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DEAL IN FOCUS

Nashville Warms Up $633 Million

BRADENTON, Fla. — The Metropolitan Government of Nashville and Davidson County Convention Center Authority plans to move forward with a $633.3 million deal next week to finance the construction of a new facility called the Music City Center.

Most of the transaction will be taxable Build America Bonds, which could save Nashville's consolidated government as much as $4 million to $5 million annually over a pure tax-exempt offering, said city finance director, Richard Riebeling. But the transaction also includes the typical bifurcated structure utilizing tax-exempt financing in early maturities.

Bond proceeds are being used to build a 1.2-million-square-foot convention facility in downtown Nashville for which construction began last month. It is expected to open in early 2013 and will replace an existing 465,000-square-foot convention center, enabling the city to capture a bigger share of the market.

The long-planned Music City Center and a 1,800-space parking garage are being built for a guaranteed maximum price of $415 million.

Bond proceeds are also being used for land acquisition and other expenses related to the project, such as design and engineering, as well as contingency funding and issuance costs. The project currently does not include a headquarters hotel.

Two days of pricing are planned for early next week with a retail order period followed by institutional sales.

The offering is expected to be sold as $11.7 million of Series 2010A-1 tax-exempt revenue bonds, $191.1 million of Series 2010A-2 taxable revenue BABs, $16.8 million of Series 2010B-1 subordinate tax exempt revenue bonds, and $413.8 million of Series 2010B-2 subordinate taxable revenue BABs.

The tax-exempts are expected to be serial bonds with maturities between 2015 and 2018, while the BABs are expected to include term bonds with final maturities in 2043. Some or all capitalized interest will be used during the three-year construction period.

All of the bonds are secured by six different tourism-tax revenue streams, some of which are new. However, the subordinate Series B bonds are also backed up by Nashville's general fund, a pledge that excludes property tax revenue.

The authority is a new credit and the deal is unique because of the variety of tourism taxes, as well as the non-tax general fund backup pledge, according to Riebeling, who was in New York this week explaining the transaction to prospective investors.

"We're optimistic we will have a successful sale," he said, adding that the city has been "very conservative" in structuring the deal.

"We sized the tax-exempt Series A bonds to have 1.75 times coverage based on [collections] in 2009, which was a down year in the tourist industry," Riebeling said. "The subordinate bonds get what revenue is left and also the non-tax pledge of the general fund so that in any given year they'll probably have 3.5 to four times coverage."

"We remain confident that the non-tax revenue pledged will not be drawn on in the future to make debt-service payments," he added.

The bonds were assigned an A-plus and a stable outlook by Fitch Ratings, which also downgraded Nashville's $1.6 billion of outstanding general obligation bonds to AA-minus from AA to reflect "the potential additional fiscal strains of the debt-financed convention center upon an already-pressured general fund beset by slim reserve levels, significant long-term liabilities, and constrained revenue-raising ability."

However, Fitch plans to upgrade the tourist tax bonds to AA-minus and the city's GO rating back to AA when the agency recalibrates its ratings on April 30.

Moody's Investors Service assigned ratings of A2, with no outlook assigned, to Series 2010A-1 and 2010A-2, and a Aa3 with a negative outlook to Series 2010B-1 and 2010B-2, attributing the higher rating to Nashville's non-tax backup pledge.

However, Moody's also affirmed the Aa2 rating on Nashville's GOs and assigned a negative outlook, reflecting the city's reduced financial flexibility and potential draws from the non-tax revenue pledge.

Standard & Poor's assigned A ratings and stable outlooks to all of the convention center bonds, and said the rating on the Series B bonds is based on Nashville's backup pledge. The agency rates the city's GOs AA with a stable outlook.

Two rating reports about the deal noted that the project does not include an adjacent or headquarters hotel that would contribute to the convention center's success and potentially increase revenue collections.

A hotel was initially planned but postponed due to the economy. Riebeling said the city hopes to have a plan in place for building a hotel before year's end, but it's not expected to be publicly financed. He also said additional property must be acquired by the city or a private developer to accommodate a hotel.

The convention center has been long planned, and the City Council's 29-to-9 vote approving the financing earlier this year did not come without questions, even from proponents concerned about the uncertain economy and the potential impact on the general fund.

"I think Nashville's convention center deal is just another example of how elected officials are induced to approve a financing with promises that the public's guarantees will never be necessary, that the project will pay for itself," said council member Emily Evans, who used to work on the other side of the dais in the municipal bond business. "Yet once the votes are counted, the city's assumption of risk becomes a major sales point for investors, and protecting the taxpayer is forgotten."

Evans said she is concerned that if the project "gets even a little off the mark," it will squeeze the city's budget.

Goldman, Sachs & Co. is the book-runner for next week's offering. Other members of the syndicate are Bank of America Merrill Lynch, Fifth Third Securities Inc., Harvestons Securities Inc., Mesirow Financial Inc., Morgan Keegan & Co., Morgan Stanley, and Stephens Inc.

First Southwest Co. is financial adviser. Bass, Berry & Sims PLC is bond counsel. Baker, Donelson, Bearman, Caldwell & Berkowitz PC is underwriters' counsel.

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