BRADENTON, Fla. Memphis planned to go to the bond market before year end to refinance $50 million of defaulted bonds to rescue financially troubled AutoZone Park and ensure that the Memphis Redbirds minor-league baseball team remains in Tennessee’s largest city.
But the deal could be threatened by delays, and City Council second-guessing of the deal negotiated by the mayor.
That could prompt bondholders, who have a leasehold interest in the ballpark and the Redbirds, to foreclose on the bonds and sell the stadium and the team, which is the St. Louis Cardinals’ top minor-league affiliate, according to a proposal prepared for the Memphis City Council.
The city planned to sell $20.07 million of tax exempt sports facility revenue bonds and $3.48 million of taxable revenue bonds through the Memphis Center City Revenue Finance Corp., and close on the deal by Dec. 31.
Some $20 million of bond proceeds would to toward paying Fundamental Advisors LP, a private firm specializing in distressed debt, which bought $58 million of defaulted bonds for about $24 million in 2010, the city’s proposal said. The Cardinals would pay $15 million for the Redbirds.
Under terms of an agreement, the city would own the ballpark, which would then be leased to the Cardinals for the Redbirds, which are currently owned by the financially struggling nonprofit Memphis Redbirds Baseball Foundation. The Redbirds would agree to remain in Memphis for 17 years, with two, five-year extensions of the agreement possible.
But the complex deal to accomplish those things, negotiated by Mayor A C Wharton with Fundamental, the Cardinals, the foundation, and others, has been delayed twice by the City Council.
Some council members have complained that details of the deal were not presented to them well in advance of when they were asked to vote on it.
On Monday, the council voted to cut the purchase offer to $15 million from $20 million, and then delayed final action on the deal until Dec. 17. It is not clear, yet, if the counter offer could jeopardize the deal.
The Shelby County Commission, which contributed funds along with Memphis to buy land for the ballpark, is slated to consider the transaction Dec. 16.
City officials did not respond to requests for information on either the planned $23.5 million sports revenue bond sale, or the planned sale of $306.5 million of general improvement refunding bonds, both of which apparently will be priced simultaneously.
The city expected to release the preliminary official statements for the offerings this week though that likely was delayed when the City Council postponed final action on the sports revenue bond financing.
Even if pricing takes place in the last few weeks of the year, when the market slows down before the holidays, a trader said that should not be a problem.
“I think that after the huge supply of this week, the Memphis deal will go well,” the trader said. “I think the sports facility bonds will have to be priced just right to sell them, since there has been such negative press about stadium bonds and the taxability question about those kinds of deals.”
Results of the Federal Open Market Committee meeting are due out on Dec. 18 and “hopefully they will not say anything upsetting” about tapering quantitative easing measures that could affect interest rates, added the trader.
The sports revenue bonds would be secured by sales tax revenues from tickets, concessions, and other sales in the ballpark, payments in lieu of taxes made to Memphis and Shelby County, and $300,000 in annual stadium lease payments from the Cardinals.
Memphis Finance Director Brian Collins told the City Council on Monday that to the extent there might be a shortfall from the taxes and stadium rent toward the payment of debt service, the team would provide a $100,000 backstop per year, and if those funds are insufficient to pay the debt AutoZone Corp. pledged an additional $100,000 as a backstop.
Collins also said if revenue projections don’t come in as anticipated, the city might be required to begin contributing toward debt service payments in 2024.
However, he said revenue growth projections were calculated conservatively and it is believed that “over 17 years the deal pays for itself, and then some” without tapping backup pledges.
“I believe this is a very good deal for the city of Memphis,” Collins told the council.
Moody’s Investors Service assigned an Aa2 rating to the general improvement refunding bonds, which are secured by the unlimited tax pledge of the city, and an Aa3 rating to the sports facility revenue bonds.
Standard & Poor’s Ratings Services assigned an AA rating to the general improvement refunding bonds, and an AA-minus rating to the sports revenue bonds. S&P said the outlook on all ratings is stable.
However, Moody’s revised its rating outlook to negative from stable on both bond issues, and said it reflects the expectation that the city’s financial position will “remain challenged” as fixed costs, including debt service, pensions, and other post-employment benefits represented 42% of operating expenditures in fiscal 2012.”
AutoZone Park, which opened in 2000, cost $46 million to build. Memphis and Shelby County each paid $4.25 million to assemble and prepare the 12-acre site on the edge of downtown.
To fund the project, including purchase and relocation of the team, $72 million of bonds were sold in 1998. Some $5.4 million in debt service payments were due each year.
In 2009, AutoZone Park was named the Minor League’s Ballpark of the Year by Baseball America. The same year, there were defaults on two of three annual bond payments. In late 2010, Fundamental Advisors purchased the defaulted bonds.
The Memphis Redbirds Baseball Foundation is the only nonprofit organization in the United States to own and operate a professional baseball franchise. The 2012 audit “raised substantial doubt about the Foundation’s ability to continue as a going concern.” As part of the mayor’s negotiated deal, debts of the foundation would be paid off.
According to Moody’s, the city’s above-average debt burden is expected to rise over the next few years because of a $1.5 billion five-year capital improvement plan, for which 44% is expected to be funded with additional bonds.
The city participates in the Memphis Retirement System, the Retirement System of the Memphis and Shelby County Public Library and Information System, and the Memphis Light, Gas, Water Retirement System. In 2012, those plans were 74.4% funded, 86.4% funded, and 84.2% funded, said Moody’s.
The city’s other post employment benefits plan was 1% funded with a $1.3 billion unfunded liability as of July 1, 2012, while MLGW was 21.2% funded with a $743 million unfunded liability.
“Overall, total fixed costs [including] debt service, pensions, and OPEB represented a very sizable 52.5% of operating expenditures in fiscal 2012, which limits the city’s financial flexibility,” Moody’s said. “Moody’s will continue to monitor the city’s ability to increase pension funding to meet their five-year goal while maintaining reserve levels that are in line with the current rating category.”
