CHICAGO — The Indianapolis Local Public Improvement Bond Bank plans to enter the market next week with $200 million of subordinate, special-tax bonds to refund debt issued 14 years ago to finance Conseco Fieldhouse, home of the Indiana Pacers pro basketball team.
The transaction could save up to $10 million, for a net present-value savings of around 5%, over the life of the debt, officials said.
The single-A rated bonds will be payable from a handful of tourist-related revenue streams, including several excise taxes and money generated by a Professional Sport Development Area that surrounds the fieldhouse and other sports and convention facilities in downtown Indianapolis.
The revenue backing the debt can be volatile as it is related mostly to tourist activity, credit analysts said. But the economy of the triple-A rated city is expected to remain strong enough to provide ample debt service coverage.
The city will host several high-profile sports and convention center events next year that will bring in additional money, including Super Bowl XLVI next February, men’s and women’s Big Ten college basketball tournaments, and several large conventions that are expected to fill the newly expanded convention center.
Over the near term, however, debt service coverage may be pressured by the National Basketball Association lockout. The finance team listed the NBA lockout as an investment consideration on preliminary bond documents, noting that it could have an adverse impact on revenues due to canceled Pacer games and related events if a new agreement is not reached before the season is scheduled to begin November 2011.
If there are no games played during the 2011-2012 season, the city could see a loss of around $1.8 million, according to Standard & Poor’s.
Standard & Poor’s rates the bonds A with a stable outlook. Moody’s Investors Service rates the debt A1 with a stable outlook. Neither agency believes that a possible lockout would pose a serious threat to bondholders.
“We do not believe the loss in revenue will have a significant impact on coverage in the near term, nor at this time that the lockout will lead to a sustained loss in revenue in the future,” Standard & Poor’s analyst Steffanie Dyer wrote in a report on the upcoming bond sale.
Moody’s analyst Tatiana Killen said the lockout was considered but wasn’t the crux of the rating decision, partly because the outcome is uncertain.
The bond sale comes as the city is in the second year of a three-year deal with the Pacers that is aimed at keeping the franchise in town. The two sides negotiated for months to try to come to an agreement over what the Pacers said were too-high operating costs at Conseco, which are estimated at $18 million annually.
The Marion County Capital Improvement Board, which runs the city’s sports stadiums and convention center, owns the fieldhouse, but it is operated by the Pacers.
Last July, the Pacers and the improvement board signed a three-year, $33.5 million deal that is an effort to keep the team in the city though the 2013-2014 season. The two parties were unable to reach a long-term, 30-year agreement, which was the original goal.
Under the short-term settlement, the board will pay the team $30 million over three years and invest at least $3.5 million in capital projects at the fieldhouse.
The Pacers would be required to pay back the money if they leave the city after 2013 and would not have any obligation if they stay through 2019.
Killen said the improvement board told the rating agency that negotiations with the Pacers were ongoing.
Indianapolis is eager to keep the team, which is estimated to pump $55 million annually into the local economy.
With an internet road show planned for this week, officials said they plan to emphasize strong debt coverage levels — which was raised to 1.25 times from 1.15 times under the original covenants — as well as the CIB’s newly strengthened fiscal position.
“While 2008 to 2010 was a difficult period of time overall from an economic standpoint, it also provided an excellent stress test for our revenue streams,” said Dan Huge, the board’s chief financial officer and the former long-time director of the Indiana Bond Bank. “We came out of the economic crisis and are now an even stronger organization based on some changes we made fiscally than we were prior to the crisis.”
The CIB owns, operates, or leases Conseco, the newly expanded Indiana Convention Center, minor league baseball venue Victory Field, the Lucas Oil Stadium, where the National Football League’s Indianapolis Colts play, and related parking structures. All are located in downtown Indianapolis.
After the improvement board struggled for several years with falling revenues, due in part to the unexpectedly high costs of running Lucas Oil Stadium, the city and the state of Indiana in 2009 put together a new-revenue package aimed at strengthening the organization’s bottom line.
The package expanded the downtown sports district to include a new Marriott hotel and raised the bed tax rate by 1%, pushing it to 17%. The state also agreed to loan the CIB $9 million in 2009, 2010, and 2011 and pay it back over 10 years.
The board’s fiscal position has since rebounded enough that Indianapolis Mayor Greg Ballard’s 2012 spending plan asks it to contribute $4 million from its upcoming budget to cover costs of providing security at the Super Bowl.
The new revenues boosted the CIB’s bottom line, though none of the money will go toward debt service on the $200 million of refunding bonds. Those bonds, which are subordinate, are payable from sports district revenue as well as liens on a county hotel tax, a county food and beverage tax, a county admissions tax, a county car rental tax, and $350,000 from state cigarette revenues.
Senior-lien bonds, which have not been issued in years, have an additional claim on the 1% increase in the hotel tax.
Several of the taxes backing the bonds suffered declines during the recession, but more recent figures show a “favorable rebound,” Moody’s said.
“When considering the overall sensitivity of the revenue streams, we looked at various stress test coverage ratios, and where there could potentially be an issue if revenues decline,” Killen said. “The coverage levels were adequate even under very stringent stress tests.”
The Bond Bank is tentatively expected to price the refunding bonds Sept. 8. JPMorgan and Morgan Keegan are co-senior managers. BMO Capital Markets, City Securities Corp., Cabrera Capital Markets LLC, and Loop Capital Markets are co-managers. Barnes & Thornburg LLP is bond counsel.
The $200 million issue will refund $177 million of 1997 bonds issued by the Marion County Convention and Recreational Facilities Authority and bonds sold by the CIB in 1999 to finance improvements at the now-demolished RCA Dome, where the Colts used to play.
The bonds feature a 2027 final maturity, which will remain unchanged by the refunding.