Regional News

Texas Sports Agency Flirting With Default

AUG 30, 2010 5:14pm ET
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DALLAS — The Harris County-Houston Sports Authority, the builder of three professional sports stadiums, could default on some of its $988 million of debt as early as March 2011, according to calculations by Moody's Investors Service.

The danger of default was detailed late last week when Moody's downgraded three underlying authority credit ratings to junk-bond levels.

The authority still retains investment-grade ratings from Standard & Poor's at BBB on senior lien debt. The bonds also remain insured by National Public Finance Guarantee Corp., formerly MBIA Insurance Corp., which is rated investment grade at Baa1 by Moody's and A by Standard & Poor's.

"National stands ready to make sure that investors get what is due to them," said spokesman Kevin Brown. "We'll be talking more to the Sports Authority in the future as things develop."

With no clear path for easing its debt crunch, the authority remains on Moody's watch list for further downgrades.

Citing accelerated debt payments on $115 million of 2001 junior-lien bonds, Moody's lowered the authority's senior-lien credit to Ba3 from Baa2.

The junior lien fell to B2 from Baa3 while the third lien dropped to B3 from Baa3.

The downgrade reflects not only the special circumstances of the Houston agency's debt structure, but also the stress on sports and tourism-related projects nationally due to falling hotel occupancy and car rental taxes and loss of credit facilities.

The Sports Authority's senior-lien debt and some junior-lien debt is backed by hotel and rental car tax revenue that suffered a nearly 12% decline in 2009 and continued to fall this year after seeing strong growth in 2006 and 2007.

Revenues at the end of 2009 were running at 1.8% times debt service for the senior-lien bonds and equal to debt service on the junior-lien debt, according to Moody's.

"Moody's believes the liquidity reserves are sufficient to cover the November 2010 payment, but their depletion may result in a payment default from pledged revenues as early as March of 2011," the report said.

The authority's debt-service schedule was thrown out of whack when the junior-lien bonds, originally insured by MBIA when the bond insurer had triple-A ratings, saw the insured rating fall below requirements under its contract for a standby bond purchase agreement with underwriter JPMorgan.

Required to buy the bonds back under the agreement, JPMorgan was allowed to demand that the authority pay back the money in five years instead of 23. Annual debt-service payments on the bonds ballooned to $24 million.

The accelerated payment schedule began in November. At the same time, the Sports Authority faces a $25 million fee to unravel a swap agreement with UBS AG. Overall debt service is expected to soar to $84 million next year from $62 million in 2009.

"The ratings remain on review for downgrade due to the expectation that liquidity will be severely pressured in the near term, as well as the uncertain outcome of a potential restructuring, the swap termination, and future revenue performance," Moody's warned.

In response to the downgrade, the Sports Authority assured Harris County voters that the rating would have no impact on their taxes. The bonds carry no backing from Houston or county property taxes or sales taxes.

"The lower ratings will have no effect on local property taxpayers, Houston's sports teams' ability to play in the stadiums, the city's ability to attract events to the facilities, or the eventual repayment of bondholders," J. Kent Friedman, chairman of the authority's board, said in a prepared statement.

However, the downgrade will have an impact on bondholders and the authority's ability to refinance its debt.

With bond insurance increasingly rare and costly, the authority would need a letter of credit or a new standby bond purchase agreement. So far, none has materialized to replace JPMorgan.

Before the downgrade, the agency's 2004 third-lien, zero-coupon revenue refinancing bonds maturing in 2031 carried yields to maturity of 7.53%, or 412 basis points above the Municipal Market Data index.

The Sports Authority was created to build two stadiums and an indoor arena for Houston's professional sports teams.

At $252 million, Minute Maid Park, formerly Enron Field, was built downtown for Major League Baseball's Houston Astros. Reliant Stadium, which, like Minute Maid, features a retractable roof, was built next to the Astrodome at a cost of $519 million. Toyota Arena, home of the National Basketball Association's Houston Rockets, is also downtown and cost $252 million.

Meanwhile, the Astrodome, the world's first domed stadium, remains a financial drain as it sits vacant next to Reliant.

The Astrodome, which is separately owned by the county, still has $32 million of outstanding debt for the last remodeling in the 1980s. The remaining debt is equal to the original cost of building in the 1960s.

In addition to $2.4 million in annual debt service on the Astrodome bonds, local taxes cover about $2 million annually in insurance and maintenance costs.

Other stadiums that still carried bond debt after they were abandoned or razed include Seattle's Kingdome, Olympic Stadium in Montreal, and Three Rivers Stadium in Pittsburgh.

Three Rivers still had $45 million in debt when it was demolished in 2001. King County, Wash., paid off the Kingdome five years after it was razed in 2000.

The Harris County-Houston Sports Authority is also not alone when it comes to downgrades in credit. In February, Standard & Poor's cut the rating on $695 million of debt for the New York Mets' new stadium to junk.

In Miami, some activists and elected officials were angered to learn that MLB's Florida Marlins made a $37.8 million profit after claiming that its future was at risk.

The team, which refused to share financial information with public officials, convinced Miami-Dade County to build a $642 million stadium with $500 million of taxpayer funds after flirting with moving to Las Vegas and San Antonio.

Calling the decision to build the new ballpark "horrible," Miami-Dade County Commissioner Carlos Gimenez told the Miami Herald that "the financing is even worse. And now you see they took us for a ride."

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