Friday, March 27, 2009

Name Over

Intriguing little nugget in the UK's Independent (h/t nolandgrab). The article discusses the disquiet in our fair Borough over Barclays' deal to buy the naming rights to the proposed Nets arena in Prospect Heights.

We'll leave to one side the hackneyed "grows" headline, on the grounds that British people won't yet be sick of it, and take a look at this sentence towards the bottom of the article.

The deal is a 20-year commitment, originally valued between $300m and $400m, but the bank is believed to have renegotiated the cost down since then.

This is, I'm fairly certain, the first time we have heard any indication that the naming rights deal might bring in less cash than originally anticipated.

Still, we're talking about a gap between two unknown numbers, since we only have rumour and guess work to go on about the size of the original deal. The conventional wisdom, echoed by this Independent reporter, is in the region of $300-400 million, over 20 years, or $15-20 million a year. By comparison, I think Citi paid the Mets $20 million per year for 20 years, and I'm tempted, given the Nets' weaker franchise (Mets fan bias here) to assume the Barclays number is nearer $15 million a year.

That the deal might have been renegotiated comes as little surprise, given the repeated delays, and the fact that the original naming rights deal had a deadline that had to be extended. Then there was the "value engineering" plan, which involved making the stadium cheaper and less shiny. Finally, there's the lingering suspicion that Frank Gehry isn't really working on the project anymore. I'd want a discount on my naming rights for a discount stadium.

I'm going to speculate a little about why this little nugget got out there at this moment in time. If you have the time, go read my earlier rant about the relationship between financial journalists and their PR handlers. I'm guessing that the reporter, not unacquainted with matters of reporting hygiene, went to Barclays for comment. Now when a US-focused scumbag (I use the term fondly) asks Barclays PR about their deal, they're bound to say "we remain fully committed to the fragrant Mr. Ratner. Screw those Brooklyn swine, they don't buy enough ETFs anyway" (I made the last sentence up, of course. Anyhow, Barclays' ETF business is up for sale, they say). The intention here is to keep the heat off Ratner and his political catamites in New York.

But the Indy doesn't have that many readers in the US (it doesn't have that many readers in the UK, either. Bad-Um-Chah! That's why they pay me the no bucks). So one assumes that if their man in New York goes to the PR, the PR will guess that the bigger story for the Indy readers is why a venerable UK high street bank is flinging money at a second-rate sports franchise in the middle of a financial nuclear winter. I imagine the bank PR might have said something like "this is strictly not for attribution but we're not on the hook for anywhere near as much. We're not that mental".

I could very well be wrong, and I apologise profusely in advance if I have traduced the reporter, who in fact has been working on a source inside the Empire State Development Corporation for many months. But if I'm right, then opponents of the arena might indeed have an ally in the form of the Great British Public, and its lack of tolerance for spendthrift bankers. And its poor impulse control.

Let's go back that old set of arena projections, shall we (you can find a discussion here)? We see that the developer was looking to meet between $30 million and $35 million of the arena's then-projected (and probably too low) $43 million in yearly debt service with sponsorship revenue, which would presumably include the naming rights. Any reduction in the naming rights' contribution to this already meager total might be fatal.

Thursday, March 26, 2009

A Ratner moment

No, not that one. A reference, and not my first, to Gerald Ratner, who made some unkind comments about his own firm's products, and suffered the consequences.

Who would ever again engage in such self-destructive language, especially after a recent painful restructuring? Why, it's the gloriously named Mads Nipper, an executive vice-president at Lego, calling his best customers "bastards".

Monday, March 23, 2009

So Which One Is It, Clever-Clogs?

One AIG headline in each of New York City's two quality newspapers.

The WSJ: "AIG's Rivals Blame Bailout For Tilting Insurance Game"

The New York Times: "At A.I.G., the Brand Is Tarnished"

Which I guess means they cancel each other out, only you still shouldn't be seen in public with any AIG merch (can I keep my AIG Highstar discount mini-Maglite?).

Friday, March 20, 2009

Towering inferno

Today I'm going to try and apply some of the garbage I've picked up following various kinds of financing transactions and apply it to the residential real estate market in New York. Uh-oh.

So, I read that the Beekman Tower project, designed by one Frank Gehry and developed by one Forest City Ratner, is struggling. Not a huge surprise, since I hear that if you're a big-ass condo and you're not struggling people look at you funny, like there are crack fumes in your central air or something.

Norman Oder, needless to say, has the gamest stab at working out what's going on, with actual reporting and everything. He remembered that the thing was financed with Liberty bonds, and sensibly asked the city's Housing Development Corp how those are going to work out.

The HDC (board member one Martha Stark) replied that the Liberty bonds are issued in tranches, and that if Ratner wants to build a smaller project, then he could simply not issue as many as originally planned.

