BRADENTON, Fla. — Memphis is exploring its legal options, including a lawsuit, against the National Basketball Association’s Memphis Grizzlies if the NBA’s lockout develops into a full-season loss.
The City Council voted to look at taking action this week because taxpayers could be on the hook for debt-service payments on bonds sold to build the FedExForum where the Grizzlies play, though a diverse revenue stream securing the bonds is first in line to pay back the debt.
The city’s attorney is expected to report back to the council on legal options in two weeks.
Residents were promised that taxes would not be raised to pay the FedExForum’s debt, City Council chairman Myron Lowery wrote in a letter Wednesday to Grizzlies owner Michael Heisley.
“When the City Council approved funding for the construction of the FedExForum over 11 years ago, we promised the citizens of Memphis that we would not raise property taxes to pay for the arena,” Lowery wrote.
“As you know, the debt service is structured so that funds are raised through a variety of sources, including the seat fee for the Grizzlies games,” he said. “Cancellation of NBA games jeopardizes our debt service payment.”
Memphis finance director Roland McElrath could not be reached Thursday for information about debt service payments the city could potentially make if other revenues securing the bonds fall short and reserves dry up.
In addition to a debt service shortfall, the city attorney said that the backup pledge applies to the replenishment of the debt service reserve, according to published reports.
The Memphis and Shelby County Sports Authority sold bonds in 2002 to build the arena. Some $208.75 million of bonds are outstanding, along with an associated $187.24 million swap with Goldman Sachs Capital Markets LP.
The Sports Authority’s bonds are rated A-plus by Fitch Ratings, Aa3 by Moody’s Investors Service and AA-minus by Standard & Poor’s.
The bonds are secured by seat-rental fees for all paid events, a sales-tax rebate, car-rental taxes, hotel taxes, and the city’s payment in lieu of taxes from the Memphis Light, Gas, and Water Division.
The NBA lockout began July 1 when the league’s collective bargaining agreement expired.
Since then the NBA has cancelled preseason games and the first two weeks of the regular season.
For the FedExForum that means that the Grizzlies will miss their eight preseason games this month, and they will miss the first eight games of the regular season, which was to begin Nov. 2.
Memphis is not the only community facing difficult decisions.
Though many arena bonds are backed by diverse revenue streams, they also have backup pledges from the issuers’ surrounding communities.
In a down economy, local governments already dealing with budget problems could now face additional pressure because of the NBA lockout.
Atlanta and Fulton County, Ga., also added general obligation guarantees to bonds issued to build Philips Arena, where the Atlanta Hawks play. Those bonds were sold by the Atlanta and Fulton County Recreation Authority.
On Monday, Moody’s warned that additional game cancellations beyond two weeks are possible.
The lockout is a credit negative for small-market cities that rely on revenue generated by NBA home games and for some arena bonds that depend on revenue from unused facilities, said analyst Valentina Clark.
Most Moody’s-rated arena bonds are secured by revenues from a diverse stream, she said. Those include the bond-financed AT&T Center in San Antonio, where the Spurs play, in Bexar County, Texas.
Last week, Fitch Ratings said it could cut bond ratings on the Los Angeles’ Staples Center and Denver’s Pepsi Center if the NBA fails to reach an agreement with players and cancels the season.