S&P Drops Houston Sports Agency’s Junior and Third-Lien Debt to Junk

DALLAS — Standard & Poor’s on Tuesday cut its rating on the Harris County-Houston Sports Authority’s junior-lien and third-lien debt to junk, dimming hopes of refinancing any of the agency’s $988 million debt.

The rating agency dropped the authority’s junior-lien and third-lien bonds five notches to B from BBB-minus.

The downgrades were attributed to accelerated debt payments on $115 million of 2001 variable-rate junior lien bonds.

Also triggering the downgrade is the recent, and potentially continuing, decline in hotel occupancy tax and vehicle tax revenue that backs the debt, analysts said.

The Standard & Poor’s action follows a similar downgrade by Moody’s Investors Service last month.

The authority, which built three professional sports stadiums, could default on some debt as early as March 2011, according to Moody’s.

Moody’s lowered the authority’s senior-lien credit to Ba3 from Baa2.

The bonds remain insured by National Public Finance Guarantee Corp., formerly MBIA Insurance Corp., which carries investment-grade ratings of Baa1 by Moody’s and A by Standard & Poor’s. The insurer has said it would make good on any debt service in the event of a default.

Under a standby bond purchase agreement, underwriter JPMorgan acquired the variable-rate bonds when they failed to find buyers on the market. The declining ratings of MBIA made the bonds hard to sell as investors sought higher-quality debt.

JPMorgan was allowed to demand that the authority pay back the money in five years instead of 23. Annual debt-service payments on the bonds ballooned to $24 million. The authority made the first $12 million semiannual payment last November.

“The downgrade is the result of higher debt-service payments in the short term due to acceleration of the Series 2001C, 2001D, and 2001E bonds, and the likelihood for a decline in reserve levels due a potential sizable collateral posting requirement related to interest rate swap agreements,” said Standard & Poor’s credit analyst James Breeding.

The Sports Authority assured Harris County voters that the junk rating would have no impact on their taxes. The bonds carry no backing from Houston or county property taxes or sales taxes.

“The lower ratings will have no effect on local property taxpayers, Houston’s sports teams’ ability to play in the stadiums, the city’s ability to attract events to the facilities, or the eventual repayment of bondholders,” J. Kent Friedman, chairman of the authority’s board, said in a prepared statement.

However, the downgrade will have an impact on bondholders and the authority’s ability to refinance the debt. The authority also faces a $25 million fee to unwind a swap agreement with UBS.

The agency’s senior-lien debt and some junior-lien debt is backed by hotel and rental car tax revenue that suffered a nearly 12% decline in 2009 and continued to fall this year after seeing strong growth in 2006 and 2007.

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