Tuesday, July 14, 2009

ESDC says it hopes to sell $650 million (not $531 million) in arena bonds even while Atlantic Yards appeal is pending

So, the projected amount of tax-exempt arena bonds would be larger than initially announced, indicating more savings for developer Forest City Ratner.

A New York Times article on July 1 stated:
The Court of Appeals' involvement, announced on Monday, is the latest hurdle to Mr. Ratner's plans to build a $772 million basketball arena, the centerpiece of the project. The developer and his bankers intend to sell about $650 million in bonds for the arena in late September.

That $650 million number was surprising, because, at the June 23 meeting of the Empire State Development Corporation (ESDC) board, a memo stated that tax-exempt arena financing was $531.1 million. (Right; click to enlarge)

The explanation

"The sizing of the tax-exempt and taxable financings is still in flux," ESDC spokesman Warner Johnston responded. "The $531 [million] number in our Board materials was a net number--exclusive of cost of issuance, capitalized interest, debt service reserve and bond insurance. In particular, the latter three are very big numbers. $650 [million] is a good ball park number for the tax exempt bond financing. The taxable piece will be relatively small (maybe $30-$50 million)."

Precise information will be released, he added, when the bond issue is finalized. Indeed, Footnote 1 attached to the board memo (above) states that the arena funding source is, in fact, net of cost of issuance, debt service reserve, and capitalized interest.

The only missing element among the four Johnston mentioned was bond insurance.

Was the board informed?

Was the ESDC informed that the total amount of tax-exempt bonds would be significantly more than $531.1 million. The board was presented only with the documents excerpted here, ESDC spokeswoman Elizabeth Mitchell confirmed: "If necessary, we will update the numbers for the Board at the next meeting, likely to be in September."

The issuer of the bonds would be the Brooklyn Arena Local Development Corporation (BALDC), and the BALDC board would authorize the bond sale.

"The LDC Board will be requested to authorize the bond issue, at which time numbers will be available," Mitchell said. "Neither ESDC nor the State will be liable on LDC bonds."

Would bonds be sold in September?

While the bond issue might be authorized in September, would bonds really be sold, as the Times article indicated, later that month, given that oral arguments in the eminent domain appeal wouldn't be held until mid-October?

Johnston wouldn't give a specific date: "We expect the bond sale to occur in 2009 and we hope to be able to sell bonds while the appeal is pending."

That could be dicey. I suspect that means that, should the questions and demeanor of the judges at the oral argument indicate they'd likely uphold the dismissal of the case, the bonds would then be marketed. I'd be surprised if the bonds would be sold before oral argument.

Another potential snag might come from the expected lawsuit against the Metropolitan Transportation Authority for its willingness to renegotiate the deal for the Vanderbilt Yard with Forest City Ratner. While such a lawsuit might not pose a legal roadblock to the bond sale, it could make investors pause--or add a risk premium to the sale.

Sale process

Before bonds can be issued, they must be authorized by the BALDC board and the bankers underwriting the deal must arrange for bond insurance and a rating for the bonds.

2 comments:

  1. Leaving out those three numbers is standard sports finance bait-and-switch, and its to the spokesman's credit that he clarified so quickly. The capitalized interest is required because the arena company will need to start servicing its debt right away during construction - before it starts making any money. So the arena company borrows the money needed to make these payments. The debt service reserve is designed to cope with any revenue shortfalls - like a late opening or some other kind of event that keeps the arena closed. So the company borrows another slug of money to sit there available for bondholders. The bond insurance I'm not so sure about. You can pay some of the premium up front, but mostly, like any other insured, you'll be paying month to month or quarter to quarter. But again, they will need to borrow enough to make bond insurance premiums until the stadium opens. Finally there is costs of issuance - basically lawyers', underwriters' and consultants' fees. That will be quite a large number too, depending on whether any of the litigation costs can be included in there. What I don't see anywhere is any indication that the FCR is going to get tax-exempt treatment for costs they were going to finance with taxable debt, so describing them as savings is probably not accurate. That said, providing a net financing amount number without building in financing costs is pretty misleading.

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  2. Fwiw, the clarification came only after I queried them, just after the Times article appeared. It took a longer to get a few more details, hence my delay in publishing until now.

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