You *Genius* Onexim

The country whose corporate finance market gave us the Aluminium Wars vomits forth a hunk of ill-informed conjecture on the Nets stadium financing so wacked-out I just have to say "bravo"! I'm almost envious.

Via nolandgrab, we hear that, like some low-rent London estate agent, the Atlantic Yards stadium finance coterie is hoping that mentioning a wealthy Russian in the same sentence will make their stinky Pimlico maisonette of a stadium financing look more appealing.

Mikhail Prokhorov, a nickel magnate, is apparently interested in a Nets bailout, though his recently-founded Onexim Group, whose website lists no financial information, and whose press release page is dominated by news of legal actions. I note, as nolandgrab notes, that his name often seems to be waved around near flailing sports franchises, and why the man wouldn't buy an equally crap team with a better balance sheet is beyond me.

I'm not even going to even start speculating about how this fantasy wormed its way into the cranium of Reuters' ace Moscow reporting duo. One can read, in this profile of the estimable finance blogger Felix Salmon, that Reuters, since its acquisition by Thomson, has regained some of its mojo of late.

Could be so, and its capital markets coverage has been much more prominent on the web the last few months. Its municipal finance coverage, however, has suffered from Thomson's disposal of the Bond Buyer some months before the Reuters purchase.

When one reads the following it's fairly apparent that there's no-one inside the Reuters brain trust to talk to any more about municipal finance:

Prokhorov is considering issuing a bond worth $700 million through Onexim to help fund the project, one source close to the deal said. The source said the bond must be issued before the end of 2009 so it is exempt from government taxes, adding: "This is a pure business story. The value potential of the club and arena are very high."

That said, any reporter that will allow the gibberish that is that final quote to make it into their story may have more immediate parts of their reporting toolbox in need of an upgrade.

But back to the first sentence. "Through" is the wrong preposition, pure and simple. The bonds would be issued through the Brooklyn Area Local Development Corporation as part of the hastily-approved corporate welfare package put together by the city and state for Atlantic Yards. The bonds can't be tax-exempt if they're issued by Onexim. I thought briefly that Onexim might borrow the money on a taxable basis and lend it on to the project, but that isn't what the article suggests in the sentence after.

So let's assume the Reuters guys aren't too hot at verbs or prepositions. Could they mean that Prokhorov is buying the bonds through Onexim? It would mean that Prokorov might decline to demand a prepayment penalty on the bonds, although I doubt that he would be able to avail himself of most municipal bond interest breaks, since he's not presumably paying much in the way of US tax.

He is far from the most suitable buyer for a tax-exempt bond, unless the arena bonds are Build America Bonds, where the tax subsidies are paid direct to the issuer, but I don't think they are.

They could have been told that Onexim is considering guaranteeing the bonds, by putting up a performance bond, in exchange for a substantial stake in the Nets or arena company, though I have no idea whether Onexim has the resources to make a $700 million contingent commitment like that, and whether the ratings agencies would believe them.

Still there must be a reason why someone close to Onexim or Ratner is babbling about bonds when no-one asked them to. I hope you will agree with me now when I say the Reuters reporters don't sound like capital markets vets. What we're hearing, via an elaborate and far from lucid chain of whispers, is that the bond financing is looking as hairy as the Net's team finances. This should be far from reassuring to Ratner's pals at the ESDC.

"Odd", Eric, ain't the half of it.

The Ratner Hat Syndrome

Just got back from a trip to Canada. So it's taken me a little while catch up with the Atlantic Yards hullaballoo. Saw the renderings in the Times on the way home.

I must say the first thing the new arena put me in mind of was the funny helmets the rebels used in the third Star Wars movie. Which makes the new arena mid-80s futuristic, I guess. It also looks a little more low-slung, which is in general a good thing. If the man managed to put it up nearby without throwing people out of their homes and gorging on public subsidies I might even learn to love it.

Two small details intrigued me. The first is that Ratner's moving the team offices out of the arena, which sounds like a pretty desperate stab at cost-cutting, and may well reduce the attractiveness of the arena to another buyer. I'm sure Ratner has lots of Brooklyn office space standing by idle right now, but am not sure that whatever mug he manages to dump the team on will be similarly, um, blessed.

The second is that Ratner has decided that the new arena will include retail space. This is interesting, because, again, and this can be confirmed fairly quickly by a quick stroll through his two ugly malls, Ratner's not hurting for vacant retail spaces in that part of the world right now. Is Ratner, or his bankers, or the agencies, so worried about the revenue that the arena will produce, that he's trying to juice it with some retail rentals?

Alongside the release of the new rendering, Ratner also granted Eliot Brown, the only professional journalist spending much time writing about the arena financing, an update on that end of things. There's not much new in here, more a sort of confirmation of some of the proposals that Ratner's been floating around the last few weeks and months.

