New York Times Plays Nuclear Gotcha. Badly

Time to reacquaint myself with the mysteries of blogging, and there's no better way to do that than by jumping down the throat of the New York Times, which just lost a finance writer under unpleasant circumstances (Email me, guys, my rewrite skillz are unstoppable. And untraceable).

Behold, the New York Times, on the new nuclear loan guarantees. Southern Company, the utility that Boss Hog from the Dukes of Hazzard would be if he was a utility (See Greg Palast here), has received a guarantee for $3.4 billion in financing for two new nuclear units. For some reason, the Times has managed to inflate that figure to $8.3 billion, maybe by including both potential interest and principal payments, even though Southern is quite clear (pdf) on the number.

But the reporter's most conspicuous boo-boo is right here:

The new aid for the nuclear power industry serves many of the Obama administration’s objectives, helping broaden support for its energy policy proposals, which face obstacles in Congress; helping control emissions of greenhouse gases; and to some extent bolstering employment and domestic energy production.

Mr. Obama said, “Make no mistake: whether it is nuclear energy, or solar or wind energy, if we fail to invest in these technologies today, we’ll be importing them tomorrow.”

But these reactors were designed by Westinghouse, a subsidiary of Toshiba, and many major components will be fabricated abroad. And nuclear power is of limited use in offsetting oil imports.

This is, to say the least, rather unfair. I've been very critical in the past of politicians conflating the debate about how the US generates its electricity with that about where it gets it oil from, since so little of the US generating fleet runs on oil. But Obama didn't say that. Obama, notes the reporter, wants to bolster domestic energy production, without specifying what kind of energy production it wants to bolster. He then notes that Obama says "if we fail to invest in these technologies today, we’ll be importing them tomorrow.

Our reporter took one look at the word "import" and thought he would like to take the president down a peg. He notes, correctly, though huffily, that "nuclear power is of limited use in offsetting oil imports," though he could have said the same about any source of fuel for generating capacity. But Obama was talking about importing technologies, not hydrocarbons. I'm not one for squealing about moments of laisse majeste (as I never tired of saying yesterday, I wasn't allowed to vote for the bugger), but this is weak fuel for a hail of peanuts.

UPDATE: The article has been revised with the gotcha nonsense removed. Fortunately, the reporter has added a new bit of nonsense for me to pounce upon. This time, he's positing the notion that "banks", by which one assumes he means commercial lenders, will be funding the loans guaranteed by the Federal government. WRONG! Lending money to a project with the full faith and credit of the federal government is just not profitable. One can simply buy government debt to earn pretty much the same return with fewer headaches. Soooo, as again the Southern press release makes clear, the actual money for the loan will come from the government-owned Federal Financing Bank. Since the government is taking on the credit risk, it might as well front the cash itself.

You *Genius* Onexim

The country whose corporate finance market gave us the Aluminium Wars vomits forth a hunk of ill-informed conjecture on the Nets stadium financing so wacked-out I just have to say "bravo"! I'm almost envious.

Via nolandgrab, we hear that, like some low-rent London estate agent, the Atlantic Yards stadium finance coterie is hoping that mentioning a wealthy Russian in the same sentence will make their stinky Pimlico maisonette of a stadium financing look more appealing.

Mikhail Prokhorov, a nickel magnate, is apparently interested in a Nets bailout, though his recently-founded Onexim Group, whose website lists no financial information, and whose press release page is dominated by news of legal actions. I note, as nolandgrab notes, that his name often seems to be waved around near flailing sports franchises, and why the man wouldn't buy an equally crap team with a better balance sheet is beyond me.

I'm not even going to even start speculating about how this fantasy wormed its way into the cranium of Reuters' ace Moscow reporting duo. One can read, in this profile of the estimable finance blogger Felix Salmon, that Reuters, since its acquisition by Thomson, has regained some of its mojo of late.

Could be so, and its capital markets coverage has been much more prominent on the web the last few months. Its municipal finance coverage, however, has suffered from Thomson's disposal of the Bond Buyer some months before the Reuters purchase.

When one reads the following it's fairly apparent that there's no-one inside the Reuters brain trust to talk to any more about municipal finance:

Prokhorov is considering issuing a bond worth $700 million through Onexim to help fund the project, one source close to the deal said. The source said the bond must be issued before the end of 2009 so it is exempt from government taxes, adding: "This is a pure business story. The value potential of the club and arena are very high."

That said, any reporter that will allow the gibberish that is that final quote to make it into their story may have more immediate parts of their reporting toolbox in need of an upgrade.

