WASHINGTON — The Internal Revenue Service took no action in a recently concluded audit of $511 million in tax-exempt advance refunding bonds issued in 2014 by the Harris County-Houston Sports Authority.
The sports authority reported the IRS decision in a notice published on the EMMA website of the Municipal Securities Rulemaking Board April 18. The sports authority said the IRS notification came in a letter dated April 5 that “the examination has been closed with no change to the position that the interest paid to beneficial owners of the bonds is excludable from gross income.”
The audit concluded a year and one day after the sports authority received a letter dated April 4, 2018, informing it that the tax-exempt status of the bonds was being examined.
The April 2018 letter said the bonds were "selected for examination because of information we (i.e., the IRS) received from external sources or developed internally that causes a concern that the debt issuance may fail one or more provisions of section 103, 141-150 of the Internal Revenue Code.”
The sports authority stated in its 2018 public notice that as the issuer of the bonds, it “believes that the bonds complied with all applicable provisions of the Internal Revenue Code, and the issuer will cooperate with the IRS in its examination of the bonds. No assurance can be given with regard to the outcome of such examination and its effect on the tax-exemption on the bonds or the marketability of the bonds.”
Preston Gabriel of Hilltop Securities, who filed last week’s public notice that the IRS audit has concluded, did not respond to an email from The Bond Buyer seeking his comments on the case.
Officials of the Harris County - Houston Sports Authority also did not respond to a request for comment.
The audit involved $435.2 million in Series A senior lien refunding bonds and $75.87 million in Series C second lien refunding bonds that the authority sold to refinance more than half of its outstanding debt after settling legal disputes with bond insurer National Public Finance Guarantee (National), a subsidiary of MBIA Inc. About $90.42 million of the Series A bonds were capital appreciation bonds.
The disputes arose in the wake of the 2008 financial crisis that hammered the sports authority’s debt portfolio.
The bonds were to be used to refund debt issued in 1998 and 2001. The 1998 bonds were used to help finance construction of Minute Maid Park for the Houston Astros baseball team. The two sets of 2001 bonds were used to help finance the construction of the NRG Stadium for the Houston Texans professional football team and the Houston Livestock Show and Rodeo as well as construction of a multipurpose arena and an adjacent parking garage for the Houston Rockets professional basketball team.
The legal disputes stemmed from downgrades to MBIA and declining tax receipts that triggered an accelerated payment schedule on $125 million of variable rate bonds, reported by The Bond Buyer at the time of the refunding in 2014.
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.
