Tuesday, April 22, 2008

Why Louisville Is Not (Quite) Brooklyn

It's been a while since there has been any arena finance blogging from me, because things have been fairly quiet while the market recovers. Now, up comes a little article from the Business First of Louisville about a forthcoming financing for the Louisville Arena Authority.

It's worth looking at if only because the lead banker on the Louisville Arena, Goldman Sachs' Greg Carey, has also been attached to the Atlantic Yards financing. Here's Mr. Carey, engaging in what is known on Wall Street as "talking your book":

In the past few weeks, conditions have improved dramatically, according to Carey. "The municipal (bond) market has come back with a vengeance," he said.

For those of us that wish the Prospect Heights monstrosity would skulk off and die in the corner, these remarks are true, and a little disquieting, though wishing financial armageddon on anyone is a mean-spirited as wishing ecological armageddon on everyone.

Louisville has effectively taken the old busted bond insurer, Ambac, and replaced it with the new hotness, Assured Guaranty. Assured, a relative newcomer, has an ever-so-slightly better financial strength rating than Ambac, and didn't get involved with all this nasty subprime business. We also learn from an earlier article from elsewhere that the Authority didn't take up a proposal from banks to guarantee the bonds, as happened, for instance, on Ratner's Beekman Tower.

We can't quite make a direct comparison between Louisville and Brooklyn. For one, the age of financial engineering excess is very much in the rear view mirror. The bond insurers, as I think I've mentioned before, want to insure not very risky deals, instead of slightly risky ones, since this is more profitable for them. The details are kind of boring, unless you REALLY FLIPPING LOVE INSURANCE, but the bond insurers have to be much more careful with their guarantees than they have been, since riskier deals require them to set aside more money to meet potential claims than less risky deals.

I don't have any idea what the Louisville Arena Authority is offering up to get its financing sorted. The FAQs are not enormously helpful on this point. According to a 2006 study, the arena is projected to generate $1.1 billion in revenue, and according to the BFL article total cost of meeting the arena's $360 million financing is $600 million. This would apparently largely be met through revenues from college ports games.

We know that the state of Kentucky is kicking in $75 million in cash towards the project, thought it expects to be repaid with interest, and has probably offered the arena both a tax-exempt bond allocation and possible tax breaks, though it's possible that as a university arena it might be exempt anyway (I know much too little about the taxation of non-profits).

But as far as I can tell from this Word document (sorry mac users), the state is going to support the bonds by dedicating tax revenues to the arena's repayment, a pretty high quality revenue stream. So, because Kentucky's debt rating is much higher than a standalone Nets stadium is going to be, the stadium will be much more attractive to the remaining bond insurers than the Nets.

But, doodz, there's still everything to play for, as they used to say during the rugby on a Saturday afternoon. And I think you'll agree, after seeing the picture above, that it's comforting that another new arena development has come forward with a design that is uglier than Gehry's vision for Brooklyn.

Wednesday, April 16, 2008

Papal Suspension of Disbelief

I was loitering around on the subway platform at Dekalb Avenue after seeing Mrs. Cutesome onto a D train. Out of the D game a young Orthodox Jewish gentleman who sneezed. I said "bless you", and then I wondered whether I should have done so. He didn't seem to mind, but one legacy of living in in a country with historically very few non-Christians is to not think too much about it.

I mention this only because NY1 has gone completely Pope-crazy. I guess that since its three main anchors are called Kiernan, Shaughnessy and Torre this might not strike you as too surprising. Well it won't if you're as prejudiced as I am.

Anyway, any clueless goyim that claim the Jews control the media should ask whether the arrival of the Chief Rabbi of Jerusalem (Ashkenazi or Sephardic, take your pick) would cause any New York news networks to redecorate their sets and dispatch their transit reporters to Washington DC for rather nebulous reasons.