But back to the first sentence. "Through" is the wrong preposition, pure and simple. The bonds would be issued through the Brooklyn Area Local Development Corporation as part of the hastily-approved corporate welfare package put together by the city and state for Atlantic Yards. The bonds can't be tax-exempt if they're issued by Onexim. I thought briefly that Onexim might borrow the money on a taxable basis and lend it on to the project, but that isn't what the article suggests in the sentence after.

So let's assume the Reuters guys aren't too hot at verbs or prepositions. Could they mean that Prokhorov is buying the bonds through Onexim? It would mean that Prokorov might decline to demand a prepayment penalty on the bonds, although I doubt that he would be able to avail himself of most municipal bond interest breaks, since he's not presumably paying much in the way of US tax.

He is far from the most suitable buyer for a tax-exempt bond, unless the arena bonds are Build America Bonds, where the tax subsidies are paid direct to the issuer, but I don't think they are.

They could have been told that Onexim is considering guaranteeing the bonds, by putting up a performance bond, in exchange for a substantial stake in the Nets or arena company, though I have no idea whether Onexim has the resources to make a $700 million contingent commitment like that, and whether the ratings agencies would believe them.

Still there must be a reason why someone close to Onexim or Ratner is babbling about bonds when no-one asked them to. I hope you will agree with me now when I say the Reuters reporters don't sound like capital markets vets. What we're hearing, via an elaborate and far from lucid chain of whispers, is that the bond financing is looking as hairy as the Net's team finances. This should be far from reassuring to Ratner's pals at the ESDC.

"Odd", Eric, ain't the half of it.

The Ratner Hat Syndrome

Just got back from a trip to Canada. So it's taken me a little while catch up with the Atlantic Yards hullaballoo. Saw the renderings in the Times on the way home.

I must say the first thing the new arena put me in mind of was the funny helmets the rebels used in the third Star Wars movie. Which makes the new arena mid-80s futuristic, I guess. It also looks a little more low-slung, which is in general a good thing. If the man managed to put it up nearby without throwing people out of their homes and gorging on public subsidies I might even learn to love it.

Two small details intrigued me. The first is that Ratner's moving the team offices out of the arena, which sounds like a pretty desperate stab at cost-cutting, and may well reduce the attractiveness of the arena to another buyer. I'm sure Ratner has lots of Brooklyn office space standing by idle right now, but am not sure that whatever mug he manages to dump the team on will be similarly, um, blessed.

The second is that Ratner has decided that the new arena will include retail space. This is interesting, because, again, and this can be confirmed fairly quickly by a quick stroll through his two ugly malls, Ratner's not hurting for vacant retail spaces in that part of the world right now. Is Ratner, or his bankers, or the agencies, so worried about the revenue that the arena will produce, that he's trying to juice it with some retail rentals?

Alongside the release of the new rendering, Ratner also granted Eliot Brown, the only professional journalist spending much time writing about the arena financing, an update on that end of things. There's not much new in here, more a sort of confirmation of some of the proposals that Ratner's been floating around the last few weeks and months.

He confirms that he does have a $200 million equity gap, but seems to indicate he's looking for outside providers to take equity in the project company, rather than pay Ratner for a stake in the Nets, which Ratner would then contribute to the project as equity. This could be smart, since there are a couple of private equity and real estate investors that might like a direct stake in an asset like this.

They'll only do it, though, I imagine, if the Nets sign a long and expensive lease on the arena, which would doom his chances of trying to sell the team for a while. Of course, Ratner says that FCE could meet this $200 million from its own resources, but I think a commitment that large would put its return on capital so far in the toilet it might as well go back to building strip malls in Cleveland.

Then there's this issue of issuing the bonds to finance the stadium and then holding them in escrow until the litigation can be resolved. Ratner has told Brown that he can do this. I'm still not sure how that will work. I'm fairly certain the tax consequences for investors of being made whole (paid back early) on these bonds would be horrible. But it might be possible, and FCE, in one final throw of the dice, might be able to put up the premium to prepay the bonds itself. Certainly it would be easier to find that kind of money than $200 million in equity.

But the process is likely to be hideously complex. Go look at this page to get an idea of how difficult refinancing municipal bond debt is. Yeah, I'm copping out a little bit here, but I had a rather large lunch, and municipal finance terminology is not my strong suit. Let's just say we're getting a clearer idea of what route Ratner might be taking, his likely gearing, and his timeline. It's a pity Brown didn't ask if he was talking to Assured Guaranty about bond insurance, though.

