Thursday, May 07, 2009

Stop Me Before I Cook Again

Was jolted out of my month-long reverie by a Double Threat. The New York Times has written something dumb about bond insurance. Not any old dumbness about bond insurance, but special dumbness about stadium finance bond insurance (h/t nolandgrab.

Here's what happened. The company that insured some of the bonds that were used to finance Citi Field has been downgraded. (By way of digression, I keep referring verbally to the Mets' ballpark as "Shea". Normally I'd spend hours practicing how to adopt such an antediluvian affectation, but this one comes really naturally.)

Quelle domage, as they say in Paris, where the parent of one of Moody's competitors, Fitch, is headquartered. And what does the unstoppable New York Times manage to extrapolate from the news that Ambac has been downgraded:

"Moody’s Investors Service said that $613 million worth of the municipal bonds that were issued to pay for the construction of Citi Field could be downgraded to junk status." WRONG. The bonds could be downgraded to bond status, just as they could be transformed by passing aliens with a peculiar sense of humour into Yankees bonds. But any downgrade to junk, or below investment grade status, will be entirely separate from the issue of the downgrade of the bonds' insurer.

This is because the Mets' stadium bonds have their own underlying rating, in this case one of Baa3, which is the lowest non-junk rating, but is not junk. It's the rating the bonds would have if there weren't insured, which is basically what has happened because of the downgrade of Ambac. This underlying rating is important, because unless it was not junk at the time of issue, the hapless Ambac would not have been able to insure the bonds. This rating, as Moody's stresses in its report, is not under threat. All that happens after Ambac is downgraded is the poor Mets are paying for insurance which is about as useful as a chocolate fireguard, because the insurer is worse rated than the Mets stadium.

There are plenty of scenarios under which the Mets bonds' underlying rating might be downgraded, particularly if the New York economy stays in the doldrums and the stadium does not generate as much revenue as it should. But let's remember this is a popular franchise in a large city with a very patient fanbase that gets plenty of excitement in September, if not in, ahem, October. Don't try and pretend that any Nets financing could get a rating like this as easily. I love the Mets, but they're a bit trashy. Compared to the Nets though, the Mets are that really classy lady in the black dress and pearls that fronts the Lexus dealers' adverts. Yes, that classy.

Couple of bond basics. The interest rate that a stadium pays, provided that it is fixed at the time the bonds are issued, is basically immune to the effects of a downgrade. There are plenty of financings that can be the victims of insurer downgrades particularly in the floating-rate market, but the Wilpons didn't hold with that nonsense, so we've got pretty boring bonds, except for the whole crappy bond insurer issue.

If you're holding the bonds you've got to be pretty sore, because you have to remove them of the metaphorical liquor top shelf and stuff them down behind the bar with the other chemical aftertaste no-brand Military Special gin type stuff. But the holders have been getting these shocks ever since Ambac stopped being triple-A, and are probably resigned to it now. The holders just act now as if they own bonds without insurance, which is hardly the worst thing in the world to be owning. I mean, they could own CDOs or Chrysler bonds.

Maybe, you're thinking, and I know the Times reporter must have been thinking when he realised that the Ambac downgrade meant nothing to the Mets, that this might prejudice their future access to the capital markets, what with only being low investment grade and all that. For saddling investors with bonds that collapsed in value they will be be punished! "If they are downgraded to below investment grade, or junk, the team may have to pay higher interest rates if it issues new debt notes the reporter, seeing the light at the end of the tunnel of irrelevant conclusions.

"Um, Mr Belson," screeches your blogger, reaching into his draw for the bag marked 'NASTY AD HOMINEM DEBRIS' "you HAVE toddled up on the seven train to Shea of late, yes? You have noticed that the damn thing is built, and there are people wandering around there working out how best to funnel their savings to Danny Meyer? You have noticed, because you wrote it, that they have already come up with the financing to meet the cost overruns? Why on earth is the the stadium going to need to raise more financing? Because they think that that the 5% they are paying in interest (plus I should note, in the interest of fairness, the premium the Mets are paying for bond insurance that doesn't work) is utter usury and needs to be refinanced? It ain't.

In fact, now I think about it, the only reason I could think for suggesting that "the Mets" might ever be looking for additional financing, is if the reporter is completely unaware that the issuer for the stadium bonds and the Sterling Mets organisation are entirely separate entities, which do not guarantee each other's debts, and is wondering how on earth the Mets are going to scrape together money for the next big shipment of Jose Reyes bobblehead dolls.

Companies, and countries, that issue bonds get downgraded. Sometimes it's a big deal, sometimes it isn't. The Mets bonds and Ambac isn't a big deal, unless you own the bonds and there aren't that many of you and you were presumably well aware that Something Was Up with your bond insurer. A Times reporter resorting to ambiguity and insinuation to stretch a one-line nib to a nine-paragraph laugh-fest was woefully under-employed yesterday.

Before anyone says (not that they will, this is hardly a popular blog with the pro-stadium crown, well it's hardly a popular blog at all, what with the infrequent postings and paucity of stimulating subjects, but you get my drift) that the preceding might be construed as a clean bill of health for the business of New York sports, please read the bit about the Mets' resilient brand, and note also that the Mets attracted new financing from the one standing bond insurer (Assured Guaranty) for a small amount for a pretty much complete stadium for a solid team. It won't do the same for the Nets. The New Jersey Nets are the Typhoid Mary of High Finance, and no-one wants to eat their delightful cooking.


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