High-Yield Focus: Managers Are Cautious About Teeing Off on Golf Bonds

High-yield buyers are proceeding with caution when considering municipal golf course deals.

Some say they're becoming a tougher sell since they don't offer an essential service and can lose backing even when supported by a local government. Several communities have slashed general-obligation backing of golf course deals by simply not appropriating money in their budgets.

Yet in a market where it is tough to find high yield, at least one fund manager is very selective and finds value in golf course bonds, avoiding sandtraps by watching credit quality. In addition, the waning interest in the sector can mean less competition and greater reward for choosy investors.

Franklin Ruben, portfolio manager of the $57 million Tax-Exempt High Income Muni Fund with AIM Advisors Inc., is highly skeptical of golf deals. He would rather find higher-coupon bonds in other sectors that aren't dependent on so many outside factors.

"Golf course deals are more land speculation than anything else," Ruben said, adding that their success depends on the location and whether people can play in the winter.

Even when the deal comes to market backed by the general obligation of a city or town, they are still too risky, he maintained, citing several deals that have defaulted over the years, including some that had GO backing. Ruben did say he'd look more closely at a golf course project if it came as part of a single-family housing project within a master plan of a community where it is part of a mortgage.

"That I don't consider as raw land speculation," he said. "But just a golf course in and of itself - there are too many unknowns that are involved. I feel that for our shareholders' money that we can do a lot better."

Elizabeth Howell, senior portfolio manager with Delaware Management Co., doesn't dispute the dangers associated with buying golf course bonds, but she still finds such deals can offer good yields for the $54 million Delaware-Voyageur Minnesota High-Yield Municipal Fund she manages. She's well aware of the risks, pointing to a North Mankato, Minn., deal that defaulted.

That deal was backed by GO debt until the municipality stopped funding it. "In many cases it's what you would call a non-essential service and the approach that we take is we look at them very much on a case-by-case basis," she said.

Howell and her analysts look at a number of golf offerings and pass on most, typically buying only a couple a year for the fund. She likes to see some kind of a municipal backing, preferring at least a double-A rating with limited competition in a strong community.

As for the financials of the deal, Howell considers the overall cost as well as the projected fees the golf course will charge and what the community would be willing to pay. Once she buys the debt, Howell watches for additional courses that might be planned since the dynamics can change quickly if more or better facilities open.

"Something can look good in the early years, and if a lot of competition springs up or the thing is mismanaged or whatever, the credit can change fairly quickly so you really need to do your due diligence and stay on it, " Howell said.

One "home-run" deal Howell bought last spring was a nonrated Santa Fe, N.M., municipal recreation complex net revenue issue bearing a 5.625% coupon. The offering was relatively small, but very attractive in part because it is the only public course within a 60-mile radius, Howell noted.

These days, Howell is looking for yields in Minnesota, where she's based, ranging from 6% to 6.5%. The market has been somewhat short on golf deals this month following a flurry of bonds that came to market in December, she said.

"If they perform according to plan, they can be really nice," Howell said. "The cash flow and ... (a) nice above-average coupon - they can work fine. It's like any high-yield (bond)"

She added that she hasn't noticed a drop in golf bonds' desirability, since everyone is scraping for yield these days.

In contrast, Kelly Mainelli, head municipal trader and head analyst of nonrated bonds with American Fronteer Financial Corp., said interest in golf course deals has declined.

"Golf courses are just a sketchy area," Mainelli said. "You get into other nonrated high-yield stuff and there's no problem. But golf courses - it's not a needed facility, they always cost (more) ... to build than they're really worth."

If a high-yield golf course bond comes to the market bearing a 7% coupon, Mainelli quipped that he looks for an 8#1/2% or 9% coupon to tease buyers to even consider the issue.

He to Fort Lupton, Colo., golf course revenue anticipation warrants with a 9% coupon that American Fronteer underwrote in 1996. The deal came with two different letters of credit and the course is nine months behind its construction schedule because of bad weather.

"I'd rather have an apartment complex or a trash dump. I know everybody's always going to rent apartments, I know people are always going to throw trash away," Mainelli said. "But golfing, it's a pastime. If the economy goes south I think a lot of people will stop spending 40 bucks a hole."

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