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.


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