Wednesday, October 22, 2008

My Arena Bonds $1 billion's-Worth

Rikey. Time to post.

So, the US Treasury Department just handed down a ruling on the eligibility of PILOT facilities for tax-exempt treatment. I'm going to avoid going into how tax-exempt treatment is applied to such facilities' bonds, the inner workings of PILOT (or payments in lieu of taxes) and assume that this blog's remaining frivolous readers will move on and wait patiently for the next Brooklyn boutique discussion.

As has been noted elsewhere, the new regulations from the IRS contain a little bit of wiggle. The new regulations say that the old regulations, which have a rather generous view of how PILOT payments can be applied to servicing bonds used to financing projects, apply to projects "substantially in progress at the time of the promulgation of the Proposed Regulations." Which was October 19 2006.

As far as the developers of the Nets arena are concerned, this includes the Atlantic Yards project, since its preliminary approval came in July of that year. Norman Oder, as ever, has the best chronology. His reading of the rules is that even a rubber-stamping of the project's environmental impact statementgeneral project plan would probably count as "substantial progress".

But let's briefly cycle back to the Yankees and Mets stadiums, since the Yankees, in particular, want to issue some more bonds because their shipping-magnate owner has no idea how things get built in New York city. These stadiums are definitely grandfathered, and it's worth noting that they both closed their original financings in July 2006.

Now since the cut-off date was simply chosen because that was when the original rules came out, we can't try, as supporters of gun control try with the second amendment, to look at the intent of the writers. It looks as if a say-so from the right Pataki stooge is the important step, and not, you know, convincing an investor of the project's viability. In fact, as the Times notes it was the outcry over these deals that forced the Treasury to look at the rules again.

Still, I'm on shaky ground discussing tax law. Let's look at the appetite for the arena's debt, an area where the Gray Lady is forced to speculate. Here the omens are still fairly horrible. Broadly speaking, Ratner and his dudes at Goldman Sachs have four financing options:

1) Borrow the money directly from a bank. Tricky. We're mostly talking about foreign banks that would be lending him money, the same ones that are still on their knees and trying not to keel over, and such an option would not involve the use of a tax exemption, which Ratner's pretty much got in the bag now. I don't know enough about tax law to say whether the banks could lend the developer the money short-term, and he then be allowed to refinance this debt with tax-exempt bonds. Either way, he has till the end of 2009, and in any case, the banks would need a guarantee that FCR would make them good. I have to assume that FCR's shareholders would view assuming a $1 billion liability like this very dimly.

2) Go to a bond insurer to insure a tax-exempt bond issue. Things have been a wee bit quieter here. The good news includes Macquarie and Citadel getting a bond insurance licence, the bond insurers' scheming to get a piece of the federal bail-out and the lack of horrible earnings releases. The bad news includes a slew of looming corporate debt securitization downgrades that will hit the remaining standing ones hard.

3) Get a bank to insure the bonds. The Beekman Tower option. See above. You would get the tax exemption in this instance, but the capacity of the banks to support such a foolhardy venture as moving a second-tier franchise to a horrendously expensive arena in a crowded market in the middle of a downturn would be limited.

4) Issue the bonds without any kind of enhancement. Or, could Goldman Sachs threaten enough of their municipal bond salesmen with firing to get the bonds to clear? Again, tricky. The universe of buyers for highly illiquid, low-investment grade infrastructure bonds is small and incestuous. Like North Lincolnshire. If they tried this right now, it'd probably lend them the money at 10% or so, or roughly what a utility would borrow at. I'm assuming a very dirty calculation that the tax-exemption is worth about the same as the premium that the Nets would have paid over the guys that keep the lights on. I used to be much more confident that this was an option, but too many people are sitting on their hands right now.

The exception, of course, are those crazy guys at Barclays. Fresh from buying Lehman Brothers for a song, they're now set to issue about $1.2 billion in bonds with a UK government guarantee. Bet Ratner would like to get a similar deal. This is the same bank that refused to take any UK government equity as part of the bail-out in part so its executives could keep paying themselves fat bonuses without worrying about government regulation.


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