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April 9, 2008
Well, We Have The Other Bloomberg's Attention
Gumby Fresh is way ahead of most of us when it comes to understanding the big picture and intricacies of bond financing. Recently, he posted some commentary on a Bloomberg News article, along with a couple informative links, and related it to Bruce Ratner's controversial Atlantic Yards arena and high-rise tower project.
In a nutshell, if the scenario in the Bloomberg story continues to bear out, it could make Atlantic Yards very tenuous. And if the market for Nets luxury suites is lukewarm, Bruce is in trouble.
For watchdogs and neighborhoodies who are trying to get a feel for what Bruce Ratner is up against in the current economic climate, Gumby Fresh's full article is well worth the read.
If your boss might be walking by at any moment, here are few choice excerpts:
In [the article], we discover that several stadiums with auction rate debt service liabilities are facing quite disgusting hikes in their debt service costs. This is because auction rate bonds rely on investors bidding at set intervals, through a dutch auction, how much interest they would like to receive and how many bonds they would like to buy. When no-one bids enough to cover the amount of debt outstanding, the auction fails, and the interest rate on the bonds jacks up to some ludicrous number like 20%, which encourages the borrower to refinance the debt pretty damn quickly, and compensates the buyer for the fact that they can't sell out of the bonds whenever they like. A longer, and pretty reliable, description, at wikipedia.
Auction rate bonds have been used on quite a few stadium deals, as the article illuminates. The Jets/Giants bonds, for instance, are hurting right now, since some of them are now carrying interest rates, says Bloomberg, of 11-20% (at issue, these are usually carrying rates of just under 5%). There are a mixture of reasons for auctions failing, including general risk aversion, the refusal of brokers and investment banks to support the auctions by buying excess bonds, and the difficulties of the bond insurers, which guarantee a fair proportion of these bonds. Some of these insurers are now very low-rated, so low-rated that 11% is almost a fair interest rate to ask for in on their bonds.
How does that relate to Bruce Ratner's Atlantic Yards?
The Bloomberg article is a tad confusing, since it does not distinguish between stadiums where a state-owned entity is the nominal borrower (as it will be for the Nets Arena, and as one has to be for the borrower's interest payments to be exempt from tax) but the state does not provide credit support for the bonds, and stadiums where the state is the nominal and economic owner, and shares the risks of ownership.
If the luxury seat sales looked very disappointing or Barclays reneged then Ratner might try to cobble together some state support, though I do not think he will get very far. The eminent domain, cash and free infrastructure improvements are the price that some of Ratner's political supporters think are necessary to get the jobs and affordable housing. Adding $1 billion in debt to government balance sheet(s), even if it doesn't come in the form of hinky bonds that reset to usurious interest rates, makes them nervous.
But it's part of the background noise, no doubt. If investors are nursing wounds because of other stadium bond investments, then this is going to push up the premium they expect to charge for the Atlantic Yards debt, and no amount of gussying it up with monoline insurance and other bits of financial engineering is going to change that.
Posted by lumi at April 9, 2008 6:18 AM