Tuesday, January 29, 2008

It's the crunch, stupid

Well, if there's one way to drag me back to blogging it's a welter of news stories that show precious little understanding of the nature of stadium or municipal finance. Oh, did I mention that these relate to the Atlantic Yards that project, which has been smashing through, though not obliterating, legal challenges like some ugly subsidy-drunk godzilla? Well, that would be bait for good old Gari's muse.

There's been a lot of ink spilt in the last 24 hours in response to an assertion, in a Forest City Ratner legal affidavit, that a drawn-out legal challenge may expose the project to ever-worsening debt market conditions, and jeopardise its future. You may read a reasonable summary of the news at the New York Times.

The most interesting line of the affidavit is item 8, where FCR's V-P finance notes the problems that lenders and monoline insurers are facing in the current credit environment. It's an admission that most of the advances in stadium financing techniques have been directed towards the public bond markets.

The reason I say this is that many years ago, a sports team typically went to a large-ish bank with experience financing large and complex infrastructure projects to finance its stadium. It would be an essentially private affair, with the bank working out whether the ticket, TV, or even parking revenues were enough to justify the market, and taxable interest rates it could charge to the borrower. It wasn't what you'd call a liquid market, but it tended to function, and most of the teams seemed to be able to get a bigger stadium out of the process should they desire.

What happened when these stadiums became treated as bits of essential public infrastructure (with all the debatable claptrap about them being engines of economic development) was that they began to be eligible for tax-exempt treatment. Holders of bonds financing sports arenas stopped having to pay tax on the interest income, and the opportunities for financial engineering became much more interesting.

I don't necessarily mean "financial engineering" as some strange and scary repackaging of payment obligations, a la subprime mortgage origination. I mean a variety of little twists and tricks designed to allow team owners to shave bits and pieces from their repayment obligations.

the most obvious of these is the use of monoline bond insurance. I don't have the time or the inclination to explain bond insurance in detail, but its premise is that bond markets do not necessary charge a reasonable rate of interest, and that for a fee that is less than the excess rate that that the bond markets charge they will guarantee your bonds. The holders of these bonds are now basically relying on the bond insurer for payment if something happens to the stadium, and get a pretty low rate of interest based on what the presumed risk of the bond insurer is.

Why don't the bond markets get the interest rate right on stadium projects? Well, there aren't that many of them, they all have different qualities, and anyway, maybe the bond markets got it right, the monolines got it wrong, and you're just getting a lower interest rate because of their mistake. There's a pretty small number of investment bankers, ratings agencies, and bond insurers who know how these deals works, and they all get great seats at sporting events. All of the recent NY area stadium deals - Yankees, Mets and Jets/Giants - used bond insurance.

Problem is, this system got all f***ed up. In another part of the market, for the insurance of bonds backed by subprime mortgages, the bond insurers priced risk pretty bloody badly, so monolines are now teetering on the verge of bankruptcy. Not only are bonds with a monoline guarantee now viewed as much more risky, and thus have a higher interest rate, but any financing might have to go ahead without any insurance at all, at which point lord knows what interest rate you'll get.

These projects are already pretty highly leveraged - the Jets and Giants ownership put in precisely zero in equity capital towards their stadium, though they did sign over a decent chunk of their gate revenue in return for a loan from the NFL. FCR will probably be able to count the money and time it's spent on the project to date in lieu as part of its equity contribution. The Nets may even need to sign over a lot more of the team revenues towards the repayment of the bonds.

Now Ratner has, it pains me to say, in Goldman Sachs one of the best practitioners of the new style of stadium financing around. Read what they did with the Yankees financing and try not to get cross-eyed.

But for all the preceding we have no idea what Goldman has up its sleeves for the detail, and what revenue streams Ratner has given them to play with. Let's assume that all the kinky swaps and insurance policies are to be found at a decent price.

Ratner's still got a fair amount of headroom, because he's not really in the sports ownership game. He's in the real estate game, where your cost of capital is, once you've got the politicians onside, the name of the game. Fling every single source of revenue, right down to the Barclays naming cash and the beer concession fees from the Brooklyn Brewery (you want to help out, right Hindy?) at repaying the bonds and you might get a fairly reasonable rate on your debt.

Be interesting to see whether he could ditch Goldman go back to a regular old bank, in the circumstances, though I suspect the legal challenges would need to be settled before they moved too. But it would get done, on substantially worse terms and at greater cost to FCR's balance sheet.

So I'm not entirely calling bullsh1t on the affidavit, though I think that a stadium deal this size might have already lost its chance to repeat the terms that the other NY teams got. Ratner must have been working on the alternatives ever since the real estate market turned south and his office-condo mix looked shaky. I'm not sure there's anything about the "now' that would justify the affidavit.

But then I'm biased.


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