The Harris County-Houston Sports Authority is restructuring its debt to provide nearly $74 million in cash-flow relief over the next two years.
With its four professional sports stadiums partially idled by the COVID-19 pandemic, the authority is also suffering a loss of revenue from taxes on hotel rooms and rental cars.
“It is unclear how long the pandemic’s negative impact will continue,” the authority cautioned in its preliminary official statement for $100 million of refunding bonds.
To ease debt service through 2022, the authority plans to issue bonds in three series through book runner Wells Fargo Securities on Sept. 29 and 30.
The new debt will come in taxable and tax-exempt form, bearing senior and second-lien status. Series A will be tax-exempt senior-lien debt while series B will be taxable. The size of the two series are to be determined. Series C will be $25 million of taxable, second-lien bonds.
The bonds will carry insurance from Assured Guaranty Municipal Corp., rated A2 by Moody’s Investors Service, AA by S&P Global Ratings, and AA-plus by Kroll Bond Rating Agency. Outlooks are stable.
Underlying ratings on the second-lien bonds are at the lowest investment grade of BBB-minus with a negative outlook from S&P. Moody’s rates those bonds an underlying Baa1 with a negative outlook.
“The negative outlook reflects the unprecedented weakening in pledged revenue stemming from the coronavirus pandemic and the uncertainty it casts on the trajectory of pledged revenue over the next several months and possibly well into the next one to two years,” Moody’s analyst Adebola Kushimo wrote.
The restructuring also creates a revenue recycling account in the flow of funds to capture excess pledged revenue for debt service on all liens over the next four years.
HCHSA’s $891.4 million of outstanding debt includes $154.7 million of junior-lien and $69.6 million of third-lien debt.
“While the authority's revenue assumptions are conservative and the inclusion of a Revenue Recycling Account over the next four years improves bond holder protection, the authority is solely dependent on pledged revenue for debt repayment with extremely limited liquidity," Kushimo wrote. "These factors combined with sustained weak economic and financial conditions and an uncertain path to recovery continues to weigh on the credit profile.”
The senior-lien bonds have underlying ratings of A3 from Moody’s and BBB by S&P, both with negative outlooks.
“While the restructuring will only impact the senior and second lien, the authority will defease the junior lien fiscal 2021 and 2022 payments with available cash in the debt repayment account, thereby eliminating the junior lien debt service requirements in fiscal 2021 and 2022,” said Kushimo.
The authority regained its Moody’s investment-grade ratings in 2015 after settling a legal dispute with bond insurance firm National Public Finance Guarantee, formerly MBIA, and a
Moody’s downgraded the authority’s debt one notch with a negative outlook across all liens on April 15 in response to the pandemic.
On April 1, S&P shifted its outlook on all convention centers and sports authorities to negative, declaring an end to the economic expansion that began in the second quarter of 2009.
HCHSA was frozen out of the bond market when ratings on its insurer, MBIA, collapsed after the 2008 financial crisis. The downgrades to MBIA and declining tax receipts triggered an accelerated payment schedule on $125 million of variable rate bonds.
The bonds came into National's portfolio when MBIA restructured to create the U.S. public finance-only subsidiary. The 30-year debt-service schedule was reduced to five years and the sports authority dipped into its reserves to make the payments.
National was so concerned about the authority's ability to pay that it filed suit in 2013 in Houston, seeking a court order that would have required the authority to raise ticket and parking fees to boost reserves. It also lobbied for state legislation mandating higher reserves, which was not approved.
The authority got a district court to dismiss National's suit, but the insurer was successful in its appeal in having the action reinstated, though the litigation was ultimately stayed by mutual agreement as the parties engaged in discussions to resolve the matter.
The variable rate debt in question was ultimately paid off in May 2014, clearing the way for the sports authority’s roughly $1 billion in remaining debt to be upgraded
National has not insured any munis since June 2017 when S&P Global Ratings handed a two-notch downgrade to the insurer.
Created in 1997, HCHSA has financed Minute Maid Park for Major League Baseball’s Houston Astros, NRG Stadium, formerly Reliant Stadium, for the National Football League’s Houston Texans, Toyota Center for the National Basketball Association’s Houston Rockets, and BBVA Stadium for professional soccer’s Houston Dynamo.
In a rating report on the NFL in August, Fitch Ratings maintained a stable outlook on its A-plus rating for $350 million of senior notes, citing professional football’s popularity and the value of its television contracts.
“Global sports leagues have resumed play, in bubble tournaments or at home venues without fans, and while the track record has been largely positive, a second wave or rising cases could require the NFL to adjust schedules, delay certain games or, worst-case, cancel the season,” Fitch noted. “Under these scenarios, Fitch believes league-level ratings are well protected for the upcoming season based on the contractual nature of the media contracts and other liquidity.”
Fitch said it would closely monitor football stadium projects, which include new stadiums in Las Vegas and Los Angeles.
“To date, adequate levels of existing cash reserves, club level cash or borrowings, incremental club level borrowing through the league arranged or other borrowing facilities or ownership support have been key mitigating factors to anticipated lower stadium revenues to cover operating costs and debt obligations for the upcoming season,” analysts said.
Wells Fargo managing director Randy Campbell and director John Young are lead bankers on next week's sale. Estrada Hinojosa & Co. and Morgan Stanley are co-managers.
Masterson Advisors managing director Trey Cash and Tina Arias Peterman are the authority's financial advisors.
Norton Rose Fulbright and the Hardwick Law Firm are co-bond counsel.
Closing on the sale is set for Oct. 9.
