Deal in Focus

Cuyahoga Sets Medical Mart Deal

CHICAGO — After years of planning and local front-page headlines, Cuyahoga County, Ohio, will hit the market next week with $346 million of tax-exempt and taxable debt that will tap two federal stimulus bond programs to help finance a new convention center and medical supply mart in downtown ­Cleveland.

The deal is set for a Dec. 1 pricing. It is the county’s largest bond sale in at least 10 years and marks the first and only financing planned for the new facility.

The medical mart — the first of its kind to open, though a similar mart is proposed in Nashville — is a year-round medical supply showroom. It is part of an effort to attract medical conventions and health care businesses to Cleveland, home of the prestigious Cleveland Clinic.

The finance team is hoping to distinguish the deal in a supply-heavy market next week by offering sizeable early maturities, ratings which are one notch off the county’s high double-A rated credit, and a pair of new tax increases that support the project.

The bonds are backed by the county’s nontax revenue, which provides about 2.2 times coverage of debt service, analysts said.

The transaction includes $20 million of federally taxable recovery zone economic development revenue bonds that feature a 45% direct-pay federal interest subsidy.

Proceeds from the series will be used to finance public infrastructure improvements at the development site. The finance team estimates the county will save $20 million over the life of the bonds due to the federal subsidy. 

A second series consists of $106.4 million of tax-exempt recovery zone facility economic development revenue bonds. The size of this series may increase by next week if Ohio allows the county to tap part of the state’s unused RZFB allocation.

The remaining $220.2 million of debt is made up of taxable economic development revenue bonds.

The stimulus bonds feature a final 2027 maturity and the economic development bonds mature in 2023.

The 17-year life of the debt reflects the 17-year life of a 0.25% sales tax increase passed in 2007 that is the main revenue stream backing the project.

The taxable structure on the third series is required because the project is considered private use, since it will be run by the Chicago-based development company that operates the Merchandise Mart in Chicago.

Stifel, Nicolaus & Co. is the senior manager. Fifth Third Securities Inc., Keybanc Capital Markets Inc., Loop Capital Markets LLC, and Wells Fargo Securities round out the underwriting team. Public Financial Management Inc. is financial adviser, and Squire, Sanders & Dempsey LLP is bond counsel.

Moody’s Investors Service rates the debt Aa2 and Standard & Poor’s rates it AA.

Cuyahoga will demolish Cleveland’s existing, aging underground convention center — which it just bought from the city for $20 million — and build a new one, which will also be underground and topped by an open-air landscaped mall. The county spent another $18.5 million to purchase other pieces of privately owned property surrounding the site.

The new medical mart building will consist of showrooms and meeting rooms and serve as an entrance to the convention center. MMPI Inc., the developer, has said the building could pull in as many as 50 new health care-related conventions a year.

In a complicated arrangement, the county will lease the project from the developer, and then sublease it to the developer for operation.

The county will pay $40 million annually to MMPI from its nontax revenue for “rent.” MMPI will pay the county about $36 million annually to cover debt-service payments. Those payments will be considered nontax revenues.

The county will be free to renegotiate an agreement with MMPI, take over operation of the facility, or bring in a new operator in 17 years, when a sales tax increase dedicated to the project is set to expire.

After years of tough negotiations and crafting complex agreements with MMPI, the city, and other parties, the bond sale seems to be the easy part, said Matt Rubino, the county’s interim budget director, who has spent years working on the project.

“The bond sale is looking to be really straightforward, and our only concern is the glut of supply,” Rubino said, referring to a crowded year-end slate of municipal bond offerings that has been testing the market.

Cuyahoga needs to sell the stimulus bonds before the expiration of the program at the end of the year and wants to get financing for the project in place by mid-December. It will enter a market brimming with supply, mostly taxable Build America Bond offerings.

Officials hope to distinguish the county’s deal by touting the bonds’ relatively early maturities compared to most taxable debt, as well as the county’s double-A credit, and the revenue streams backing the debt.

“Almost all of the taxable bonds in this particular transaction are private-use related bonds, not related to a federal subsidy payment, and because of that most of our large maturities of taxable bonds are early in the amortization schedule,” said Tim Offermatt, senior vice president at Stifel Nicolaus. “We think that this is different from a lot of the other back-end-loaded taxable schedules in the market, and we are hoping that the somewhat different nature of this structure will interest the investor community.”

The county is hoping to achieve a true interest cost of 4.5%, Offermatt said.

In August, the county priced a similar bond issue, taxable economic development brownfield bonds secured by nontax revenue. Bonds maturing in 2025 saw a yield of 5.284%.

The bonds are backed by nontax revenue, but the sales tax increase is key to the project.

Cuyahoga in late 2007 raised its sales tax to 1.25% from 1% and voted to set aside the additional revenue, estimated at $40 million annually, for the project.

Last week, the county implemented a 1% hotel tax increase that pushes the county’s overall hotel rate to 4%.

Together the two revenue streams are expected to generate about $43 million annually, Rubino said.

Revenue from the tax increases will be used to free up nontax revenue, he said. The county has pledged to appropriate annually nontax revenues sufficient to cover debt-service payments in the coming year. Nontax revenue consists mostly of fees, charges for service, investment income, and grants.

The bond offering will more than triple the amount of the county’s outstanding parity debt after next week’s sale, pushing it to $465 million from $118 million, according to Moody’s.

Despite the increase, coverage levels of maximum annual debt service provided by nontax revenue are still expected to be “adequate” at 2.2 times, Moody’s said.

Rubino said the project’s budget assumptions are conservative, in part because they do not assume any growth in tax revenue over the life of the debt. The county has also set up a stabilization reserve fund with at least $15 million set aside for the project.

“That will help us with any downturn periods over the next 17 years, which I’m sure there will be,” he said. “But I think there’s also a pretty good chance that there will be growth in the sales tax as well.”

The stabilization fund and other protections that the county has assembled could prove key to the county’s future fiscal health, said Moody’s analyst Henrietta Chang.

“Given the scope of the project, and the risk of project overruns, the protections and contingencies the county has put in place will be critical to its ability to manage its general operating budget,” Chang wrote in a report on the borrowing.

Cuyahoga has obtained a cap on construction costs for the project and any overruns will be paid by MMPI. The developer will also cover all capital improvements over the next 17 years, Offermatt said.

County officials are hoping the convention center and medical mart will help revive Cleveland’s downtown and attract new businesses to the area. The project is scheduled for completion in 2013, the same year that a new $600 million casino and a $300 million office-and-hotel development are scheduled to open ­downtown.

“It will be nice to have a vibrant complex for conventions, but even better will be to lure new businesses here,” Rubino said. “That’s what the future is supposed to be for the center.”



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