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.

Friday, January 11, 2008

First Horseman of the Apocalypse

So, children, not only is Brooklyn Borough President Marty Markowitz very close to announcing a run for mayor, but the poor twerps at Gothamist are proclaiming that "Mayor Marty Markowitz Does Have a Nice Ring to It". I'm sorry, I shouldn't call the Gothamist people twerps. They're good people, they just have no idea how awful Markowitz is.

See he's not just playing a bluff, crass, shallow media personality, to compensate for the fact that the Brooklyn Borough President has no power, he actually is a shallow media hound. He's one of the most intellectually lightweight pols that the New York Democratic party has ever vomited forth. According to, um, wikipedia, he "spent over two decades as a New York State Senator for Brooklyn. During his time as a state senator, he was known for creating a series of oceanfront concerts and other festivals rather than drafting legislation."

I've spoken to more than one person familiar with the Borough's politics, and their verdict is that the man has very limited gifts, and little head for the economic and social issues that are going to roil the Borough in the coming years. To be honest, I don't think the man shouldn't be mayor because he's been a proponent of the Atlantic Yards. I don't think he should be mayor because his support for the project shows how he's able to ignore the social, environmental, economic and cultural effects of the project because of some weird fixation on a 1950s egg-cream vision of what Brooklyn could be.

Markowitz has demonstrated a flair for edgy fundraising practices, getting his picture taken, and cuddling up to real estate developers. That's it. He hasn't been slumming as Borough President, he's been forced to raise his game, and at the first sign of trouble he's been exposed as vindictive, inarticulate and petty.

But I want to be constructive, and so may i suggest that the man may have a use back in the state senate. The state senate has been in Republican hands for years, and is thus in a good position to block any useful legislation that percolates through the cesspit that is Albany. But it could tip towards the Democrats in the next few years.

Particularly vulnerable is Bay Ridge senator Marty Golden, who took his seat from a Democrat in 2002. Marty's schtick is well-suited to the electorate of Bay Ridge, and I say that not out of a lack of respect for their mental faculties but because present-day Bay Ridge is probably the only part of Brooklyn that slightly resembles the 50s Brooklyn playing in Marty's head.

There's a pleasing symmetry to the idea of Marty taking the guy down, since he came into his job as Borough President after one Howard Golden (no relation, far as I can tell) retired. After returning to the senate, he can do as he's f***ing told by Spitzer, and never come back down from Albany again.

I'm not really too worried about the man becoming mayor, since he'd lose to pretty much any Republican that can string a sentence together. He would be further proof that the city's Democrats are incapable of presenting a candidate for mayor we could vote for without wincing. If I had the vote I'd pull the lever for Roger Stone before him.

Which brings me to a more general point about these New York mayor shenanigans. It's an important job, don't get me wrong, but the selection process is all f***ed up. First you've got the democratic primary, which is a little pitched battle between various venal mini-machines, and then you have the general election, where the Republican candidate, who has spent the time working out how to be appealing to electors rather than working out which democratic club can cough up the most fundraising dollars, stomps the Dem.

It's sort of a mystery to me how Mike Bloomberg and Rudy Guiliani, the two most recent Republican mayors, have convinced themselves that the natural additional media attention they get for being mayor of New York somehow equates to electoral catnip. Both won pretty handsome re-elections, and both assembled a pretty good record in the city (I'll leave the debate over whether the economy achieved the same effect to one side).

But both of them have only won election campaigns against the New York City Democratic party. I can't stress enough how important this is. The city's Democrats long since gave up on concentrating on electability, deciding instead to devote their energies to dividing the spoils that an overwhelmingly left-leaning electorate dumps in its lap every single election time. Beating the Democrats isn't so much a proof of electability as proof that you can at least comb your hair in the morning and talk like you managed to finish high school.

Give Markowitz anything more taxing to do than attend a high school graduation and you'll be quite aware of this too. Apologies for the rant, but if he gets nominated I'll start scouring the New Jersey real estate listings, and if he's elected I'm outta here.

[UPDATE: Since buying a place to live I'd largely stopped visiting Brownstoner, and had been given to think the quality of its commenting had declined rapidly. Not so. Some good stuff on Marty's record in the Borough here]

Wednesday, January 09, 2008

Young Gods, Old Country

Waiting for some day job news articles to post (our publishing software is amusingly bad), before scooting off to fetch Mrs. Cutesome some scallops. I will, as I am known to do, post a link to my most recent Sugarzine column.

I really wasn't intending to do it, what with Sugarzine turning into a Queens fanzine and all that. But then I recalled, very dimly, that I'd been to a gig when I was in London. Very wasted, but yes, I thought that would do. It's not as if being too drunk to remember the song titles has ever been a bar to serious music criticism. And the editor asked very nicely.

So there you have it. Swiss industrial metal. From a drunk man. Nice.

Wednesday, January 02, 2008

Arc Of The Somnambulant

So, I'd ended 2008 with a promise to post more frequently, and succeeded only in trolling for comments from My Hot Wife.

I've been lucky today, since along comes an interesting little article from that old dependable, Slate. In it, Mr. Brendan Koerner takes a look at plasma arc gasification (PAG).

So what is PAG? Well, the pat answer is that it's a cool-sounding big-ticket piece of kit designed to part a fast-growing county's tax-payers from their dollars. I am, though, being a mite unfair, since not a huge amount is known about the technology's limits. It could be the future, or it could be a less sensible use of precious tax-exempt bond capacity than just building a new prison.

The technology involves using electricity to heat up garbage to an enormously high temperature, creating synthetic gas, mostly inert slag, and a couple of nasty by-products, including heavy metals (no not the cool kind) and some other gases, of which probably the least malign is carbon monoxide.

It's fairly easy to filter out the nasty metals, and some of the gases, or at least it's possible. But the long-term performance of PAG equipments, given the temperatures at which they operate, is difficult to predict.

You also might have noticed I mentioned something called synthetic gas in the second to last paragraph. This is the key. The idea behind the PAG technology is that you burn this gas to generate the electricity used to heat the garbage, and so forth, in a virtuous circle.

But we have absolutely no idea how efficient this process is meant to be. This is a shame, because this is the only way we can judge what the total environmental benefits could be. If the technology is self-sustaining, there's no definitive statement I can find to this effect.

The Slate article gives us to understand that the biggest obstacles to the technology's adoption are the problems of disposing with the other byproducts of the process. I'm not convinced. It's telling that PAG has been extensively marketed to communities that for one reason or another are done with trying to plonk their garbage in landfills.

The environmental benefits may be there, although there's going to be some carbon emissions from PAG. But it's better - at least in environmental terms - than just burning trash, and is a quicker solution than trapping methane from landfills, which can take years.

It's sort of a mirror image to coal-to-liquids projects, which have gained some acceptance in the US as oil prices stayed high, and the US wakes up to the fact that it has much more coal than oil. The problem, though, is that the process, which takes coal, and turns it into something that can run in diesel petrol engines, emits hideous amounts of carbon, maybe 1.8x as much as ordinary petrol.

But in both cases the cost-benefit analysis is nowhere near advanced enough to justify a raid on the municipal kitty, no matter how connected the developers can be.