There is something exotic about seeing the world's second-biggest theocrat appear on your soil, and since the biggest, the Ayatollah Ali Khamenei has little pressing business on the steps of St Pats, we're unlikely to see bigger. But do we really need to hold everything to cover the man's perambulations, given that more than a few of us have a religious background that has been at odds with Papalism (not that there's anything right with that)?

Sheldon Silver would have been wise to have decided to use this week to kill congestion pricing in New york, given that NY1's ace transit reporter, Bobby Cuza, is presently in DC pondering the mysteries of the Pope bobblehead doll.

Here's Jon Stewart being sane about it:

Tuesday, April 15, 2008

Gallagher's Glories

It's one of my favourite phrases: "like a cage match between Pol Pot and General Pinochet", the idea being that at least one villain is going to get their just deserts after a little entertainment. So what do we make of the latest outburst from tired and irrelevant Dadrock icon Noel Gallagher about the poor ticket sales at this year's Glastonbury Festival? He blames none other than the choice of Jay Z, hip-hop impresario, boycotter of fine champagne, and part owner of the "Brooklyn" Nets, the team that would very much like to despoil his old 'hood with the aid of gallons of subsidies.

"Sorry, but Jay-Z? F***ing no chance. Glastonbury has a tradition of guitar music, do you know what I mean? Even when they throw the odd curveball in on a Sunday night and you go, Kylie Minogue? Don't know about that."

I will avoid the suggestion that the curse of Bruce Ratner travels as far as lovely Somerset, and say only that the collision of two pop icons, each so malign in his own way, is a rather gratifying spectacle.

Thing is, indie music fans really are quite racist. The New Musical Express has figures for the newsstand sales of all of their covers featuring recording artists of colour, and they're not pretty. The most charitable explanation I have is that they don't think that "American Gangster" has erased the memory of that terrible deployment of the Public Enemy horn sample

Built Tough

It's fairly common in New York to feel that the city's other baseball team, the Mets, don't get enough respect. There's the trashy Long Island fan base, the relative lack of visibility in Manhattan, the pitiful number of pennants.

But I'd just like to have on record how much better they've handled the whole new stadium thing than the Yankees.

Firstly, they persuaded Citibank to help underwrite the cost of the new stadium. It might be mean, it might be corporate, and it might get rid of the name forever associated with getting the Beatles out of the live music game. But it brought in money, and the owners of the Mets, the Wilpons might even spend some of that on player salaries.

Secondly, they built the new stadium in their own parking lot. Don't get me wrong, there were plenty of freebie infrastructure improvements and tax subsidies thrown in. But the Mets didn't pave over anyone's park, or knock down anyone's bar, like that meanie Ratner wants to do. I will note, though, that the new stadium seems to be the spur for a rash of rather dubious eminent domain action.

Thirdly, they financed the stadium with plain vanilla fixed-rate bonds. Given the crazy things that have happened to the financial products the other stadium builders have used (the Giants, the Yankees), the Mets financing stood up pretty well.

Fourthly, they've managed the construction of the stadium much better. Probably because the Wilpons are real estate developers by trade.

And I can't help but suspect that were they to have encountered the same preposterous buried shirt palaver that the Yankees just dealt with they wouldn't have spent $30,000 digging it up and admitting how scared they were of a construction worker's prank. These are people who traded a perfectly serviceable pitcher because they thought his wife was crazy. They're not scared of arsey bricklayers.

Anyhoo, the Yankees suck, and not just because they're owned by a decrepit shipbuilding magnate.

Sunday, April 13, 2008

Horses During Courses

Limey readers need not linger on this post too long, but if you've ever been curious about why I flipping love drinking so much, and have so little patience for wanky bars, then the Times provides the reason: The mighty pubs of Oxford. The author wisely skips some of the high street hell-holes (except for the ho-hum Wheatsheaf), but is much too charitable towards the Kings Arms (bait for some rather unpleasant individuals), and unforgivably omits the White Horse. Still, it provided five minutes of welcome nostalgia. Take a look

Too Big To Fail

On Thursday I was scanning the second part of the interview with the anonymous hedge fund manager in n+1 (It's a very fun read, if you have the time). An exchnage between the despondent manager and the interviewer about the collapse of Bear Stearns really caught my eye:

n+1: Wouldn’t it have been better to let them go bankrupt?