From looking at the most recent bond prospectus (which can, I hope, be found here. If not I might be persuaded to post it, but I'd hate to inadvertently violate any securities laws), we see that on 28 March 2008 the HDC issued $203 million in bonds, that it is issuing another $238 million in bonds this year (I do not know for sure if these have closed, since the prospectus does not have the interest rate written in, but I think they have), and it says that it expects to issue another $238 million in bonds in 2010. Some of these are tax-exempt Liberty bonds, but some are regular taxable bonds, on which you'd have to pay taxes on interest payments.

What's the other interesting bit of information about the bonds? Well, they're being issued by Goldman Sachs, which is still nominally in the frame to run the Atlantic Yards financing, as well as Fifth Third Bank. But that's not the interesting bit. The banks that have promised to repay bondholders, in the event that the project does not, are led by Eurohypo and RBS Citizens. We also note that of the 2009 bond proceeds, which my best guess has having closed earlier this month, only $12 million will be used upfront, with the rest put to work down the line.

Now it's really easy to point out right now that such and such a bank is working on a financing and then highlight that they're having financial difficulties and then wail "but what happens to the deal"? The short answer is, if they don't have the money to finance the project and it hasn't happened yet, the project doesn't go ahead, but if they've already put up the money then it doesn't matter a damn what financial condition they're in, with a few exceptions, which I'll get to.

But the Beekman situation is a tad different. the banks aren't providing the money. They're just promising to be around and be healthy enough to put up the money if bondholders need it. In this instance it is perfectly reasonable to unleash the hounds of snark and point out that Eurohypo, a unit of Germany's Commerzbank, lost 1.4 million euros in 2008, and that RBS is a legendary UK government-owned basket-case brought low by its expansion into markets it didn't understand. Ahem.

What also happens to sick banks is they start to become really finickity about borrowers sticking to their promises. And if I had to hazard a guess, I'd say that the banks are the guys slamming on the brakes. My initial thought was that they might have the right to step in if unit sales are not holding up, but I see the building is rental. I don't know whether there could be some kind of metric for measuring lease commitments, or whether banks have the right to rein in the financing based on new market studies. Probably not.

I do notice that Forest City Enterprises has provided a guarantee of the project being completed on budget. I can't imagine that their costs have increased much in the current economic climate, but a spike in costs would be the most obvious reason for cutting back the size of a rental project. We also note that the bonds are variable rate and their interest rate resets periodically, and holders, from my unfortunately brief scan of the prospectus, could compel the letter of credit providers to buy them in the event that they could not be sold. The existing letter of credit expires in 2012, and if they can't replace this the bonds get put to the existing banks. I think.

You can find a list of events of default on p42 of the prospectus if you're so inclined, and there seem to be a few this might be applicable. This one looks particularly tasty: "any survey required or requested by the Agent shows any material adverse condition not approved by the Agent and such condition is not removed within the applicable time period after notice by the Agent to the Mortgagor." Hard to tell how applicable this is, and it could just apply to the physical condition of the property, but it might be applicable to the financial state of the project. If the banks call a default, then they take over the project.

What does this mean for the Atlantic Yards situation? The differences are legion, in particular the fact that probably the first bit of AY to come to market is the arena, which will have a different, though not necessarily better, economic profile than Beekman. But the fact that a project with this bank letter of credit enhancement is struggling quite probably blocks off the last best hope of finding someone to guarantee the AY bonds, since the bond insurers really aren't that interested in terrible basketball team relocations right now. A commenter ages back pointed to the Beekman financing as one model for what FCR might do on AY. I think by now it's a shining example of the perils of applying such a solution to the doomed Brooklyn arena.

Monday, March 16, 2009

Pay To Not Play

While I'm on a roll, and encountering subjects about which I know something. Ratings. Those little letter grades you find attached to bonds, and which have not been amazingly good predictors of how safe the bonds are.

San Diego Law's Frank Partnoy, the nearest thing academia has to a ratings expert (Duke Law's Stephen Schwarcz comes close) has an op-ed out asking why we're still dependent on ratings agencies, even after they failed us so badly. Partnoy says, quite rightly, that ratings are much too entwined right now in the corpus of financial markets regulation.

All good. And then he gets here:

The financial markets can function without letter ratings. Instead of relying on arbitrary letters, regulators and investors should consider all of the information available about an investment, including market prices.

Finally, regulators and investors should return to the tool they used to assess credit risk before they began delegating responsibility to the credit rating agencies. That tool is called judgment.

Which is sort of like wishing that all financial regulators were unicorns. I don't doubt that this novel "judgment" substance he speaks so highly of can be bought in by firms and regulators. But this has a price, and it will need to be passed on to market participants somehow. The hiring of large numbers of buy-side analysts will add appreciably to the fees charged by money-market funds. The hiring of more and smarter regulators will similarly be borne either by some kind of investor insurance scheme or by tax-payers. It may also, and you may think that this is a feature rather than a bug, restrict the types of debt securities that are available to all but the richest and most risk-thirsty private individuals.

