Tuesday, December 15, 2009

"Junkyard Bonds" get tossed in garbage truck, but are state officials listening? What about the "loophole" allowing the BALDC to avoid scrutiny?

Well, it was a very clever idea for a demonstration: dump Forest City Ratner's "Junkyard Bonds"--illustrated with images of developer Bruce Ratner and Governor David Paterson, plus the corporate logos of bond ratings agencies and the underwriter--into a garbage truck to illustrate their questionable quality and the many doubts about the procedure behind them. Wall Streeters walked by with bemusement as a few dozen protesters gathered, followed by cameras.

(Photo and set by Adrian Kinloch)

But is anyone in charge listening? Develop Don't Destroy Brooklyn (DDDB), which organized the demonstration (complete with garbage truck from Crown Container, a business fighting eminent domain in Willets Point) held outside at noon yesterday outside ratings agency Standard & Poor's in Lower Manhattan on Friday sent a letter to Attorney General Andrew Cuomo and State Comptroller Thomas DiNapoli.

The letter asked that they investigate both the bond structure and "bad faith acts committed by the Empire State Development Corporation (ESDC) in its advocacy for Forest City Ratner's Atlantic Yards project and Columbia University's expansion, particularly in pursuit of eminent domain for these two entities."

Some of the questions are more serious than others, as I suggest below. Probably the most important one concerns the ESDC's creation of the Brooklyn Arena Local Development Corporation (BALDC), which, however legal, skirts the review of the Public Authorities Control Board (PACB) and Comptroller, because only subsidiaries which have the same members or directors as the ESDC or Job Development Authority are included.

Given that BALDC has different directors than the JDA and is thus not subject to PACB review, "this is an absurd and incongruous result," wrote DDDB attorney Jeff Baker, citing a "loophole... to allow $500 million of bond financing to avoid third-party scrutiny and the protections established by the legislature when the PACB was established in 1976.

(Photo and set by Tracy Collins)

As underwriter Goldman Sachs proceeds to market the bonds--the tax-exempt bonds are actually rated one notch above junk, while the taxable bonds are rated junk-- the two state officials have a short window in which to respond, much less take action.

And Paterson, despite a public pledge on December 1 to conduct "an objective and fair hearing" into Atlantic Yards, has yet to make a further public statement, while his ESDC persists in both the Atlantic Yards and Columbia projects.



(Above, the contrast between the garbage truck and the tower next to it. Videography by Jonathan Barkey.)

Who was there

While City Council Member Letitia James, a staunch opponent of the project, participated in the protest, no other elected officials showed up. Nor has Assemblyman Richard Brodsky, a persistent after-the-fact critic of the New York Yankee stadium deal and the leader of the legislature's just-concluded epic effort to reform state authorities (like those in charge of AY and its bonds), raised his voice.

The Daily News sent a reporter--the only story in today's paper concerns not the protest but a brief on the effort to reopen the eminent domain case-- as did News12 and a couple of radio stations (WBGO, WCBS). But neither the major TV stations nor the Times showed up.

(Photo by Tracy Collins)

Also participating in the protest were representatives of Good Jobs New York and the groups fighting the Columbia expansion.

Fiscal laxity, fiscal crisis

But the questions shouldn't be dismissed. Even if subsidies have already been issued, the state commitment of resources to Atlantic Yards contrasts with the current fiscal crisis. The Metropolitan Transportation Authority's willingness to revise a deal with Forest City Ratner and get less cash--despite its leverage--also contrasts with the imminent "doomsday budget" facing the agency.

(Photo by Tracy Collins)

And, while the $500 million in tax-exempt bonds authorized by the Brooklyn Arena Local Development Corporation (BALDC) are supposed to be non-recourse, with no risk to the state, state officials have refused to rule out the possibility that the state would bail out the bondholders should revenues not meet expectations.

DDDB suggested that the same criticisms raised of public authorities apply to the BALDC, which is operating "in the dark" and "without any oversight":
BALDC, comprised of six anonymous people, is poised to sell $500 million in triple tax-exempt, bonds for Forest City Ratner’s (FCR) Nets basketball arena—the most expensive arena in the world. The bonds would be paid for with diverted tax money—Payments In Lieu of Taxes (PILOTS). As with previous actions by the Empire State Development Corporation (ESDC), there are simply too many unanswered questions, putting the State at high risk.
Below, James--who asks what's happened to the review Paterson promised, among other questions--and DDDB's Scott Turner and Daniel Goldstein speak at a press conference. Videography by Jonathan Barkey.



DDDB posed a list of questions, which I'll take a preliminary shot at evaluating, in italics.

Questions for the ESDC/JDA and BALDC

• Why are bonds being issued for an arena that NYC’s Independent Budget Office said will be a $220 million net loss for NYC?
Because elected officials want to cut the ribbon on an arena. Because the ESDC doesn't believe the IBO--though the ESDC's arguments aren't too convincing. Because of inertia.

• How much of a net loss will the rest of the Atlantic Yards (AY) project be now that it has been converted to a multi-decade option on a no-bid monopoly for Forest City Ratner? What happens if it is never built?
If it's never built, the developer would have to pay back the subsidies--or go to court to resist doing so. No one has ever done a full and rigorous cost-benefit analysis of the project as a whole built over ten years or over a more likely lengthier completion period: 15, 20, 25, or 30 years.

(Photo by Tracy Collins)

• FCR just defaulted & renegotiated a loan for land in the AY site, so how will they raise the equity they need for the arena?
That's not necessarily a sign of cash-flow difficulties; it could simply be some very tough bargaining.

Below, the bonds go into the garbage truck. Videography by Jonathan Barkey.



