DALLAS – On the heels of a ratings downgrade triggered by its financial commitment to the National Hockey League’s Phoenix Coyotes, Glendale, Ariz., is restructuring the debt it has taken on for professional sports facilities with $230 million of taxable and tax-exempt revenue bonds.
The deal, expected to price Thursday through negotiation with Wells Fargo Securities and Robert W. Baird & Co., includes $39.5 million of senior-lien Series B, $173.6 million of subordinate-lien Series C and $16.9 million of taxable subordinate Series D. All three series are backed by the city’s excise tax and issued in the name of the Glendale Municipal Property Corp.
Proceeds of the Series 2012B bonds will refund debt for the Jobing.com Arena, built by Glendale for the Coyotes at a construction cost of $220 million in 2003. The arena investment was part of the city’s effort to make itself a major venue for professional sports.
Proceeds of the Series 2012C and 2012D bonds are expected to refund all of the city’s outstanding third-lien general excise debt for the Camelback Ranch baseball spring training facility, used by the Los Angeles Dodgers and Chicago White Sox.
The issues are structured to provide budget relief by reducing near-term debt service requirements, analysts said.
Planned in Arizona’s boom years before the 2008 financial collapse as a way to expand the city’s economy, the hockey arena has become a drain on Glendale’s finances, with the city choosing to reimburse the NHL for $50 million worth of losses over the past two years. Adding to the city’s woes is the NHL’s lockout of its players, and resulting cancellation of all games so far this year beginning with the season opener Oct. 11. Through this month, 422 regular season games have been lost. Since moving to Glendale from downtown Phoenix, the Coyotes have reported some of the lowest attendance figures in the NHL.
The team is now owned by the NHL after it went bankrupt in 2009; it’s now on the verge of a sale to a group called Arizona Hockey Arena Partners to keep the Coyotes playing at the arena. Former San Jose Sharks NHL hockey executive Greg Jamison is frontman for the otherwise unidentified buyers.
Moody’s Investors Service downgraded the city’s general obligation bond rating two notches to A2 from Aa3 Nov. 30, and maintained its negative outlook.
Moody’s also downgraded to A2 from A1 the rating on the city’s Series B senior lien general excise tax bonds. Bonds in the subordinate-lien category were downgraded to A3 from A2.
The downgrade reflects the city’s “high debt burden that includes significant leveraging of excise taxes to support sports facilities with revenues that would otherwise be available for general operations.” The ratings affect $1 billion of total debt.
To support its debt, Glendale recently increased its sales tax. That move was challenged unsuccessfully in a ballot initiative Nov. 6, leaving the tax increase intact. About 66% of voters opposed overturning the city council’s decision to increase the rate temporarily.
Standard & Poor’s cited the tax hike as its basis for revising its outlook to stable from negative on Glendale Municipal Property Corp.’s senior-lien rating of AA-plus.
At the same time, S&P lowered its rating to AA from AA-plus on the MPC’s second-lien certificates of participation.
“We have revised our outlook due to the city’s increase of its local sales tax, which will significantly increase coverage,” said S&P analyst Alda Mostofi. “Despite the city’s increase of its local sales tax, which will significantly increase revenues available for debt service, the city is refunding its third lien excise tax revenue bonds through its second lien, so coverage on the second lien excise tax revenue bonds will be significantly diluted.”
The Moody’s downgrade was the city’s second in less than a year. In January, Moody’s assigned Glendale a negative outlook and downgraded ratings on some debt.
Glendale owes $152 million on the hockey arena it opened at the urging of then-owner Steve Ellman in 2003. To increase the appeal to the city, Ellman promised to develop a retail area known as Westgate City Center adjoining the arena. Ellman later sold the team to partner Jerry Moyes, who sent the team into bankruptcy in 2009 in the wake of the collapse of financial and housing markets. Westgate City Center remains open, though it has fallen into foreclosure.
Glendale also owes $200 million on Camelback Ranch, the city’s spring-training ballpark. Total debt issued in the name of Glendale MPC was $458.9 million as of Nov. 1, according to the preliminary official statement.
The city took on much less risk in approving the $455 million University of Phoenix Stadium, which opened in August 2006 adjacent to the hockey arena.
It’s home to the Arizona Cardinals of the National Football League. The stadium, a relative bargain compared to others recently completed in NFL cities, was financed primarily with bonds from the Arizona Sports Tourism Authority, a state agency backed by its own sales tax.
Glendale invested in roadwork and infrastructure around the stadium but was not on the hook for the bulk of the debt. The stadium has drawn tourism dollars to the city with the 2008 Super Bowl and is scheduled to host the championship game again in 2015. The stadium also hosts the annual college football Fiesta Bowl.
To keep the Coyotes playing in the city-owned arena, the Glendale City Council agreed to pay $25 million to the NHL in fiscal years 2011 and 2012. The city borrowed the money from enterprise funds as loans to the general fund. Payments to the NHL to keep the Coyotes in Glendale have come in the form of arena management fees.
Under the agreement with Jamison’s proposed ownership group, the city would pay it $17 million in arena management fees in the first year of a 20-year period, with annual payments rising to $20 million in the second through fourth years, and falling to $10 million in years 15-20. Until the sale of the Coyotes to a new owner is complete, the agreement is not in effect.
While Moody’s agrees that the sales-tax increase should help, it said the city of 226,000 must “implement additional and politically challenging measures” to shrink budget deficits.
The city’s general-fund reserve fell from $72.5 million in fiscal year 2006 to $2 million this year. Total general fund revenues fell from $167 million in FY 2008 to $136 million in FY 2012, according to the POS. When the city began planning the FY 2013 budget, it anticipated a $32 million deficit without a tax increase or spending reductions. The tax increase is expected to produce $22 million in additional revenue, while spending will fall by $10 million, officials said.
Financial advisors on this week’s deal are JNA Consulting Group and SRJ Government Consultants. Greenberg Traurig is bond counsel.
Glendale officials anticipate saving about $28 million by refinancing a portion of its $1 billion debt. Series B bonds will mature in 2033, the year of peak annual debt service. Series C reaches final maturity in 2038, while Series D matures in 2021.
The Glendale bonds come in a heavy week for debt issuance, which is expected to hit $11.61 billion, up from $8.99 billion last week. Nonetheless, strong demand for tax-exempt bonds has kept yields near historic lows.
Despite the Moody’s downgrade, “the market is to our advantage right now and the projected savings is still expected,” said Glendale spokeswoman Julie Frisoni.