HFM: And let their counterparties face the music? Maybe, but the parlous condition of the financial system as a whole I think persuaded the Fed that this is not the time to experiment and see how interconnected the system has become.

With this passage I finally realised what has been bugging me about this financial rescue effort. Why didn't this happen to Enron?

Now I'm going to go through a few differences and similarities, and before I do that I'm going to make myself very clear: there has been no evidence of any criminal wrongdoing at Bear Stearns, and I believe that there was plenty at Enron.

I'm more curious about how much the two meant to their respective industries, and I want to make a stab at what the likely effects of Enron's collapse were on the wider economy.

You will recall that when Enron was going bust, caught in a vicious cycle of pulled liquidity lines, ratings downgrades, and yes, financial results that finally reflected reality, there was no talk whatsoever of bailing them out. Not from friend of management George W. Bush, not from energy regulators, not from futures regulators. It's always been a difficult detail to square with the caricature of an administration in thrall to the energy industry.

But Enron was pretty essential to the then-nascent businesses of gas and electricity trading, It was pretty-much single-handedly making markets in electricity trading, for good or for bad, as the poor residents of California discovered, when their electricity bills were at the mercy of Enron's Houston-based power traders.

The sums of money involved in electricity trading were pretty inconsequential, but Enron's bankruptcy, combined with the reckless over-building of power plants, ratings agency clampdown on industry participants, and pushback from local utilities, set back the deregulation of the power industry in the US permanently. It also led to billions in losses at banks that were involved in the sector, and at shareholders in Enron and its clones.

With Bear Stearns, certainly, the sums involved were much larger. But Bear was not the only actor in the markets in which it operated, and its misfortunes seem to echo those of Enron, in that its inability to access liquidity was a big factor in its collapse.

The cynic in me says that one big difference between Bear and Enron was the presence of Hank Paulson in the cabinet, a former investment banker with an outsized faith in the importance of the financial services industry. Moreover, when even the New York Times has an in-house investment banking apologist, public opinion can be swung behind a rescue quickly. Enron's followers included such mainstream publications as Platt's Global Power Report and Argus.

I guess deep down I know that the criminality and the California power crisis probably doomed Enron. Bear Stearns was a group of good old Wall Street boys playing crazy leverage games with other people's money. But if we want to look at the intersection of public policy and business failures, Enron's collapse, while more the case of the dog that didn't bark, was probably more interesting.

Monday, April 07, 2008

Manhattan In Still Centre of the Universe Shocker

More frivolity of a busy Monday morning. It's been commonplace the last few years to decry London's gaining on New York in terms of cultural clout and opportunities for conspicuous consumption. And that is without even taking account of how little Brits care for such baubles.

But if there's one measurement of a city's wealth that can't be gamed, its the prices charged by its ladies of the night. Today brings us a datapoint that illustrates the difference nicely.

On 13 February, Eliot Spitzer arranged for a Manhattan-based call-girl to schlep down for an assignation in Washington DC, no doubt because the nation's capital did not measure up in the eyes of such a seasoned whoremonger. He paid around $4,300 for the privilege, a sum Wonkette decries as a little extravagant.

On 30 March, the News of the World reported that Max Mosley, a fascist scion who really should have known better, engaged in a Nazi-tinged orgy with five prostitutes in a Chelsea dungeon. The price? $5000.

So for the price of one fragrant New Jersey-bred high-end prostitute on the New York market, one can afford FIVE whip-wielding minxes in London. I'm sure that there are a number of reasons for this disparity, not the least of which is the difference between the, um, services rendered. My preferred explanation is that the Russians are not working the same wonders on the whore market that they achieved on the property market.

So put that in your AIM and smoke it. Looks like Sebastian Horsley, producer of the quite literally seminal "Sebastian Horsley's Guide To Whoring" missed out on reaching the pinnacle of his profession when he was denied a visa at Newark Airport.