Oh my god, municipal finance commentary and Star Wars references. This really is turning into a low-rent Accrued Interest, isn't it?

Soon You're Talking Real Money...

I finally got round to picking through this extremely interesting, timely, lucid, and well-reported Q&A at Nets Daily post about a potential sale of the New Jersey Nets basketball team. It's awesome. Go read it. Go read it again. Go pick through it yourself like an episode of The Wire. There at the bottom is a comment from me. I'm going to elucidate here on what I wrote there.

The blog's pseudonymous author has worked out that there are a lot of rather angry investors in the Nets ready to vent at the nearest knowledgeable Nets fan, and the author has done a very good job of tracking them down. They also have appeared to have gleaned a pretty convincing idea of the Nets team finances.

But buried down in the information is something pretty momentous - Ratner needs to scare up another $200 million from somewhere to finish his new stadium in Brooklyn.

According to one insider, half the $400 million [sales proceeds] would go towards the down payment on the Barclays Center and half towards reducing team debt.

I'd been working on the assumption that the $150 million that he'd sunk into the project - on land acquisitions, fees and site work, would be considered an in-kind equity contribution, its "down payment", as the Nets Daily writer put it.

Looking back at that assumption now I should have realised that FCR, which has mortgaged a lot of the footprint property to Grammercy Capital, would probably have to pay back that financing before the site could be considered equity, since I can't imagine that Grammercy would find it very entertaining to try and foreclose on land that's got a massive arena on top of it.

But there might be more to this. I've always thought that at some point the ratings agencies, no matter how supine they can be when confronted by the considerable charms of the Goldman Sachs sports financing team, might start to bite back. This is a tremendously over-leveraged developer trying to pitch a tremendously over-leveraged project to the market.

My assumption was, without knowing much about the conventions of sports team financing, that the Nets would throw whatever revenues they had at their disposal into the mix until the arena looked like it could cover its debt comfortably. TV, advertising, sponsorship, concessions, and so on. Which they may have done.

No matter. Credit markets have thawed a little, and it looks increasingly likely that the Nets - if they get the right financing structure in place - could get the bonds done at an interest rate of no more than about 2 percentage points higher than the other New York team stadiums did. But they won't be able to put in a token equity contribution.

What the agencies might be saying is that the project is so speculative, or the economic environment is so poor, that the developer is going to have to kick in some more cash to absorb revenue shortfalls before bondholders do. When the Jets and Giants are struggling to shift some seats at their new stadium this is an understandable position to take. So Ratner needs to sell the team to get this equity contribution, suggesting that additional stock or bond issues by FCE to fund this commitment are not feasible.

Now go back to the Nets Daily article and take a gander at the logistics of this. Ratner wants to sell the team, and use the proceeds to fund the stadium. But buyers - with the NBA's support, apparently - do not want to be locked into an above-market lease for a Brooklyn arena. They want to own the arena, but probably don't have the resources to convince the agencies to follow through.

The Nets losses then, are only part of the reason Ratner needs to sell. But Ratner might not be able to sell the team until the financing is in place, but needs to sell the team to conclude the financing. Can he bundle both into a single instantaneous transaction? Watch this space.

RIP Ellie Greenwich

Pop genius Ellie Greenwich is no more. She's probably the reason why, despite his crimes, I'll never stop listening to Phil Spector music. Off to the Brill Building in the sky.

Even The Ramones treated her compositions with respect. Though in that case they were encouraged to behave by the presence of one Phil Spector sat behind the control desk and presumably waving a BIG BLUDDY GUN around. Here they are being all respectful on Top of the Pops. If you look closely, you can see Spector on the sidelines pointing a bazooka at them.RIP Ellie Greenwich

Glue Me Baby

Falls into the category of too big for twitter, too political for Facebook, and too personal for blogger. But I'm going to settle on blogger, since it is, aside from occasional AY-related link love, where I have the fewest followers. Probably because I'm pseudonymous.

Was getting my daily fix of the Guardian this morning when I chanced upon this article about how opponents of US healthcare reform are using the UK to demonstrate how poor a job government does at providing healthcare. This is a laughable claim, and I'll come to some substantive criticisms in a moment, based on my experiences of both systems.

But first, this little nugget:

To the dismay of British healthcare professionals, US critics have accused the service of putting an "Orwellian" financial cap on the value on human life, of allowing elderly people to die untreated and, in one case, for driving a despairing dental patient to mend his teeth with superglue.

