CHICAGO - After clearing its plate of more complicated variable-rate restructurings related to its downtown redevelopment projects over the last year, Kansas City, Mo., plans to enter the market next week with $53 million of special obligation bonds to fund construction of a garage for a new nonprofit performing arts center.

The deal is expected to sell next week with Oppenheimer & Co. as senior manager and RBC Capital Markets and Valdes & Moreno Inc. as co-managers. First Southwest & Co. and Moody Reid Inc. are co-financial advisers. Bryan Cave LLP is bond counsel and Gilmore & Bell PC is tax counsel. The city sought insurance bids, but did not receive any interest.

The bonds are special obligations of the city backed by an annual appropriation pledge. The city will tap gaming revenues to repay the 20-year bonds. It is using a capital appreciation bond structure, since gaming revenues won't be available for another 10 years when other capital infrastructure-related debt is retired.

Kansas City considered several revenue streams, but gaming revenues emerged as the most appealing because no tax increase was needed. It currently collects about $18 million in casino-related taxes. About half repays infrastructure bonds and the rest is used on a pay-as-you-go basis for capital projects.

Although not classified as an essential undertaking, city leaders "consider this an important project to support but wanted the funding mechanism to be budget-neutral," one member of the finance team said. Oppenheimer was selected as the senior manager because the firm proposed tapping into the future gaming revenues and using a CAB structure.

The finance team considered using the Build America Bonds program, but the decision to use the CAB structure eliminated that option, given that interest compounds and is paid at maturity.

The City Council last month gave final approval for the financing. The council seven years ago first pledged support for the garage, and later councils also endorsed it.

Proceeds of the transaction will finance construction of a 1,000-space, four-level underground parking garage adjacent to the new center that is under construction. The garage will also provide parking for the nearby convention center.

Ahead of the transaction, Fitch Ratings stripped Kansas City of its top marks, lowering its GO rating on nearly $300 million of debt one notch to AA-plus with a stable outlook. The city's $416 million of special obligation bonds were lowered one notch to AA-minus, as was its $645 million of other appropriation debt issued through its development corporations.

Moody's Investors Service affirmed Kansas City's special obligation A2 rating. The agency rates the GOs Aa3 with a negative outlook. Standard & Poor's affirmed its AA-minus on the special obligation credit and rates the city's GOs AA.

Fitch attributed the downgrade to a doubling of debt since 2002 to support downtown projects, a decline in reserve levels, and general weakening of the city's credit profile. The still-high GO rating of AA-plus is supported by the city's diverse economy and tax structure.

Kansas City closed out fiscal 2006 with a healthy surplus of $18.1 million, increasing its general fund balance to $47 million. Facing a mid-year shortfall in fiscal 2008, it cut costs. A one-time legal settlement of $15 million also helped ward off a deficit and the city closed out the year with its unreserved general fund balance at $36.3 million.

Kansas City undertook further cutting in fiscal 2009 due to faltering revenues and does not expect a drop in the general fund balance when final numbers are announced. It made additional cuts to close a gap in the final $1.3 billion fiscal 2010 budget approved in late March.

"Fitch expects fiscal 2010 will be a difficult year for the city as taxes contract, perhaps even more so than the declines that have been budgeted, and the city faces budget cuts, which will likely include personnel reductions," wrote analyst Melanie Shaker. "Maintaining an adequate level of general fund reserves is a key credit consideration."

Moody's attributed its negative outlook to "the city's exposure to interest-rate volatility and stagnating economic trends that could pose growing pressures on the city's economically sensitive revenues, particularly given the city's modest level of reserves."

The city still has $320 million of variable-rate debt outstanding. It undertook a series of restructuring earlier this year to eliminate a major strain on its finances, the impending accelerated repayment of bank bonds, and last year converted $230 million of debt to fixed rate.

Kansas City remarketed about $180 million of appropriation-backed bonds issued for the KC Live entertainment district earlier this year. All the bonds were held by liquidity provider Depfa Bank PLC and the city was under pressure to act, with an accelerated payment schedule beginning in April. It also refunded $36 million involving bank-held, variable-rate tax increment financing bonds insured by MBIA Insurance Corp.

The city sold variable-rate bonds earlier in the decade to help finance a new arena, an expansion of its convention center, and public improvements for the KC Live entertainment district, all part of a massive rejuvenation of downtown.

All of the issuance used a variable-rate structure with insurance from Ambac Assurance Corp. Faced with higher rates and failed remarketings, Kansas City restructured the $213 million of arena bonds and $100 million of convention bonds last summer. However, the KC Live transaction was held up as the financial crisis spread to European banks and Depfa PLC - which was to provide the new letter of credit for the restructuring - was downgraded.

On the political front, Mayor Mark Funkhouser recently survived a signature drive to force a recall vote by a narrow 129 signatures. A total of 16,950 votes were needed. Supporters of the move have decided not to go to court to seek a recount, lacking the financial backing to undertake a legal battle.

The first-term mayor has come under fire from some who believe controversies involving his wife's volunteer involvement in city business and clashes with other city leaders have hurt his ability to lead.

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