Monday, August 10, 2009

I am the god of capitalism, and I give you nonsense

They say that the future of publishing lies in occupying your niche properly. In which case I would like to make my case as the Best Blog Speculating About The Atlantic Yards Arena Financing Evar. To those pedants among you saying that the proper name for the arena is "Barclays Center", I would say, it ain't called that till it's built, and if Barclays wants me to advertise its execrable banking services it can pay me directly.

Anyway, the cause of this haste is a workmanlike update on the arena financing from the Times' Charles Bagli, FCR's go-to guy for expectations management. Oder teases out the juicy bits so you don't have to. But it's fairly thin stuff.

Ratner's meeting the ratings agencies, which we knew. What we don't know yet is if he's trying to put something together with Assured Guaranty, the least crap bond insurer in the whole of America. He's scrounging for cash from the public and outside investors, both of which are fairly well-known.

Which leaves us with the last paragraph of the story:

Some real estate executives and critics said it would be hard to sell the bonds for such an uncertain project. But Jay Abrams, a bond analyst at FMS Bonds, said there “is definitely an appetite for tax-exempt bonds in New York, and elsewhere.” The lawsuit, he added, “is not necessarily a game-killer. At the right price, there’s always a buyer for bonds.”

I don't know whether Bagli tried to ask Ratner whether he had a plan for getting the bonds out ahead of the litigation being resolved. I suspect Ratner would have been deliberately vague in any case. The reasons being that any way round the December 31 deadline for a bond financing would be fiendishly convoluted.

But let's go back to this Jay Abrams at FMS Bonds. He seems like a contrarian sort of fellow. Maybe they should give him a spot at The Big Money. It could well be that he's privy to the machinations inside Goldman Sachs' sports finance shop. More likely, though, he doesn't have a clue what he's talking about.

I had a quick gander at the website of FMS Bonds, which appears to be a South Florida-based brokerage with a decent online presence whose bread and butter is persuading retail investors to pile into municipal bonds. Nothing wrong with that. Highly patriotic behavior, encouraging dumb retail money to crowd the market and lower government borrowing costs. Give them a knighthood, um, I mean, Presidential Medal For Virtuous Bond Pimps.

I'm just not convinced, they've spent much time on non-recourse private activity bonds. Which aren't like regular muni bonds. Which is fine, because they're aren't that many of them, and after the end of this year there will be even fewer, at least for speciously useful sports facilities. No, the real money will probably be in clean energy, but I will pull up there before I digress.

I'm very tempted to speculate on, maybe even recreate, the conversation. In fact, I'll do it, at least in outline. I'll assume that Bagli washed up at their door through the intervention of that wise old capital markets pro we call The Google. He probably outlined a slightly risky and speculative bond issue, maybe mentioned the threat of litigation, and our bond analyst, putting up his feet and donning his Wise Capitalist glasses, assured the reporter that in any market there is a price at which a good clears, and municipal bond markets are no different.

There are a couple of issues with applying this theory to the AY bonds, however. The first is that equity also has a price, and the more expensive the bonds get, the less attractive the project becomes to FCE's, and the Nets' long-suffering shareholders. I dare say that the bonds would clear the market with a 15% interest rate, but nether the arena, nor FCE, could sustain that rate. Abrams is assuming that the "how desperate are you for the cash" metric, which is pretty much the only one a municipal treasurer cares about, can be applied to these bonds.

But the arena company is a private borrower. I say borrower rather than issuer, because the NYIDC, or the ESDC, I forget which [it's the BALDC, an ESDC subsidiary, I have been corrected], will be the issuer. But they'll lend the funds on to the private stadium company, and the private stadium company, not the state, not the city, and not FCE, will be responsible for paying the bonds. The arena financing will not be like poor Jefferson County, Alabama, which started off trying to deal with a poorly-structured sewer bond issue, and ended up laying off two-thirds of its workers.

