Kansas City, Mo., Readies $115M for Entertainment District

CHICAGO — Boosted by a recent rating upgrade, Kansas City, Mo., will sell $115 million of variable-rate revenue bonds next week in a deal that will wrap its planned borrowing to help finance a new seven-block downtown entertainment district.

The bonds are scheduled to be marketed next Wednesday with the Kansas City Industrial Development Authority serving as the issuer. Oppenheimer & Co. is the lead manager and Merrill Lynch & Co. and Harvestons Securities Inc. are co-managers. The Hardwick Law Firm LLC and the Broadus Law Firm PC are bond counsel and Springsted Inc. and the Knight Group are financial advisers.

Proceeds of the sale will finance the remaining infrastructure work needed for the district, paving the way for developer Cordish Co. to begin construction on buildings. The district is anchored by the city’s convention center and a new arena and it recently issued debt associated with an expansion of the convention center and to finance construction of the new arena. Plans for the entertainment district include new restaurants, retail shops, commercial space and residential units.

“This completes our financing for the entertainment district,” said Kansas City Treasurer Randall Landes.

Ambac Assurance Corp. is expected to insure the offering, which is broken into two series — one for $69.5 million and the other for $49.5 million, with Depfa Bank providing liquidity.

The bonds are secured by an annual appropriation pledge of the city. Though the city can use any available revenues to pay debt service, it intends to use only revenue streams generated by the project, including tax-increment financing revenues and a portion of the state’s sales and income taxes generated by the district. The taxes are expected to provide at least 1.04 times coverage levels.

Fitch Ratings has not yet affirmed the bonds’ AA rating. Standard & Poor’s recently affirmed its AA-minus and Moody’s Investors Service this week upgraded the debt to A2 from A3. The ratings also cover $180 million of floating-rate downtown redevelopment district bonds issued last year for the $378 million project.

Moody’s analysts attributed their upgrade of the credit to several factors, including progress made on the project and a recent state Supreme Court ruling clarifying the right of Missouri municipalities to finance annual appropriation-supported projects that “mitigates some uncertainty factored into prior rating reviews.”

The rating agencies expressed some concern over budgetary strains that resulted in a $2.1 million drawdown on reserves in 2005 and the city’s growing debt burden to finance various infrastructure and development projects, echoing warnings issued recently by city auditor Mark Funkhouser.

Standard & Poor’s analyst John Kenward wrote: “Although the city’s growing debt burden is a credit concern, we also expect that the city’s debt burden will gradually moderate as its population and tax base continue to grow.”

Moody’s noted that while a majority of the city’s outstanding debt is secured by general fund annual appropriations, it is actually repaid from various non-property tax sources including sales taxes, convention and tourism revenues, hotel-motel taxes, and revenues derived from specific projects. After the city completes the upcoming sale, floating-rate debt will represent 45%, or $667 million, of its $1.48 million portfolio of tax-supported debt, “exposing the city to significant interest rate volatility risk.”

Landes said the city is currently reviewing its portfolio with an eye toward better managing that risk. and therefore opted to sell the entertainment district deal at a floating rate to provide flexibility in a possible restructuring later this summer. First Albany Capital Inc. is serving as a financial adviser and the city has pre-qualified nine firms to serve as potential swap counterparties.

“We are looking at restructuring. We always had a goal of keeping borrowing cost for the arena and the district to no more than 4%. We may do swaps, we may convert some debt to straight fixed rate, or we may do nothing,” Landes said.

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