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.


At 10:59 PM, Anonymous Anonymous said...

Bonds issued for the arena do not have to be, and in the likely case, would not be auction rate bonds. Note for instance that when FCR financed its Beekman towers deal it was variable rate bonds backed by a letter of credit and not auction rate bonds.

At 8:35 AM, Blogger Gringcorp said...

The combination of VRNs and a bank letter of credit would certainly be a viable alternative to the no longer operative monoline/auction rate combo. Three caveats: One, we're not certain that there would be bank appetite for up to $1 billion in speculative arena letters of credit. Two, these banks will not be AAA rated, and investor interest in bonds with a lower average rating, say single-A, is lower. Three, the arena will need longer maturity debt than the Beekman Towers project. This again limits the ability of banks to participate, though there are instruments that could get round this limit.


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