Wednesday, August 10, 2016

Bloomberg: refinancing Barclays Center bonds will save Prokhorov $6M a year initially (but where's role of NY State?)

So, New York State still hasn't issued information about the Barclays Center bond refinancing that an obscure state entity approved on Monday, but Bloomberg--apparently from investment sources--added detail (and some lingering questions) in an article yesterday headlined Barclays Center Owner Prokhorov to Refinance Arena’s Debt:
Mikhail Prokhorov, the Russian-born billionaire owner of the Brooklyn Nets and the Barclays Center, is taking advantage of rock-bottom interest rates in the U.S. municipal bond market to refinance about $480 million of debt issued in 2009.
The bonds, which are backed by payments in lieu of taxes[ PILOTs] [were] rated BBB- by S&P Global Ratings Inc., and Baa3 by Moody’s Investors Service, the lowest investment grade. BBB rated revenue bonds maturing in 30 years yield 3.42 percent,... [The arena] will generate operating profits of $46 million before paying debt service in 2016-2017... Refinancing the 2009 bonds may reduce debt payments by $6 million annually  
(Emphases added)

These are tax-exempt bonds issued by the Brooklyn Arena Local Development Corporation (BALDC), a "dummy not-for-profit." Prokhorov doesn't own the Barclays Center; he owns the operating company. The state owns the arena, for the purposes of tax-exempt status, and the PILOTs pay for construction.

So they're not general obligation municipal bonds repaid from general funds, or revenue bonds died to specific taxes; rather, the municipality--or in this case, entity--is "a conduit issuer of bonds, [so] a third party covers interest and principal payments," as noted by Investopedia.

In fact, the government role goes unmentioned, nor the taxable bonds. I'll offer more detail when I see the backing documents.

Actually, the savings is only $6 million for the first decade. According to S&P:
The proposed refunding results in substantial debt service savings of about $3.4 million, on average, over the debt term. However savings are front-loaded, averaging about $6.6 million annually within the first 10 years of the debt term followed by $1.6 million in average annual savings through 2044.
The ratings agency and the savings

It's interesting that the bonds again get that lowest investment-grade rating, though, as far as I can tell, the projected profits before debt service are far lower than in the 2009 offering statement. Then again, the ratings agency are paid by the issuer.

The key is that Prokhorov will save about $6 million a year. Yet there was no consideration from New York State to request additional fees from arena operators.

What about the Islanders?

A consulting report in the offering statement acknowledges the possibility that Islanders could leave after five year, but "arena management could leverage the Advisory Board, its Los Angeles-based office, and other existing relationships to fill a portion of those [44] dates with third party events."

Sure, but how big a portion?

More obfuscation

The document below appeared yesterday on the website of Electronic Municipal Market Access (EMMA), a service of the Municipal Securities Rulemaking Board, which posts required documents related to various bonds.

Note the number of documents, including Monthly Engineer Reports, Quarterly Financial Information, and Annual Financial Information, that were not filed or filed late.

Also note that ArenaCo, aka Brooklyn Events Center (formerly majority owned by Forest City Ratner, now by Prokhorov), "also failed to timely file notices of these failures."

What was obscured? I'll take a closer look. But the dereliction of duty is pretty glaring.

Perhaps they had to get all the documents filed to sell the next round of arena bonds. But shouldn't it be a red flag for new investors?

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