Questions for Rating Agencies (Moody’s and S&P)

• Why can’t Moody’s answer why they envision 225 annual arena events when Ratner projects 200 events?
Because they apparently were sloppy. (Ratner said at least 200 events.) This does remind us of the many questions raised about ratings agencies, private companies that play an important public role. But ticket revenues are only a portion of the revenue stream expected, so the number of events may not be crucial.

• Basketball hosts 41 games without playoffs. How will the arena meet 220 events? Where is the independent analysis backing Ratner’s projections?
Well, S&P, where the demonstration was held, actually considers 220 events "aggressive"--but still rated the bonds investment-grade, again based on other factors.

• Why does the Preliminary Official Statement (POS) for the bonds claim that all that is necessary for professional hockey in the arena is ice-making equipment, when it appears the arena isn’t large enough to accommodate an NHL hockey rink?
The POS consists of several components, including a market analysis commissioned by Forest City Ratner. That market analysis both suggested the possibility of NHL hockey and omitted the issue of arena capacity. But the POS also says that minor league hockey--not NHL hockey--is expected. So the POS is contradictory and anyone reading it should look at it carefully.

(Photo by Adrian Kinloch)

• How does the team with the worst record in the NBA, a pitiful NJ fan base, no Brooklyn fan base and an untested facility get the same exact bond rating as the leading sports franchise in the world—the NY Yankees—particularly when recent experience has shown that even a great team like the Yankees has been unable to sell their luxury seats?
The marketing study does suggest a demand for--well, an interest in--luxury suites as well as a market for events like concerts, given the relative lack of seats in New York City compared to other cities. But it's a good question: if the Nets are shedding fans; can they really swing the same demand for a luxury product if they move to Brooklyn?

• 12/10/2009 was the sixth anniversary since the project was announced with an arena completion date of 2006: How is it reasonable to say in the Preliminary Official Statement that the arena will be completed by June 2012?
Well, there are even incentives to finish sooner. But it's curious to not see any acknowledgment of the challenge of building on such a tight site--unlike the recent stadium construction in Queens and the Bronx--or the possibility that continued litigation could slow the project, if not stop it.

• Why is the POS litigation risk assessment—MTA’s violation of the Public Authorities Accountability Act, two lawsuits against the ESDC’s September approvals—reliant only on FCR, ESDC & MTA, rather than independent legal opinion?
I don't know what the standard practice is, but the opinion is aimed at bond buyers. The state and city have committed resources, so it would make sense for someone--Cuomo, DiNapoli, Brodsky--to want another opinion.

• Why doesn’t the POS include the renewed eminent domain challenge to AY after the ruling against Columbia University?
Because the POS was issued before the challenge was renewed. Shouldn't Goldman Sachs be giving an update to any bond buyer?

(Photo by Adrian Kinloch)

• What if Mikhail Prokhorov is not approved by the NBA, or walks away from his Letter of Intent – How does that affect the viability of the Project, and thus, the ability to repay the bond buyers?
That's a good question.

• Why didn’t Fitch rate the arena bond?
Because they didn't need a third rating.

Below, a News12 reporter produces a story on the protest.



Questions for Public Officials (particularly Paterson, Cuomo, DiNapoli):
• Why isn’t this $500 million triple tax-exempt bond being reviewed and considered by the Public Authorities Control Board (PACB) and State Comptroller? Why has the BALDC been created under the JDA, rather than as a subsidiary of the ESDC, the lead agency on the Atlantic Yards Project—particularly when PACB approval was necessary in 2006 for a substantially less risky and different transaction?
>> 20% smaller arena that costs 70% more than approved in December 2006 ($637 million then, $1.1 billion now).
>> Less functional arena (appears to be unsuitable for hockey).
>> Proposed new team owner and new partial owner of the arena—Mikhail Prokhorov.
ESDC officials should have made sure this all was kosher. But even if it is, the public officials should tell us, and tell us--as with other activities regarding public authorities--whether it's good policy, given the questions raised by Baker.

(Photo by Adrian Kinloch)

• When will Comptroller DiNapoli and Attorney General Cuomo investigate this financing structure and its evolution?
That's a big pending question.

• The bonds reportedly will not be insured. If the bonds default, won’t the state cover them to avoid a bad credit rating?
Ditto.

• Why are PILOTs being misused and the land value being inflated? What is the tax assessment & what is the PILOT amount?
PILOTs are being used in the same way they were for the Yankees and Mets stadiums--a dubious but not illegal practice. The land value seems inflated (and thus worthy of an oversight hearing), but, interestingly enough, after the IBO warned that land assessments would lead to PILOTs insufficient to support a $678 million tax-exempt bond, the bond was reduced to $500 million.

• Why are bonds being issued when ESDC board didn’t approve the new smaller arena and did not do a review or background check of the new proposed Nets owner Russian investor Mikhail Prokhorov?
Good question. They didn't approve a smaller arena. And Prokhorov's purchase wasn't announced until after the ESDC board acted.

(Photo by Tracy Collins)

• Why has Gov. Paterson told the Legislature to make cuts in healthcare & education but he won’t cut this pork that he controls?
Because the (initial) spending on Atlantic Yards has already been committed.

Below, DDDB's Goldstein answers press questions. Videography by Norman Oder.



"We believe these bonds should have been rated junk," Goldstein said, noting that the most recent bonds for Yankee Stadium got the same rating, and the Yankees are a more solid franchise. "There's a big question as to whether these bonds can be paid back."

"We hope to hear from Cuomo," Goldstein added, "but he only got this letter we sent on Friday." He said there was no legal action contemplated regarding the bonds. Keep watching the video to see protesters chanting, "Ratner's bonds are junk bonds."

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