CHICAGO — Into the volatile waters of this week's municipal bond market come $95 million of taxable appropriation bonds from triple-A rated Indiana.
The state's borrowing arm is floating the bonds on behalf of a privately owned company that owns one of the most popular sports venues in the state, the Indianapolis Motor Speedway.
It's one of the state's rare borrowings to benefit a private company.
The bonds are structured as lease-appropriation debt. They carry ratings of AA-plus and Aa2, based on the customary linkage ratings agencies maintain between Indiana's gilt-edged issuer rating and appropriation-backed bonds. Indiana relies on lease appropriation-backed bonds to finance nearly all of its capital needs.
The state is scheduled to sell the bonds Wednesday. The deal comes during one of the most tumultuous weeks this year in the muni market, with the possibility of a Puerto Rico default and other troubled credits, like Chicago Public Schools, unsettling investors.
As of Monday, Indiana said the sale was still set for Wednesday. Officials said that they were monitoring the markets and would "only move forward if it's in the best interests of the state."
The borrowing is a mix of serial bonds that mature in 15 years and term bonds that go out 20 years.
Bank of America Merrill Lynch is book running senior manager. Wells Fargo Securities, JPMorgan, and Siebert Brandford Shank & Co. LLC are also on the underwriting team. Barnes & Thornburg LLP is bond counsel and Public Financial Management and Crowe Horwath LLP are financial advisor.
The Hoosier State is floating the deal to finance a high-profile upgrade to the home of the Indianapolis 500, which is billed in bond documents as the largest single-day attendance sports event in the world. Renovations include upgrades to seats, the track, new concessions, a club, and a fan entertainment deck.
The project is expected to be complete by May, in time for the 100th running of the Indy 500.
"The IMS has determined that for the Indianapolis Motor Speedway to remain 'The Greatest Race Track in the World,' and for the Indy 500 to remain 'The Greatest Spectacle in Racing,' it is critically important to modernize the facilities and improve the experience fans have when visiting the Indianapolis Motor Speedway," officials wrote in bond documents.
The "Brickyard," as race fans call it, is privately owned, and the company, Hulman and Company, parent to the Indianapolis Motor Speedway LLC, has pledged to cover any shortfall of revenue used to cover the bonds after 30 years. Under the deal, Indiana is expected to appropriate $140 million for debt service over the life of the 20-year debt.
The law authorizing the deal requires the Indiana Finance Authority to ask lawmakers to appropriate sufficient funds to cover debt payment if rent payments fall short at any point in the next 20 years.
It's a financing that the state has been planning for years.
The General Assembly approved a bill in 2013 that paved the way by creating the Indiana Motorsports Commission and a new motorsports investment district around the speedway. The Commission Act created a new admissions tax and allows the district to capture incremental revenue from state sales and income taxes levied within the district over the amount levied in 2012.
"While the goal is to protect taxpayers by creating the revenue sources behind the scenes, the key point for investors is that the IFA is issuing this debt using the lease-appropriation structure we traditionally use for capital projects," said IFA spokesperson Stephanie McFarland.
Indiana does not issue general obligation bonds and traditionally relies on lease-appropriation backed bonds to enter the capital markets. The same structure was used to finance the Lucas Oil Stadium, the Indiana Convention Center, and other high-profile projects.
"[Investors should consider] the ability to invest in a triple-A state lease-appropriation structure with taxable rates, as opposed to the more traditional tax-exempt rates," McFarland said.
The commission is expected to pay off the bonds with the tax revenues. But for ratings agencies, key to bondholder security is a statutory requirement under the Commission Act that requires the IFA to ask the General Assembly to appropriate an amount sufficient to cover debt service if the rental payments fall short.
And while most lease payment structures in Indiana require the facilities being available for use and occupancy, the new deal is not subject to this requirement, according to ratings agencies.
The structure of the lease requires the private owner, the IMS, to lease a portion of the speedway to the IFA, which will lease it to the Indiana Motorsports Commission, which will lease it back to the IMS.
"This could affect General Assembly willingness to appropriate if the [private company] does not maintain the facility, closes it, or goes into bankruptcy," Standard & Poor's said in its ratings report, in which it assigned its AA-plus rating. Like the other ratings firms, S&P says the risk is offset by the IFA's statutory pledge to seek appropriation in the case of a shortfall.
In rating the bonds Aa2, Moody's Investors Service said the "two-notch differential between the Series 2015 C bonds and Indiana's triple-A issuer rating reflects the risk of non-appropriation and the less essential nature of the financed project. The risks introduced by the presence of a private company as current owner of the facility and sublessor are mitigated by the Indiana Finance Authority's statutory requirement and indenture covenant to seek legislative appropriation of debt service."
Fitch rates the bonds AA-plus, noting that lawmakers have already appropriated funds for the project in three legislative sessions. "In Fitch's view, the fact that the transaction directly benefits a private entity rather than a state entity as with other Indiana appropriation-backed debt does not warrant a rating distinction," Fitch said. "IFA has strong incentive to seek appropriations for this project give the demonstrated state commitment."
In a presentation promoting the deal, the finance team highlighted Indiana's fiscal position and the IFA's appropriation pledge. Maximum annual debt service totals $7 million, and the state has already appropriated $14 million for the rental payments through 2017, according to Dan Huge, the IFA's chief operating officer.
When signing the bill into law in May 2013, Gov. Mike Pence said the finance plan would "further economic development in the motorsports industry while also protecting the interests of Hoosier taxpayers."
That the Indy 500 and the annual NASCAR stock car race at the track generate $500 million in annual revenues for the state's economy, according to preliminary bond documents.
Mark Pascarella, the director of debt management for the IFA, highlighted Indiana's fiscal position, saying that operating revenues have risen 3.9% on average for the past five fiscal years. The state also has a general fund reserve balance of over $1 billion.
