Tip-Off This Week for Milwaukee Bucks Bond Deals

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CHICAGO – With construction crews ready to get to work this summer, Wisconsin-based issuers will sell $235 million of debt this week to cover most of the public's share of the new $524 million arena for the National Basketball Association's Milwaukee Bucks.

The Wisconsin Center District, which will own the arena and lease it to the team, will sell nearly $200 million in three series, two being publicly offered, to raise a total of $203 million. They are comprised of $101.5 million of appropriation revenue bonds, $56 million of senior lien dedicated tax revenue bonds, and $35 million of taxable bonds backed by various stadium and team related revenues and a subordinate pledge on some tax revenues.

The taxable piece will be privately placed with the Wisconsin Board of Commissioners of Public Lands.

The bonds fund the district's $203 million contribution, and Milwaukee is separately spending $47 million for the venue. The team's owners, Wes Edens and Marc Lasry, are covering $174 million plus any cost overruns and former Bucks owner Herb Kohl is contributing $100 million.

The district will hold a retail order period on Wednesday and open up the sale to institutional buyers on Thursday although it reserves the right to complete the transaction Wednesday, said David Erdman, Wisconsin's state capital finance officer.

All of the tax-exempt pieces from the city and state offer a rare exemption from state income taxes. Most Wisconsin bonds don't exempt interest from state income taxes, but the arena package offers the added boost. That could generate a projected 10 basis point savings for the district, Erdman said.

Morgan Stanley is running the books with Stifel as co-senior manager. Citi, Ramirez & Co., Siebert, Brandford Shank & Co., RBC Capital Markets and US Bancorp are co-managers. Robert W. Baird & Co. Inc. is financial advisor and Quarles & Brady LLP is bond counsel.

The Wisconsin Center District's 20-year appropriation revenue bonds carry an A1 rating with a positive outlook from Moody's Investors Service and an A rating from S&P Global Ratings. The bonds mature from 2017 to 2036 and a total of $160 million will be spent to repay $101 million of principal.

"The district will utilize a stand-alone bonding credit with mechanics and features modeled after the state's existing appropriation credits," Scott Neitzel, the state's Department of Administration secretary and the district's board chairman, said in a recorded investor presentation. The state has pledged to appropriate $8 million annually to the district under the financing package enacted last year and signed by Gov. Scott Walker.

If a state budget is not enacted, the appropriation from the previous year is carried over and the team, which threatened to move without public subsidies for a new arena, would trigger financial penalties that would go to pay off debt if it abandons its 30-year lease. No additional bonds may be issued with the same backing except refundings, according to the investor presentation.

The A1 rating is notched two levels off the state's Aa2 rating and positive outlook "to reflect the need for annual legislative appropriation of funds to pay debt service and the less essential nature of the projects to be financed," Moody's wrote.

"The likelihood of the legislature failing to make appropriations for the bonds is minimal, given that Wisconsin, like many state governments, relies somewhat on market access for subject-to-appropriation debt for capital financing needs," Moody's added. About $4 million of the state's contribution will come from Milwaukee County, limiting the impact on the state's general fund.

The Wisconsin Center District's senior lien tax revenue bonds carry an A2 rating from Moody's and an A rating from S&P. The 2046 maturity on the dedicated tax revenue bonds will carry Assured Guaranty Municipal Corp. insurance and additional maturities may be added depending on market demand, Erdman said.

Erdman said the small size and taxable nature of the district's third series made it a good candidate for the private placement with the public lands board. He described the loan structure as the "most efficient" means to sell the bonds.

The district expects to finalize the term sheet this week. The public lands board also participated in the financing for renovations to the Green Bay Packers home, Lambeau Field.

Officials in the district's investor presentation highlighted the long 20-year history of tax collections and the strong debt service coverage ratios. The district collects a 2.5% tax on rooms, 3% tax on car rentals, and 0.5% tax on food and beverage sales in Milwaukee County.

It also receives a 7% hotel room tax formerly collected by the city of Milwaukee. The taxes generated $29 million in 2014. The state arena legislation extended most of the district's taxes to cover the new debt.

The dedicated tax revenue bonds are structured as current interest bonds maturing between 2016 and 2020 and capital appreciation bonds maturing between 2033 and 2046. The deal carries a higher overall repayment price as they must accommodate repayment of the district's existing junior and senior lien convention center debt which is retired in 2032. A total of $160 million will go to retire $60 million in new principal.

"The proposed transaction does not rely on revenue growth" but a third party assessment projects steady growth in tax revenues, the district's finance director, Jeff Sinkovec, said in the presentation. Senior lien coverage remains at a level of at least 2.9 times after the financing. The state Department of Revenue sends revenues needed for debt service directly to the trustee.

"The A2 rating on the district's senior lien debt reflects the large and diversified economic base that generates the pledged revenues, the narrow nature of the special tax pledge, strong legal structure, and satisfactory debt service coverage," Moody's said.

Under the state financing legislation, the WCD's powers were expanded from managing the city's convention center to include the new arena. The district was created in 1994.

The legislation also imposes a $2 ticket surcharge with 75% going to the district and 25% going to the state. It is expected to raise a total of $60 million. The district's share will go, along with some tax revenue and team payments, to repay the taxable state piece. The private payments would run afoul of federal tax rules.

Milwaukee will take competitive bids Thursday on $39 million of general obligation notes and bonds that will be repaid with tax increment financing revenue. Public Financial Management Inc. is advising city comptroller Martin Matson's office and Chapman and Cutler LLP and Hurtado Zimmerman SC are bond counsel.

The city's $47 million contribution is for the cost of a parking structure and to convert existing space into a public plaza. The city's contribution will come from tax-increment financing but the debt is backed with a general obligation pledge. Milwaukee carries GO ratings of Aa3 from Moody's and AA ratings from Fitch and S&P.

The new venue will be just north of the arena it will replace, the BMO Bradley Center. The team hopes to have the venue ready for use for the 2018-2019 season. The 30-year lease calls for team payments of between $40 million and $47 million over the term and another $60 million for capital and maintenance work.

The deal comes as the use of tax-exempt borrowing for professional sporting stadiums has come under federal and congressional scrutiny with proposals to halt such use. Supporters of the tax exemption contend such projects have a public good and benefit local economies while critics counter that the benefits are overrated and the primary beneficiaries are the wealthy owners of sports teams.

Since 2006, 263 tax-exempt bond issues totaling $16.9 billion have been sold to finance stadiums and sports arenas, according to figures compiled in March by Thomson Reuters. Walker promoted support for the package as a means to keep an estimated $600 million in income tax expected from the team and visiting franchises.

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