I found this particularly funny since I have false teeth and have indeed been driven to fix them with superglue. Here's the thing. It sure as hell wasn't in the UK where this happened, and it was at the suggestion of a US dentist that I resorted to this fix. When I finally got round to getting a new one, I gently reminded the dentist that whatever impression he took of my gob should take into account the wonky teeth I'd had in it the last few weeks.

But US dentists essentially just subcontract all this sort of work to outside makers and have very little interest in the details of this work. It's also telling that the denture I got in the UK lasted for about seven years, while my two US ones have managed maybe three years each. [Actually, it turns out that that the UK anecdote involves a man supergluing a crown to his gums, which is a little different]

Of course what any of this has to do with US healthcare is beyond me, because there is no such thing as publicly-funded dentistry in the US. Dentists have little interest in being subject to any kind of cost control, government supervision, or the demands of common sense. They are, if you will, all thieves.

But it segues nicely into my larger observation about healthcare reform: how on earth do you have a sensible conversation about the proper functioning of your body and money at the same time? Now a supporter of the hopelessly bloated and unequal US system would say "how can you have a sensible conversation about the necessity of medical treatment?" They'd also add, and I confess they're entirely right, that the UK has built a medical system around its founders' inability to discuss money with its medical practitioners, and it's had the fortunate effect of being very fair too poor people.

And they're sort of right, but they very rarely say that the US is super-awesome at treating rare and expensive diseases and awful at dealing with the more pedestrian ones. We're talking about huge copays for drugs that cost pennies to produce, little attention paid to preventative medicine, this weird way that America is proud of Medicare and the VA system and seems to hate public medicine.

I'm biased. I'm writing this as I'm trying to work out how to settle some BS copay for a chest x-ray that diagnosed me with walking penumonia rather than Swine Flu. Was I informed about this when treated? Nope, via a snotty letter that says I'm inches from going to a collections agency. It's by no means a horror story along the lines of a lot we've had, it just indicates what a wasteful and time-consuming process private healthcare can be. We focus too much on the cost in money of employer-provided healthcare and not enough on the time cost. Maybe if we did, there would be companies other than GM prepared to face down the private health lobby.

I am the god of capitalism, and I give you nonsense

They say that the future of publishing lies in occupying your niche properly. In which case I would like to make my case as the Best Blog Speculating About The Atlantic Yards Arena Financing Evar. To those pedants among you saying that the proper name for the arena is "Barclays Center", I would say, it ain't called that till it's built, and if Barclays wants me to advertise its execrable banking services it can pay me directly.

Anyway, the cause of this haste is a workmanlike update on the arena financing from the Times' Charles Bagli, FCR's go-to guy for expectations management. Oder teases out the juicy bits so you don't have to. But it's fairly thin stuff.

Ratner's meeting the ratings agencies, which we knew. What we don't know yet is if he's trying to put something together with Assured Guaranty, the least crap bond insurer in the whole of America. He's scrounging for cash from the public and outside investors, both of which are fairly well-known.

Which leaves us with the last paragraph of the story:

Some real estate executives and critics said it would be hard to sell the bonds for such an uncertain project. But Jay Abrams, a bond analyst at FMS Bonds, said there “is definitely an appetite for tax-exempt bonds in New York, and elsewhere.” The lawsuit, he added, “is not necessarily a game-killer. At the right price, there’s always a buyer for bonds.”

I don't know whether Bagli tried to ask Ratner whether he had a plan for getting the bonds out ahead of the litigation being resolved. I suspect Ratner would have been deliberately vague in any case. The reasons being that any way round the December 31 deadline for a bond financing would be fiendishly convoluted.

But let's go back to this Jay Abrams at FMS Bonds. He seems like a contrarian sort of fellow. Maybe they should give him a spot at The Big Money. It could well be that he's privy to the machinations inside Goldman Sachs' sports finance shop. More likely, though, he doesn't have a clue what he's talking about.

I had a quick gander at the website of FMS Bonds, which appears to be a South Florida-based brokerage with a decent online presence whose bread and butter is persuading retail investors to pile into municipal bonds. Nothing wrong with that. Highly patriotic behavior, encouraging dumb retail money to crowd the market and lower government borrowing costs. Give them a knighthood, um, I mean, Presidential Medal For Virtuous Bond Pimps.

