A Cinderella bond is issued on a taxable basis and is convertible to tax-exempt status upon the occurrence of a specified event. The conversion requires bond counsel to sign off that the interest is now tax-exempt. The tool become more popular after 2017, when the Tax Cuts and Jobs Act eliminated tax-exempt advance refundings.

The entire Series B piece was originally structured as taxable after the city of Austin declined to give Million Air a so-called TEFRA, or Tax Equity and Fiscal Responsibility Act, hearing required to secure the tax exemption.

Such a public hearing is required for private activity bonds sold through conduit issuers, in this case, the Wisconsin-based Public Finance Authority.

Typically a formality for public approval, Million Air has won approval for previous bond deals, but as of late October, the city and the airport had declined to schedule the hearing.

On Friday, however, the airport signaled that it was willing to work with Million Air to grant the hearing.

"We are excited for the expanded presence of Million Air in Austin and we continue to collaborate with them on their project," a spokesperson for the airport said in response to an email from The Bond Buyer asking about the TEFRA hearing. "We look forward to the positive impact their expansion will have on the Central Texas general aviation community."

With the TEFRA hearing back on track, underwriter Raymond James went back to the drawing table and is now expecting to structure the $56 million as taxable debt that will convert to tax exempt when the TEFRA comes through early next year, said DJ Mehigan, a managing director at Raymond James who specializes in aviation deals.

"We're confident we're going to get the TEFRA, but not immediately, so we're going to build a structure likely a Cinderella or something similar, allowing Million Air to get the benefit of the tax exemption," Mehigan said.

Mehigan added that he worked on a Cinderella bond for the Charleston, South Carolina, airport in 2022.

"That was a great deal for them because soon after we closed, rates continued to rise, so their cost of capital was lower than if they were even able to currently refund the bonds," he said.

The team expects to float the structure to investors Tuesday to gauge interest, with the pricing tentatively set for next week.

Selling unrated taxables would have been "the heavier lift versus the tax-exempt piece, which everyone is comfortable with," said Jay Wheatley, a Raymond James managing director.

Even before the news that the borrower may end up securing the tax exemption, the team was already "very encouraged" as the investor road show had received more than 300 views as of Nov. 1, Wheatley said.

The relative scarcity of high-yield bonds should support the deal, Mehigan said.

"There's not a lot of high-yield paper in the market, whether tax-exempt or taxable, so we're very encouraged that with this track record and with where these bonds are being issued, in Austin, a thriving, wealthy city that's growing, we're pretty optimistic."

Million Air CEO Roger Woolsey attended an October muni high-yield conference to promote the deal, said a high-yield investor who's tracking the deal. "With deals like this, you're investing in the management team," the investor said. "People are paying attention."

Selling two-thirds of the debt as taxable was going to be a tough sell, the investor added.

Taxable unrated muni debt "is really hard," the investor said, adding it was questionable if it would have gotten done in the original structure.

It's not clear why Austin originally denied the TEFRA hearing. Last year, however, the city paid $88 million to settle a lawsuit with airport terminal operator LoneStar Airport Holdings.

LoneStar is the operator of the airport's South Terminal, used by low-cost airlines Frontier and Allegiant, which will be demolished as part of the airport's expansion program. The company sued the city in 2022, accusing it of abusing its condemnation power and claimed the city breached a 40-year contract by excluding the company from participating in plans to build a new terminal.

Unlike the LoneStar contract, the Million Air financing has no recourse to the city or the airport.

The deal comes amid a volatile post-election market and after the high-yield market saw outflows the week of Oct. 31 for the first time in months. Inflows resumed this week, reaching $333.7 million compared with outflows of $64.6 million the week prior.

"High-yield has defied broader market trends all year, supported by a sharp decline in new issue credit supply," said James Pruskowski, chief investment officer at 16Rock Asset Management.

"Surging inflows and the tax multiplier on absolute rates have obscured credit fundamentals, which have generally been deteriorating in the space," Pruskowski said.

But that's not the case with Million Air, he added.

The company "is proving to be a decent diversifier, outperforming on key credit metrics," he said. "However, with high-yield outperforming investment-grade by a wide margin, I anticipate a narrower pool of focused buyers for the offering."

The deal is limited to 35 qualified "sophisticated" investors and sold in $100,000 minimum denominations.

The Million Air license system makes up the third largest fixed-base operator chain in the U.S. and is currently operating franchises at 36 airports, according to bond documents. Fixed-base operators provide aircraft fueling, parking and storage, pilot services and aircraft maintenance primarily but not exclusively to general aviation.

The company was founded in 1984 by Texas-based Mary Kay Cosmetics, which launched the first luxury-style FBO for private jets. Woolsey, a former pilot, bought the company in 2002 and created a network of franchised FBOs and related companies.

Last year marked the second-busiest yet for private jet activity in North America behind 2022, according to privatejetcardcomparisons.com.

Private jet usage spiked 46.3% in 2021 after a 22.5% drop in 2020 due to COVID-driven travel shutdown. The business has enjoyed a strong recovery from even pre-Covid numbers, with 792,170 more flight hours recorded in 2023 than in 2019, the company said.

The Million Air bonds are backed by fuel sales from commercial, military and private aircraft as well as hangar rents, office rents, ramp, security and facility fees and other miscellaneous revenues, according to the investor presentation.

Fuel sales account for the majority of the company's revenues. The obligated group, Million Air Three LLC, is comprised of one fixed-base operator at the Austin airport operated by Million Air Austin and two FBO facilities at Marathon International Airport.

A portion of the proceeds will be used to reimburse REW Investments Inc., the umbrella company, for costs related to the purchase of the Marathon FBO and for other expenditures at the two airports. Proceeds will also fund capitalized interest on some of the bonds, fund a debt service reserve fund, a supplemental reserve fund and an operations and maintenance reserve fund.