He confirms that he does have a $200 million equity gap, but seems to indicate he's looking for outside providers to take equity in the project company, rather than pay Ratner for a stake in the Nets, which Ratner would then contribute to the project as equity. This could be smart, since there are a couple of private equity and real estate investors that might like a direct stake in an asset like this.

They'll only do it, though, I imagine, if the Nets sign a long and expensive lease on the arena, which would doom his chances of trying to sell the team for a while. Of course, Ratner says that FCE could meet this $200 million from its own resources, but I think a commitment that large would put its return on capital so far in the toilet it might as well go back to building strip malls in Cleveland.

Then there's this issue of issuing the bonds to finance the stadium and then holding them in escrow until the litigation can be resolved. Ratner has told Brown that he can do this. I'm still not sure how that will work. I'm fairly certain the tax consequences for investors of being made whole (paid back early) on these bonds would be horrible. But it might be possible, and FCE, in one final throw of the dice, might be able to put up the premium to prepay the bonds itself. Certainly it would be easier to find that kind of money than $200 million in equity.

But the process is likely to be hideously complex. Go look at this page to get an idea of how difficult refinancing municipal bond debt is. Yeah, I'm copping out a little bit here, but I had a rather large lunch, and municipal finance terminology is not my strong suit. Let's just say we're getting a clearer idea of what route Ratner might be taking, his likely gearing, and his timeline. It's a pity Brown didn't ask if he was talking to Assured Guaranty about bond insurance, though.

Oh my god, municipal finance commentary and Star Wars references. This really is turning into a low-rent Accrued Interest, isn't it?

Soon You're Talking Real Money...

I finally got round to picking through this extremely interesting, timely, lucid, and well-reported Q&A at Nets Daily post about a potential sale of the New Jersey Nets basketball team. It's awesome. Go read it. Go read it again. Go pick through it yourself like an episode of The Wire. There at the bottom is a comment from me. I'm going to elucidate here on what I wrote there.

The blog's pseudonymous author has worked out that there are a lot of rather angry investors in the Nets ready to vent at the nearest knowledgeable Nets fan, and the author has done a very good job of tracking them down. They also have appeared to have gleaned a pretty convincing idea of the Nets team finances.

But buried down in the information is something pretty momentous - Ratner needs to scare up another $200 million from somewhere to finish his new stadium in Brooklyn.

According to one insider, half the $400 million [sales proceeds] would go towards the down payment on the Barclays Center and half towards reducing team debt.

I'd been working on the assumption that the $150 million that he'd sunk into the project - on land acquisitions, fees and site work, would be considered an in-kind equity contribution, its "down payment", as the Nets Daily writer put it.

Looking back at that assumption now I should have realised that FCR, which has mortgaged a lot of the footprint property to Grammercy Capital, would probably have to pay back that financing before the site could be considered equity, since I can't imagine that Grammercy would find it very entertaining to try and foreclose on land that's got a massive arena on top of it.

But there might be more to this. I've always thought that at some point the ratings agencies, no matter how supine they can be when confronted by the considerable charms of the Goldman Sachs sports financing team, might start to bite back. This is a tremendously over-leveraged developer trying to pitch a tremendously over-leveraged project to the market.

My assumption was, without knowing much about the conventions of sports team financing, that the Nets would throw whatever revenues they had at their disposal into the mix until the arena looked like it could cover its debt comfortably. TV, advertising, sponsorship, concessions, and so on. Which they may have done.

No matter. Credit markets have thawed a little, and it looks increasingly likely that the Nets - if they get the right financing structure in place - could get the bonds done at an interest rate of no more than about 2 percentage points higher than the other New York team stadiums did. But they won't be able to put in a token equity contribution.

What the agencies might be saying is that the project is so speculative, or the economic environment is so poor, that the developer is going to have to kick in some more cash to absorb revenue shortfalls before bondholders do. When the Jets and Giants are struggling to shift some seats at their new stadium this is an understandable position to take. So Ratner needs to sell the team to get this equity contribution, suggesting that additional stock or bond issues by FCE to fund this commitment are not feasible.

Now go back to the Nets Daily article and take a gander at the logistics of this. Ratner wants to sell the team, and use the proceeds to fund the stadium. But buyers - with the NBA's support, apparently - do not want to be locked into an above-market lease for a Brooklyn arena. They want to own the arena, but probably don't have the resources to convince the agencies to follow through.

The Nets losses then, are only part of the reason Ratner needs to sell. But Ratner might not be able to sell the team until the financing is in place, but needs to sell the team to conclude the financing. Can he bundle both into a single instantaneous transaction? Watch this space.