There's only a certain number of people that a struggling arena could lay off before hordes of Brooklyn Beer-starved hordes descend on the arena for FREE SPORTS and FREE HOT DOGS and FREE BROOKLYN LAGER with not enough staff to stop them getting in. Sort of like a less entertaining Dawn of the Dead. Jacking up the rate, beyond a certain level, is just not an option.

Maybe this Abrams guy is talking about discounting the bonds. You issue $780 million in bonds but only bring in $700 million in proceeds. Possibly, but the practical effect of discounting the bonds is to increase their interest rate.

What Abrams didn't say was "give them a juicy enough prepayment penalty and they'll pile in". He would have been referring to the idea that the proceeds of the bonds could be kept in escrow until the litigation is settled, and if FCR loses the litigation then the proceeds would be returned to the bondholders, as well as a fee to compensate them for their trouble. There are, possibly, a few reasons for his omission. Muni issues are not very frequently repaid early, and there is an entire class of muni bonds, called refunding bonds, that exist on top of outstanding, more expensive, bond issues.

It's possible that the arena could issue tax-exempt bonds with an eye-watering rate of interest before the end of the year, and then try and refund them, though I doubt those bonds would be tax-exempt. More importantly, at some point, the interest rates on a badly-assembled tax-exempt financing would be so high that Ratner might as well wait and just issue the bonds in the taxable market if it takes until 2010 to get the litigation dismissed.

But our assumption is that the 2-3% saving from tax-exempt treatment on the arena debt is critical to the economics of the project, though maybe less important than the legal authority to seize other people's property for it.

So, back to prepayment penalties. Very well-regarded municipal issuers can avoid paying them. Sketchy arenas can't. It takes time and effort to read through whatever nonsense the underwriters marshal in support of the bonds. The guys that buy these private activity bonds don't tend to allocate much of their time and money to them. So the issuer needs to offer to pay them at least 2% of the proceeds, probably more, on top of handing back what they've borrowed, if they want to pay back the bonds early. If, say, the arena doesn't get built.

If you're a local government, then fine. You can fire a few teachers and use the savings to pay back the jackals of Wall Street. If you're a corporation that is bringing in revenues, you can take the same route. But the stadium won't have been built. Won't be making revenues, can't even be sold to make the penalties.

There's a glimmer of an idea. FCE might be persuaded to promise to pay the prepayment penalty. But FCE's well below investment grade. Assured Guaranty couldn't counter-guarantee this promise, and the promise might even drag down the bonds' rating. So Goldman Squid will have its work cut out here.

UPDATE. Of course it was a short while after I hit Publish that I remembered that The Florida Marlins got a financing for a new ballpark done in July. It doesn't alter my thesis, because the Marlins bonds were backed by tax revenues, not stadium revenues, and there's no indication that the city is looking at shoveling the Nets this kind of support. Just as well, cos according to this lady, the flipping thing's half-empty most of the time


At 2:45 PM, Blogger brokeland2003 said...

who specifically would buy these AY arena bonds, under the scenarios considered above? which institutions, etc? any idea?

At 3:09 PM, Blogger Gringcorp said...

Well, we're talking about large, well-capitalised organisations that will need cash to meet obligations up to 30 years down the line. Specifically life insurance companies (John Hancock, MetLife, Allstate, TIAA-CREF) and pension funds, both public and private, like Calpers, or the pension funds for NY state public employees. Just to stress, I have no idea whether they are looking at the deal.

You also have a few funds that focus on bonds rather than stocks, like those run by Pimco, but they are less likely because they like to be able to buy and sell bonds easily, and unusual bonds like these are not easy to sell. Basically, they want to buy them and forget about them.

In theory, if Assured Guaranty does insure the bonds they will be much easier to sell, because rather than a rating of BBB- or BBB (just above junk level), they'll have a rating of AAA or AA. A lot of buyers have restrictions on how much lower-quality debt they can buy. Insurance makes this less of a problem. But the buyers will need to be large, because they don't to have a large proportion of their assets locked up in a speculative and hard to value venture like the arena.

Hope that helps


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