DALLAS - Higher-than-expected interest rates on $294.3 million of auction-rate debt issued in 2006 by the Louisiana Stadium and Exposition District and lower-than-anticipated revenue from the district's 4% hotel tax have created a financial whiplash for the Louisiana Superdome in New Orleans.
The district issued the debt in March 2006 to provide $40 million for repairs to the stadium damaged by Hurricane Katrina in August 2005, refund the district's existing debt of approximately $200 million, and provide $25 million of working capital for the district until revenues reached pre-hurricane levels. Some $10.5 million of the proceeds from an uninsured tranche repaid a 2005 note representing a loan Merrill Lynch & Co. had made to the district.
Whit Kling, director of the State Bond Commission, said the district is currently paying 12% interest on its auction-rate debt. That's costing the district almost $2 million of additional interest a month, he said.
"The auctions have failed, so the interest rate on the debt was reset to the backstop of 12%," Kling said. "The district had been paying debt service of anywhere from $300,000 to $450,000 a month, and now the debt service payments have gone up by $1.8 million a month."
"But forget about the interest rate problems on the auction-rate debt," he said. "Regardless of those issues, the district is running an operational deficit. They estimate the deficit will be $121 million in fiscal 2009, and $65 million to $80 million a year over the next four years."
The bond proceeds included $25 million for the district to help pay operational expenses until hotel tax revenues were sufficient for its needs, Kling said.
"That money has now been spent, and the taxes are still not sufficient," he said.
Kling said the district's hotel tax in Orleans and Jefferson parishes is not bringing in enough money to pay operational costs, including debt service, and also make payments totaling millions of dollars a year to the New Orleans Saints of the National Football League and the New Orleans Hornets of the National Basketball Association.
The district has agreed to pay the Saints a total of $113.4 million in annual installments through the 2010 football season if the team continues to play its games in the Superdome. The district also agreed to pay the Hornets between $1.7 million and $5 million a year through 2012 to retain the team.
The deal included a stepped-coupon, fixed-payer swap designed to provide early debt-service relief. The stadium district wanted up-front relief so the deal was structured to begin with a low coupon on the swap. It was set to rise because revenues were expected to recover enough so that the district could sustain a higher level of debt service coverage.
The step coupon swap was expected to generate $33 million to $34 million for the district for fiscal 2007 through 2012. The savings generated by the swap would be used to help pay inducements to the teams. The agreement allows the teams to leave Louisiana if certain conditions aren't met.
In order for the deal to work, a 2.5% growth rate in all revenue streams, including hotel-motel taxes, must be achieved over the next 20 years, with collections being at pre-Katrina levels by 2009. However, the hotel tax revenues continue to lag.
Kling said he has had several meetings with district officials, and had submitted a list of potential solutions to the governor's office.
"If the district fails to make its payments, the state has to step in," he said. "I don't want to talk about the options we outlined, because it could affect the market in those securities. But every day that goes by without a solution costs the district another $60,000 in extra debt service."
"The only quick solution I know of is for the auction-rate market to return to normal overnight," Kling said. "But we all know that is not going to happen.
"That is a situation that has to be addressed. It is not a unique situation," Kling said. "It is affecting everyone with auction-rate bonds, but it comes on top of the district's existing problem with the insufficient revenues."
Timothy Coulon, chairman of the stadium district, said Tuesday afternoon that he could not comment on the situation. "The people involved in finding a solution are meeting this afternoon," he said. "I'm not trying to be unresponsive. I just can't say anything at this point."
The 2006 sale included $170 million of insured tax-exempt revenue and refunding bonds, $70 million of insured taxable/tax-exempt convertible revenue and refunding bonds to facilitate additional advance refunding opportunities, and $56 million of uninsured taxable revenue and refunding bonds.
All but the $56 million of taxable bonds were insured by Financial Guaranty Insurance Co.
Due to the complexity of the transaction and its exposure, the district paid a bond insurance premium of $13 million, which at the time state Treasurer John Kennedy called "unconscionable." Market observers said the steeper fee was realistic, given the battering the hurricane gave to the area's economy.
The district's credit was downgraded to Ba1 by Moody's Investors Service and to B by Standard & Poor's after the hurricane. Moody's bumped the rating up to a bare investment-grade level of Baa3 before the sale, but the district did not seek a rating from Standard & Poor's because it felt the agency would not have raised the bonds above junk status. Fitch Ratings did not provide a rating on the deal.
Merrill Lynch was lead underwriter on the issue. Co-managers included Morgan Keegan & Co., Loop Capital Markets LLC, Stephens Inc., and Dorsey & Co. Foley & Judell LLC was the bond counsel on the 2006 bonds. Financial adviser was Wright, Moore, Dupuis, Hutchinson LLC. Government Finance Associates was the swap adviser.