DALLAS - Glendale, Ariz.'s decision to cancel its arena contract with the Arizona Coyotes National Hockey League Team is a positive factor for the city's credit rating, even with the threat of a $200 million lawsuit, according to Moody's Investors Service.
"Voting to cancel the 15-year arrangement is credit positive because it reduces the city's costs related to professional sports enterprises and provides additional resources for critical services," Moody's Investors Service said in a report Friday. Glendale, a western suburb of Phoenix that sought to make itself a mecca for professional sports, carries an A3 general obligation bond rating from Moody's with a positive outlook.
Glendale is facing the threat of a $200 million lawsuit from owners of the Coyotes after the city council voted 5-2 to on June 10 end its lease on city-owned Gila River Arena, which was previously Jobbing.com Arena. Glendale financed the arena with $180 million of tax-supported debt to host the Coyotes beginning in 2003.
Standard & Poor's said the contract cancellation, subject to a restraining order sought by the team owners, doesn't affect its BBB-plus GO rating for Glendale, "although we will monitor the situation." Damages of $200 million would represent 140% of the city's general fund budget, according to S&P.
"We consider a contingent liability of this magnitude a negative credit factor," S&P analyst Kate Burroughs said. "However, at this time the circumstances surrounding the lawsuit and whether it will occur are preliminary and uncertain."
Coyotes owner IceArizona Acquisition Co. LLC, a subsidiary of Renaissance Sports and Entertainment, secured a restraining order against Glendale in Maricopa County Superior Court on June 12 that at least temporarily prevents cancellation of the agreement. The city said it is willing to consider a new, less onerous agreement with the Coyotes.
Glendale was committed to paying the team's owners $225 million under the lease agreement, or $15 million annually, to manage the city-owned and financed Gila River Arena. Ending the agreement will save the city the equivalent of 6.3% of budgeted operating revenues for the fiscal year ending June 30, 2016 before the projected lower cost of contracting a new arena manager, according to Moody's.
The city is on the hook for $133 million of long-term arena debt outstanding until 2033. The debt-financed construction of the arena is secured by the city's general excise taxes, a key operating resource. Glendale expects to appropriate annual transfers from its general fund or seek other measures to offset $39.3 million of outstanding internal transfers that the city previously made to its general fund from its environmental enterprises.
The fund transfers supported subsidies totaling $50 million that the city owed the National Hockey League from fiscal years 2011 and 2012, when the league temporarily managed the Coyotes.
"Cost savings will be offset somewhat by payments to a new facility manager for Gila River Arena, which officials estimate will cost approximately $6.5 million annually based on contracts for comparable facilities," Moody's said. "The city also faces unknown, onetime legal costs from the Coyotes' legal actions."
Despite the legal threat, "any negative effect to arena-related revenues should be outweighed by cancellation-related savings," Moody's said.
Glendale's next payment under the contract is $3.75 million due on June 30.
"City management has indicated that, if the contract has not been terminated as of the due date, they will remit the payment in full," according to S&P. "However, per management, if the contract is terminated, they cannot remit."
Mayor Jerry Weiers called for an executive session meeting on Tuesday, June 16 to discuss the city's management agreement with the Arizona Coyotes.
"Although the council took an on-the-record vote, the city must officially confirm the action in a letter to the Arizona Coyotes," officials said. "This letter will only be sent pending the outcome of the executive session meeting."
"An opportunity for the two of us to discuss the issues has presented itself, and I am optimistic that with continued dialogue we can come to an agreement that satisfies both parties," said Weiers.
Executive session meetings are closed to the public by statute so the mayor and city council can address issues involving privileged information.
The city receives estimated excise taxes of more than $6 million annually from retail activity surrounding the arena, driven by a large retail shopping and dining center, according to Moody's. Spending rises with consumer traffic for hockey games and non-hockey events such as concerts.
The city also received more than $6 million annually in shared revenues from the team's owners for parking fees, ticket surcharges and naming rights.
"Those revenue sources will flow to the city absent the arena agreement," Moody's said. "If the Coyotes opt to relocate, the city would lose some funds generated from retail activity linked to at least 41 regular-season games a year."
Las Vegas is reportedly considering luring the Coyotes to its new, $350 million MGM-AEG Arena that seats 20,000. Under its lease with Glendale, the Coyotes are allowed to move the team in year five of the contract if losses exceed $50 million. The team is entering the third year of the contract.
MGM and Anschutz Entertainment Group announced their joint arena plan for Las Vegas on March 1, 2013, later adding a $100-million pedestrian shopping area to serve as a gateway.
Located near the Strip between the New York New York and Monte Carlo casino hotels, the arena project broke ground on May 1, 2014. Completion is expected in early 2016.
IceArizona, a nine-person ownership group headed by George Gosbee and Anthony LeBlanc, bought the Coyotes from the National Hockey League for $170 million in 2013.
On Dec. 31, 2014, IceArizona sold a 51% controlling stake in the Coyotes to Philadelphia hedge fund manager Andrew Barroway for a reported $152 million. Barraway said he plans to keep the team in Arizona.
However, another arena in Phoenix that could host both the National Basketball Association Phoenix Suns and the Coyotes is also proposed by Phoenix City Councilman Michael Nowakowski.
The new arena could be built the current site of the South Building of the Phoenix Convention Center, Nowakowski said. The old Suns arena, US Airways Center could be redesigned as an urban mall, he said.
Glendale's cancellation of the contract with the Coyotes is based on an Arizona state law that allows municipalities to cancel any contract, without future obligation or penalties, if an associated party has a conflict of interest.
The city plans to provide written notice of the termination of the agreement within the next week.
"There is reportedly no case law regarding use of this statute, which raises uncertainty regarding a court's potential interpretation of the city's action," Moody's said. "Cancellation of the agreement under state law will be effective upon written notice from the city to the Coyotes."
Sale of the Coyotes to IceArizona came with pledges of $15 million per year from Glendale for managing the arena. The city's support for professional sports, including hosting the Arizona Cardinals National Football League team and a $200 million spring training facility for the Los Angeles Dodgers and Chicago White Sox, led to a series of credit downgrades after the 2008 financial collapse.
Under a new mayor and city council, the city has sought to achieve a balanced budget with tax increases and austerity measures for city services.
"Standard & Poor's current rating on the city is partly driven by what we consider its very weak budgetary flexibility due its negative general fund balance," Burroughs said.
"Numerous studies show sports arenas are not a net economic positive," according to Douglas Bention, senior municipal credit manager at Cavanal Hill. "The challenge Glendale has is the arena is already constructed and it is uneconomical and politically unrealistic to simply padlock the doors or attempt to repurpose the arena. So the city's current leadership will attempt to minimize the cash drain, blame the former leaders for this folly, and provide a level of city services consistent with citizens' expectations."