If the NYC prostitution market is the equivalent of cooking in the 3-Michelin star restaurants of Paris, then poor Sebastian is still toiling away in the back of the Barnetby Top Little Chef

Friday, April 04, 2008

The 'Mats. Slang For the Replacements. Swag For Marty's Wife

Sorry, work bad = blogging bad. May I just take a moment to tell you how classy Marty Markowitz' wife is?

Marty Markowitz. Making Michael Bloomberg look like George Washington since 2001.

Tuesday, April 01, 2008

Well, We Have The Other Bloomberg's Attention

This is a little frustrating, because I'm in the middle of examining some of these issues for the day job. But if you want to get an idea of what stadium borrowers confront, you can do a lot worse than take a look at this article from Bloomberg.

In it, we discover that several stadiums with auction rate debt service liabilities are facing quite disgusting hikes in their debt service costs. This is because auction rate bonds rely on investors bidding at set intervals, through a dutch auction, how much interest they would like to receive and how many bonds they would like to buy. When no-one bids enough to cover the amount of debt outstanding, the auction fails, and the interest rate on the bonds jacks up to some ludicrous number like 20%, which encourages the borrower to refinance the debt pretty damn quickly, and compensates the buyer for the fact that they can't sell out of the bonds whenever they like. A longer, and pretty reliable, description, at wikipedia.

Auction rate bonds have been used on quite a few stadium deals, as the article illuminates. The Jets/Giants bonds, for instance, are hurting right now, since some of them are now carrying interest rates, says Bloomberg, of 11-20% (at issue, these are usually carrying rates of just under 5%). There are a mixture of reasons for auctions failing, including general risk aversion, the refusal of brokers and investment banks to support the auctions by buying excess bonds, and the difficulties of the bond insurers, which guarantee a fair proportion of these bonds. Some of these insurers are now very low-rated, so low-rated that 11% is almost a fair interest rate to ask for in on their bonds.

The Bloomberg article tends to concentrate on stadiums in smaller sports markets, those where TV rights and luxury boxes are not going to meet debt service, and states and their sports authorities will have to provide some kind of support for the debt. In these markets, team owners are able to strike a very good bargain when getting financing for their stadiums, because the projects often represent the only chance at large-scale development that the city will attract. Now, when auction rates reset to punitive levels, states have to carry the can.

Atlantic Yards is a little different. Government support is, to the best of our knowledge, confined to comparatively small cash contributions, eminent domain, sweetheart deals and so forth. There's no question of government providing credit support for private projects, though there's no reason why it couldn't. The Bloomberg article is a tad confusing, since it does not distinguish between stadiums where a state-owned entity is the nominal borrower (as it will be for the Nets Arena, and as one has to be for the borrower's interest payments to be exempt from tax) but the state does not provide credit support for the bonds, and stadiums where the state is the nominal and economic owner, and shares the risks of ownership.

If the luxury seat sales looked very disappointing or Barclays reneged then Ratner might try to cobble together some state support, though I do not think he will get very far. The eminent domain, cash and free infrastructure improvements are the price that some of Ratner's political supporters think are necessary to get the jobs and affordable housing. Adding $1 billion in debt to government balance sheet(s), even if it doesn't come in the form of hinky bonds that reset to usurious interest rates, makes them nervous.

But it's part of the background noise, no doubt. If investors are nursing wounds because of other stadium bond investments, then this is going to push up the premium they expect to charge for the Atlantic Yards debt, and no amount of gussying it up with monoline insurance and other bits of financial engineering is going to change that.

I'd be fascinated to know which "sports consultant" has been lined up to provide the underwriters, banks, and ratings agencies with the requisite study that shows that of course moving a basketball team from New Jersey to Brooklyn will be hassle-free. If Ratner can't find corporate buyers for his luxury boxes, and his lack of success with finding anchor tenants for Miss Brooklyn is hardly reassuring, expect everything to change.