CHICAGO — Evansville, Ind., will enter the market today with $115 million of taxable Build America Bonds to finance construction of a downtown arena meant to revitalize the city, a hub of southwest Indiana and northern Kentucky.

The finance team yesterday began taking retail orders on $6 million of tax-exempt bonds that also will help fund the arena ­project.

The city plans to tap into several revenue sources to pay off the debt, including tax-increment financing and revenue from a casino boat that floats in the Ohio River not far from the new arena site.

The bonds will be issued by the Evansville Redevelopment Authority. The Evansville Redevelopment Commission will lease the space from the authority, and the debt will be secured by the commission’s lease revenue ­payments.

J.J.B. Hilliard, W.L. Lyons LLC — an Evansville-based firm that recently built a new headquarters midway between the new arena and the casino boat — is senior manager on the deal. City Securities Corp. and Fifth Third Securities Inc. round out the team. Indianapolis-based London Witte Group LLC is financial adviser. Bingham McHale LLP is bond counsel.

Located about 175 miles south of Indianapolis and 120 southwest of Louisville, Evansville is a regional hub with a stable tax base and diverse employment. With a population just under 115,000, the city is home to a pair of universities and several large hospitals and manufacturers. The unemployment rate has risen lately, boosted by Whirlpool Corp.’s recent closure of its facilities, but at 9.5% remains below the state average of 10.5%.

Like most local governments in Indiana, the city has struggled with fallout from the state’s sweeping property tax reforms implemented in 2008. Officials have warned Evansville will see property tax revenue decline by nearly $4 million in fiscal 2010, leading to a drawdown on general fund cash reserves.

Noting the budgetary imbalance, Standard & Poor’s last week revised its outlook to negative from stable on the city’s AA-minus rated general obligation debt.

Two-term Mayor Jonathan Weinzapfel has spent years planning the new Evansville Arena and promoting it as a “downtown magnet for growth” that will mean hundreds of new jobs and spark regional development.

The 11,000-seat facility, already under construction, will anchor one end of the city’s main street, with the other end anchored by the gambling boat.

A private developer is in the process of rehabbing an existing 400-room hotel next to the arena site with plans to reopen it as a 250-room hotel.

“The downtown arena is going to bring them a lot of new opportunities,” said Bob Swintz, a partner at London Witte and the city’s financial adviser on the project. “Just the beginning of the project has already spurred some development and after it opens up it’ll continue.”

Ahead of the sale, Standard & Poor’s rated the BABs A and Moody’s Investors Service rated them A1, both with stable outlooks. Moody’s does not maintain a rating on the city’s GO debt.

The project is expected to cost a total of $127.5 million.

The $6 million tax-exempt bond issue is expected to include three tranches that mature in 2014, 2015, and 2016. The $115 million BAB issue features bonds that mature starting in 2017 — when the last debt issued for a county convention center is paid off — through 2025. The issue also includes three tranches of term bonds that mature in 2029, 2034, and 2039.

The finance team estimated Evansville would save $67 million over the life of the debt by using the BAB program, under which the city will receive a 35% interest subsidy from the federal government.

“When we started this project, BABs didn’t even exist,” Swintz said. “The deal was always going to have a 2039 maturity, and the underwriters came back and said with the rebate and the ultimate yield, financially the BABs are the best deal for the city.” 

Proceeds from today’s sale will be used to generate $95 million for construction costs as well as money for a debt-service reserve fund and capitalized interest through 2013.

Evansville plans to tap into three revenue sources to pay off the bonds. Revenue from an existing TIF district surrounding the arena is pledged, as is revenue from a 1% county-wide food and beverage tax. The city also plans to use gaming revenue to pay off the debt.

The revenue sources together are expected to provide 1.81 times debt-service coverage through 2018, and 2.17 times after, according to Moody’s.

Ultimately the bonds are secured by a pledge of Evansville’s share of Vanderburgh County’s 1% option income tax. The city’s share of the county option income tax  revenue totaled $15.2 million in 2009, up 4.19% from $13.1 million in 2008.

In crafting the borrowing, the finance team projected that the city will see a 3% annual increase in COIT revenue through 2020. But analysts have warned that the city could see a drop in that revenue based on a weak regional economy over the near term.

Despite the pledge, Evansville does not expect to have to use the income tax money to pay off the bonds, Swintz said.

“We don’t anticipate that we will ever have to touch the COIT,” he said. “Just based on the current tax increases that are coming in from the food and beverage tax and gaming revenues, we almost have 150% coverage.”

Evansville usually uses the three revenue sources to pay for capital projects and some other debt, so the finance team structured the arena borrowing to achieve relatively slow amortization to give the city more flexibility for capital projects in the future, Swintz said.

“We didn’t want to use all the revenues for debt service,” he said. “We wanted to make sure we had the flexibility to fund some of their annual capital needs and have a way to fund additional economic development.”

The city hopes to finish construction by the end of 2011. The University of Evansville-Indiana’s basketball teams will be the arena’s major tenants. Other tenants will include professional hockey teams and musical acts, officials said.

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