These developments could all be desirable. I've got more skeptical of late abut the ratings' agencies arguments that they're the only hassle-free game in town. I am, like many people, now convinced that opaque debt markets were a sufficiently major cause of the crisis that the additional expense of an overhaul is now necessary. And I'm one of the agencies' water-carriers. But a huge cost there will be. We can't pretend that putting on a tough face will be enough.

"I'll Get Back To You"

I note that the FT's estimable Alphaville blog is losing patience with financial public relations professionals. I'll give you some illustration of the fact that these poor sods are all that stand between their employers and ritual evisceration in a haze of populist anger. This morning on NY1's In the Papers, coverage of the bonuses paid to AIG dominated the first couple of minutes.

But the media relations people working for these organisations are unaware that their audience has changed. Financial PR used to be a very sweet gig, mostly because it involved trading favours and locking horns with a set of journalists with their own pretty small and focused readership. At most, when dealing with, say, the Wall Street Journal or Bloomberg, you'd have exposure to, well, most financial services professionals. But those guys don't write angry letters to congresspeople, they just write cheques, or they don't.

The thicket of securities and disclosure rules surrounding financial transactions, not to mention the prevalence of non-disclosure agreements, to which I alluded in this comment at the Atlantic Yards Report, together with financial institutions' increasing willingness and ability to enforce message discipline on their employees, has resulted in the creation of a horrible symbiotic relationship between financial journalists and the PRs that service them.

I must stress, there's plenty of information sloshing around outside the usual channels. Only it's a) rumour and b) usually being spread around for financial gain. The sort of public-spirited leaks we tend to encounter in national security and political reporting are much less common in the world of finance. Even Harry Marokopoulos the hero of the Madoff scandal, looked over Madoff because he was a competitor.

Given that the corporations tend to have access to much better legal help, though much weaker libel protections, than private citizens, these PRs tend to enjoy considerable power as gatekeepers. In fact, as far as I can tell, the London Stock Exchange seems to make employing an outside firm, or at least having a substantial PR capability, a condition of listing.

So reporters get hopelessly reliant on PRs to confirm, off or on the record, the stuff that's swilling around as market rumour, or at least to immunise themselves from charges of sloppy reporting. Kudos, then, to Alphaville, for giving us an example of the PR sausage factory in action. Their reporter, Neil Hume, got a tip that Barclays was trying to sell its asset management arm, but couldn't even get an off-the-record nod either way from Barclays' PR people. A nod, in the negative, that the PRs were happy to provide other reporters.

Turned out to be (at least partly) true, and that Barclays is trying to work out whether it needs a UK government bail-out, whether selling its asset management arm would be enough, or whether selling its asset management arm might be needed to pay for the government insurance.

As an aside, because this isn't really an Atlantic Yards post, either outcome is not very good news for the Nets arena naming rights deal. A UK government bailout would increase pressure on the bank not to be subsidising Brooklyn real estate ventures. Bt if the asset management sale goes through, there's very little need for Barclays to slap its name on a sports arena. You might sell mutual funds by beaming your logo at basketball fans, you sure as hell don't sell investment banking services. That all said, Barclays might be fine, and neither option would be necessary. But banks' records on insisting they're not in trouble are pretty rotten.

Which brings me back to Goldman Sachs, which was also making, this time very public and strenuous, denials about its benefiting from a US government bail-out of AIG. Which turned out to be not entirely operative.

Egg on the face for Goldman PR Lucas Van Praag, then. He's now locked in a deathmatch with Goldman's other principal PR, Michael Duvally, over who can come up with the most ridiculous statements to the press. Duvally is a former reporter and, like the Inspector Highland character in Patriot Games can expect NO QUARTER. Head over to Dealbreaker for one of his bundles of amusement.

But the best one by far is his insistence that it was an entirely different type of money that Goldman used to pay bonuses after receiving TARP money. This I sense is one of those moments where a financial PR tries to get a handle on how financially illiterate his new audience is.

In Goldman's retelling of the bonus story earnings, the source of the bonuses, and capital, the destination of the TARP money, are two entirely different tthings, and are not at all related. This is humorous because banks' earnings are a key way by which a troubled financial institution could rebuild its capital. By noting that Goldman bonuses were paid out of its earnings, Goldman is saying "we could have used all that money we made prop trading and skirting conflicts-of-interest issues to beef our capital base. But the US government did that for us. So we'll keep paying the bonuses. Cheers!"

I'll end this only-slightly-erudite discussion of the trials and tribulations of the financial PR business by noting that financial PRs have at least as difficult a time in their dealings with the institutions they represent. For each of the episodes I mention there's probably a tangled backstory that involves the person in question trying to get sense out of their own people. But then again, that's why they pay them the big bucks. Dealing with scumbag journalists should be comparatively plain sailing.

Thursday, March 05, 2009

Gowanus Lounge -> Vallhalla

RIP Robert Guskind. This from a much less dedicated, and much less generous-spirited, blogger. I feel bad that my last interraction with him, by Twitter, was far from sympathetic. I'll miss him. He had the best blog in Brooklyn. And now he's gone.