Friday, February 05, 2010

In a second effort to market taxable junk bonds for the arena, they have an interest rate--and smaller quantities are on the block

So, the Atlantic Yards junk bonds were back on the market this week, and the Brooklyn Arena Holding Company (BAHC) may be selling them soon, near or at a hefty 11% interest rate.

First try

In December we learned that Standard & Poor's (S&P) rated the $146.8 million in taxable arena bonds as B, which is "very speculative." S&P assigned "a recovery rating of '6' to this debt, indicating our expectation of negligible (0%-10%) recovery in the event of a payment default."

Project Finance magazine suggested, apparently without foundation, was that the taxable bonds might be bought by Mikhail Prokhorov, slated to own 80% of the Nets and 45% of the arena company.

That's not how it worked out. Ten days later, on December 21, Standard & Poor's withdrew its preliminary ratings, stating, "The notes were not sold in December 2009. The issuer's [sic] intends to market them in the new year."

Back on the market, same risks

This week a smaller sum--$106 million in bonds--were for sale, according to a February 2 ratings report issued by S&P. It's a good time to market corporate bonds, according to the Wall Street Journal, before interest rates sky.

That said, the bonds still have a preliminary 'B' rating, and the recovery rating of '6', all of which means it's still a speculative investment.

Interest rate means sale's close?

What's new is a statement of an 11% interest rate--a sign, one source tells me, that the bonds are close to a sale.

There's been no announcement of a sale, however.

Has construction begun?

Also new in the ratings report is the questionable statement that "Construction has commenced [sic] is expected to be completed by May 1, 2012."

(The version in December, by contrast, stated, "Site preparation work for the arena is underway and construction is expected to be completed by May 1, 2012.")

However, there's been no official announcement that construction has commenced, and the Empire State Development Corporation has yet to take title to the property needed for the arena block.

Perhaps "commenced" means that a significant amount of infrastructure work has begun. But we really don't know what it means.

Given that the ratings haven't changed, there's apparently no additional concern about the risk posed by pending litigation. The report notes that "the project has successfully overcome" multiple legal challenges.

Risks and strengths

The report cites several risks, including uncertain demand for the arena, current low attendance, and potential reduction in the annual PILOT (payment in lieu of taxes) payments.

Still, S&P cites several strengths, including a plan to "secure a high level of contractually obligated income," a nonrelocation agreement, and no capacity for the Brooklyn Arena Holding Company to issue additional debt.

As with its report in December on the tax-exempt bonds, S&P considers the projection of 220 annual arena events "to be aggressive."

Stable outlook

The report concludes that the stable outlook "reflects our expectation that construction will likely be completed as scheduled and within budget and that the arena will perform in line with our base case assumptions."

That could change--a rating upgrade might happen after the arena opens and/or operations work well, while a rating downgrade could be caused by significant cost overruns or construction delays, or a poor arena performance.

Financing gap remains


These bonds would be on top of the $511 million in tax-exempt bonds sold. But there's still a gap between $106 million and $146.8 million. And even that latter sum would be only part of the $324.8 million financing gap identified on bond documents.

Could Prokhorov make up the difference? Surely he has the money. That doesn't necessarily mean he'll spend it. Remember, he asserted in October that his investment was no money down.

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