Tuesday, December 01, 2009

Tax-exempt bonds rated just above junk, down to $500 million; arena cost confirmed at more than $1 billion

In another crucial advance for the Brooklyn arena, the tax-exempt bonds for the planned Barclays Center--the cost of which is now estimated at $1.06 billion--have been rated investment-grade, though just above junk.

It should be enough to get the bonds sold to major institutional investors, though, as the Bond Buyer notes, bond insurance--which reassures investors but makes it more expensive for those paying back the bonds--remains in question. (The Times notes that bonds for the new Yankees and Mets stadiums got the same grade.)

Also, the amount has been reduced from $600-$650 million to $500 million, plus another $146 million in riskier "subordinated bonds," according to a report issued by Moody's Investors Service. (Those bonds are "likely to be sold to one of the project company's sponsors," reports Project Finance magazine, which says the split is indicative of the difficulty in getting an investment-grade rating.)

The Moody's report concerned the proposed issuance of $500 million of PILOT [payments in lieu of taxes] Revenue Bonds, Series 2009 (Barclays Center Project) by the Brooklyn Arena Local Development Corporation. The bonds must be sold by the end of the year to qualify for a tax exemption, which would save the developer well over $100 million.

What's next?

Neil deMause writes:
The next question is what this means for the bonds' interest rate, and the team's bottom line — each added percentage point of new interest will cost the Nets owners $5 million a year — something that could be answered when the Empire State Development Corporation makes its initial bond offering, as soon as tomorrow.
The Observer reports that Standard and Poor's also rates the bonds one step above junk.

Bond primer

Moody's primer: Baa Obligations rated Baa are subject to moderate credit risk. They are considered medium-grade and as such may possess certain speculative characteristics...the modifier 3 indicates a ranking in the lower end of that generic rating category.

A key giveaway and a key to the rating

One thing clear from the report: if the state hadn't given away naming rights to developer Forest City Ratner, the arena would not be built.

Also, key to the credit rating is an on-time construction schedule--not the safest bet, given the history of Atlantic Yards

Reasons pro/con


Moody's said there were reasons to be optimistic as well as wary, citing "the security afforded by the PILOT bond structure, the strength of New York City as a media market, the non-relocation agreement, the Operating Support Agreement, the significant amount of existing contracted sponsorship support, the large equity component of the financing structure and the solid coverages that support debt service."

On the other hand, Moody's also cited the team's weak financial condition, construction risks (which it said were largely mitigated by the contract), and "the uncertain demand forecasts for premium seating, sponsorships, ticket sales and other sources of revenue."

Financing: just $500 million plus $146 million

Interestingly, while last week the Brooklyn Arena Local Development Corporation (BALDC) contemplated $600 million to $650 million in tax-exempt bonds, plus $150 million in taxable bonds, now the numbers are $500 million in tax-exempt PILOT bonds and $146 million in taxable subordinated corporate bonds.

Apparently, there's a larger amount of equity: 40% of the project.

Moody's said the project "has a substantial equity component of approximately $424.4 million," including $131 million from New York City--apparently a reference to land purchases and infrastructure support (but I haven't gotten that confirmed)-- as well as $293.4 million from Forest City Enterprises, affiliates, and new team/arena investor Mikhail Prokhorov.

Barclays deal key

Moody's cited the naming rights agreement with Barclays Capital as generating "substantial annual revenues" but didn't specify a number.

It had been reported at $20 million a year for 20 years but may well have been renegotiated after the project was delayed and marquee architect Frank Gehry left the project.

Once construction begins, Moody's said, more sponsors are expected.

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