Monday, June 30, 2008

Underway with no way on

I really have no idea how the MajesticStar financing situation will evolve today. If forced I still say the whole deal is 'too big to fail' as it were, but it's getting harder to believe that.

What if today or some point before completion this all falls apart. It's almost too painful to think about. It would be one thing if this had all happened earlier, but Barden can't back out now financially and the site as everyone is prone to report has 'steel rising'. The white elephant potential is pretty high.

If the license is ever actually revoked the first result would be endless litigation. Barden suing the gaming board and others, subcontractors suing contractors, contractors suing Barden, parties I can't even conceive of suing each other. It's not like anyone else is going to step in and get the license and proceed ahead anytime soon. What if the competitive bidding out of the license has to start from scratch?

Then the financial consequences. For Barden it would be disastrous. For a lot of local subcontractors it would not be fun. Then there is the city which since Act 47 plan forward has written into its budget anticipated casino revenue to keep the city afloat. That won't be there, nor will any community contributions in the Hill District or elsewhere. Then there is the new Arena. This is so slim that it doesn't deserve to be called a silver lining, but there is a bit of a pewter lining. Remember all the haranguing over how to get the new arena financed once Isle of Capri didn't get the casino license? If Barden had proposed building an arena himself the way the Isle of Capri folks did, then the revocation of the license would put the whole arena project dead in the water. However, Barden's role is indirect the way it all played out. The core financing in the form of $7.5 annually is indeed slated to come from him, but he isn't really involved in building it. So who does bear the risk of the arena project.

One answer is the Sports and Exhibition Authority (SEA) because THEY ALREADY BORROWED THE MONEY. That raises lots of questions. If the Barden money stream does not start flowing in as expected, what happens? It is not an immediate problem in that they have some built in debt reserves built into the offering.. Also I assume payments for construction of the arena are not due 100% up front and instead will draw down the bond proceeds on some pro-rata basis. They have been making payments on the bond since November.

Nonetheless, at some point once construction accelerates, the arena will eat up all or more of the bond proceeds and without casino payments this could get interesting. The bonds are essentially revenue bonds backed by all the revenues of the SEA. I have not had time to read through the bond statement entirely, but the bonds are insured which is curious unto itself a bit for revenue bonds. But it gets a bit weirder in that the revenue backing the project are not limited to the revenues specifically tied to the arena, to include the Barden payments, rent or other sources.. but all the SEA revenue. At least that is my reading. So before these bonds could default to bond insurers it seems the holders have claims against most SEA revenue. The problem then becomes that the SEA needs a lot of that revenue for other projects. So even though the bond explicitly says that there is no clawback liability to the state nor any political subdivision (i.e. the city or county) it is not that simple.

Since the SEA is a creature of the city and the county I bet there are costs that would be their responsibility if all other revenues go toward required bond payments. So instead of the whole project providing a pretty serious revenue bump for the city, it could become a net cost.

And if you really want the Dr. Doom perspective on all this (above was the rosy part)... Go to the bond statement I linked above. I didn't realize this until now, but the SEA bond for the arena looks to me to be a variable rate bond. These variable rate bonds have proven to be pretty disastrous for a lot of public entities in the last 6 months... For example read about UPMC's experiences with some variable rate bonds. Anyone have any more insight on that? The only reason I put this last and not first is that I don't have sufficient information to know if the SEA has hedged out the variable interest rate risk with swaps or something else. If they did, this might be a non-issue. But it's something I would be looking into if I were an intrepid financial reporter though.

update: I still don't have any first hand info on what hedging the SEA did for this bond, but according to Bond Buyer last year when they were setting this up:

The $247 million of variable-rate bonds are immediately going to be swapped to fixed rate, so the authority will know exactly what its debt service and swap payment obligations will be, DiMartini said. The deal will include a SIFMA swap for the tax-exempt portion, and a LIBOR swap will be used for the taxable portion, he said. "You're trying to find the balance between variable and fixed that gives you the lowest cost of borrowing," Conturo said.

I still wonder a bit what they did in the end, but it looks like they at least planned to hedge the variable interest rate risk going in.


Blogger Felix Dzerzhinsky said...

Damn, Chris, you're right -- pp. 9-10 (pp. 19-20 of the PDF) indicates that the interest rates are indeed set weekly. And it's not as if they'll be able to easily refinance the way UPMC did, given the unreliability of Barner's contributions. The official statement does mention some swap agreements, though I'm not clear on the details.

To my eyes after a quick skim of the relevant parts, it does not appear that the entire revenues of the SEA are pledged to pay off the bonds, only the revenues pledged for the arena specifically, which make up the Trust Estate (see p. 17 of the document, aka p. 27 of the pdf). The "Special Revenues" referenced here includes Barden's money ("The Casino Operator Agreement").

Or at least, that's my reading -- please clarify for me.

In light of all this, who is liable for paying off these bonds? The SEA has no taxing power. So how would they make up any shortfall in the funds of the Trust Estate?

Methinks this is a matter of a wee bit more significance to the city than who pays for City Council's lawyers.

Monday, June 30, 2008 6:05:00 PM  
Blogger C. Briem said...

I can't quite tell where the final risk really lies and which revenue streams are really encumbered. Fester has taken a crack at the convoluted moral obligation that may exist no matter. But who pays in the end if the designated revenue is not enough to make bond payments? Could be the bond insurance. If they can't or don't want to go that route, and they might not given that they may want to engage in other borrowing sometime soon (say if construction costs for the arena escalate past what there is a contingency for) then I believe SEA bills can be split between city and county. If one or both of them can't pay then I dunno.. Does Act 47 cover special districts and public authorities? That endgame is a bit ahead of even this gloomy post, but as a hypothetical question it's worth asking.

Monday, June 30, 2008 7:11:00 PM  
Blogger Felix Dzerzhinsky said...

The official statement pretty explicitly states that the city and county are not obligated for the bonds, nor is the Commonwealth apart from the lease payments to the SEA. (This is the bit in all-caps right on the first page.) Who pays will undoubtedly be a political question. There is serious finagling and fallout to come if Barden's efforts fall through!

Tuesday, July 01, 2008 12:58:00 AM  
Blogger C. Briem said...

thats right... but I am talking in general on who 'owns' the SEA in a sense. Even with as much legal indeminifcation you can put into the bonds, this can't be good for the SEA overall and at some point you get to the question of who must pay their bills which I think is eventually the city and county together (sort of proto-consolidation in there). And that all begs the question: Would they really choose to let the bonds default on their own. A hypotethical question for sure.

Tuesday, July 01, 2008 9:04:00 AM  
Anonymous Anonymous said...

There's a front-page article in today's WSJ that your readers might find interesting.

It's not just Barden. Capital for the entire US gaming industry has dried-up in the last six months because travel to Vegas is down this year and the economy--and high gas prices--are squeezing the returns of local casinos. Yep, turns out that gaming is not "recession-proof."

According to the article, several high and low profile gaming companies are seeking workout assistance and consulting with high-profile bankruptcy attorneys.

Not a good time to have a huge hole in the ground on our riverfront. At least they haven't turned shovel in the hill for the new arena yet. Maybe the Penguins are destined to move to KC?!

Tuesday, July 01, 2008 9:11:00 AM  
Blogger C. Briem said...

note all.. see update I put into the post with a little more info on the SEA bond.

Tuesday, July 01, 2008 10:07:00 AM  
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