I'm just not convinced, they've spent much time on non-recourse private activity bonds. Which aren't like regular muni bonds. Which is fine, because they're aren't that many of them, and after the end of this year there will be even fewer, at least for speciously useful sports facilities. No, the real money will probably be in clean energy, but I will pull up there before I digress.

I'm very tempted to speculate on, maybe even recreate, the conversation. In fact, I'll do it, at least in outline. I'll assume that Bagli washed up at their door through the intervention of that wise old capital markets pro we call The Google. He probably outlined a slightly risky and speculative bond issue, maybe mentioned the threat of litigation, and our bond analyst, putting up his feet and donning his Wise Capitalist glasses, assured the reporter that in any market there is a price at which a good clears, and municipal bond markets are no different.

There are a couple of issues with applying this theory to the AY bonds, however. The first is that equity also has a price, and the more expensive the bonds get, the less attractive the project becomes to FCE's, and the Nets' long-suffering shareholders. I dare say that the bonds would clear the market with a 15% interest rate, but nether the arena, nor FCE, could sustain that rate. Abrams is assuming that the "how desperate are you for the cash" metric, which is pretty much the only one a municipal treasurer cares about, can be applied to these bonds.

But the arena company is a private borrower. I say borrower rather than issuer, because the NYIDC, or the ESDC, I forget which [it's the BALDC, an ESDC subsidiary, I have been corrected], will be the issuer. But they'll lend the funds on to the private stadium company, and the private stadium company, not the state, not the city, and not FCE, will be responsible for paying the bonds. The arena financing will not be like poor Jefferson County, Alabama, which started off trying to deal with a poorly-structured sewer bond issue, and ended up laying off two-thirds of its workers.

There's only a certain number of people that a struggling arena could lay off before hordes of Brooklyn Beer-starved hordes descend on the arena for FREE SPORTS and FREE HOT DOGS and FREE BROOKLYN LAGER with not enough staff to stop them getting in. Sort of like a less entertaining Dawn of the Dead. Jacking up the rate, beyond a certain level, is just not an option.

Maybe this Abrams guy is talking about discounting the bonds. You issue $780 million in bonds but only bring in $700 million in proceeds. Possibly, but the practical effect of discounting the bonds is to increase their interest rate.

What Abrams didn't say was "give them a juicy enough prepayment penalty and they'll pile in". He would have been referring to the idea that the proceeds of the bonds could be kept in escrow until the litigation is settled, and if FCR loses the litigation then the proceeds would be returned to the bondholders, as well as a fee to compensate them for their trouble. There are, possibly, a few reasons for his omission. Muni issues are not very frequently repaid early, and there is an entire class of muni bonds, called refunding bonds, that exist on top of outstanding, more expensive, bond issues.

It's possible that the arena could issue tax-exempt bonds with an eye-watering rate of interest before the end of the year, and then try and refund them, though I doubt those bonds would be tax-exempt. More importantly, at some point, the interest rates on a badly-assembled tax-exempt financing would be so high that Ratner might as well wait and just issue the bonds in the taxable market if it takes until 2010 to get the litigation dismissed.

But our assumption is that the 2-3% saving from tax-exempt treatment on the arena debt is critical to the economics of the project, though maybe less important than the legal authority to seize other people's property for it.

So, back to prepayment penalties. Very well-regarded municipal issuers can avoid paying them. Sketchy arenas can't. It takes time and effort to read through whatever nonsense the underwriters marshal in support of the bonds. The guys that buy these private activity bonds don't tend to allocate much of their time and money to them. So the issuer needs to offer to pay them at least 2% of the proceeds, probably more, on top of handing back what they've borrowed, if they want to pay back the bonds early. If, say, the arena doesn't get built.

If you're a local government, then fine. You can fire a few teachers and use the savings to pay back the jackals of Wall Street. If you're a corporation that is bringing in revenues, you can take the same route. But the stadium won't have been built. Won't be making revenues, can't even be sold to make the penalties.

There's a glimmer of an idea. FCE might be persuaded to promise to pay the prepayment penalty. But FCE's well below investment grade. Assured Guaranty couldn't counter-guarantee this promise, and the promise might even drag down the bonds' rating. So Goldman Squid will have its work cut out here.

UPDATE. Of course it was a short while after I hit Publish that I remembered that The Florida Marlins got a financing for a new ballpark done in July. It doesn't alter my thesis, because the Marlins bonds were backed by tax revenues, not stadium revenues, and there's no indication that the city is looking at shoveling the Nets this kind of support. Just as well, cos according to this lady, the flipping thing's half-empty most of the time