Friday, March 27, 2009
MLS: No done deal
Complicated financing plan will face intense scrutiny from investors
Portland Business Journal - by Erik Siemers Business Journal staff writer
City officials remain pessimistic about finding buyers for $36 million in bonds critical to the effort to bring Major League Soccer to town.
Failure to find a buyer could doom the proposal to renovate PGE Park for the Major League Soccer franchise granted last week to Merritt Paulson, who owns the Portland Timbers, Portland’s minor league soccer team.
The problem? The financing proposal calls for selling a complicated zero-coupon bond to a weak market in which buyers want simple and safe investments.
“I’ve been doing this since ’82 and I’ve never seen a market where we don’t know if there will be buyers,” said Eric Johansen, the city’s debt manager.
Paulson, however, remains confident, saying the biggest hurdle — securing the franchise — has been leapt.
“As it is now, it’s not a concern for me,” he said from his PGE Park office. “We faced a bigger challenge in getting to where we are now.”
The city’s $124 million plan to attract Major League Soccer includes roughly $33.7 million to upgrade PGE Park and make it a soccer-specific stadium.
Another $55.1 million would be spent to build a new ballpark for the Portland Beavers, the city’s minor league baseball team, which Paulson also owns.
The Beavers currently play at PGE Park. The new ballpark, as planned now, would be next to the Rose Garden.
Both stadiums would open in April 2011.
Paulson would personally pay the $35 million franchise fee for the new soccer team along with $12.5 million of stadium construction costs.
Those certainties aside, the bond financing for the deal is tricky.
The city wants to pay about $50.1 million of the cost of the stadiums with taxable bonds from two different revenue sources — $18.5 million backed by an urban renewal district around the Oregon Convention Center and $31.6 million from a city fund generated by ticket taxes and other fees paid at PGE Park, the Rose Garden and other facilities.
Paulson and his City Hall backers can sell $13.6 million in bonds backed by ticket taxes using a commonly used debt structure that should have no difficulty finding buyers, said Ken Rust, the city of Portland’s chief administrative officer.
Using ice cream flavors as an analogy, Rust called the bonds “plain vanilla.”
But that so-called “spectator” fund will have a limited revenue stream until previous debt service is retired on PGE Park and the Rose Garden, forcing the city to employ a more complicated “zero-coupon” debt structure for the remaining $18 million in ticket-tax bonds.
With zero-coupon bonds, investors won’t reap any rewards until the bonds mature in 2035 while still paying taxes each year on the increased value of the bonds.
In Rust’s analogy, such zero-coupon bonds are “pistachio” flavor.
The $18.5 million in bonds related to the Convention Center’s urban renewal area are even more complex.
Similar to the ticket-tax bonds, they’ll be taxable zero-coupon bonds.
But complicating things further, the bonds will have what’s referred to as a “junior lien,” meaning previous debt service will have first priority on incoming revenue, increasing the possibility of receiving a lower credit rating.
“I’m not sure what flavor it is,” Rust said.
With each new layer of complexity comes a new story to explain to investors, whittling down the potential pool of buyers, Rust said.
“The more complicated the story gets, the more buyers you start to lose,” Rust said.
Paulson admits that selling a taxable zero-coupon bond will be a challenge. That’s why he wants to make the bonds tax-exempt.
In coming months Paulson plans to employ what he calls a “unique” set of resources in the financial world, including experts in municipal finance, to explore ways to structure the bonds as tax-free and, therefore, more desirable.
“If we aren’t able to do it, I’ll be able to sleep well knowing there isn’t anything else that could have been done,” said Paulson, son of former U.S. Treasury Secretary and Goldman Sachs CEO Henry Paulson.
There is precedent for making such bonds tax-free. New York City in 2006 financed the $1.6 billion cost of building new ballparks for Major League Baseball’s Yankees and Mets with a similar strategy.
Markets might favor Paulson.
While most buyers in today’s market are so-called “retail” or individual investors unwilling to lock-up their money for long periods, some investors have expressed a willingness to hear complicated pitches, said Mike Stanton, managing director and publisher of Bond Buyer, a daily newspaper covering municipal finance.
“There are a lot of investors who prefer it this way,” Stanton said. “They feel in this current environment, they can earn a decent return.”
Moreover, the municipal bond market remains strong.
The state had record interest in bonds it sold in February. Retail investors placed orders for $130 million in bonds, even though only $103 million was available.
If that continues, the city’s pessimism may recede. The stadium bonds are likely to be issued in August.
Even if Paulson succeeds, the bonds are one of several pieces that need to fit together.
The city’s $124 million proposal also has a $15 million gap after commissioners voted to remove urban renewal money from the financing plan.
While the urban renewal district idea can be revisited, Paulson contends he has another potential source to fill the gap that wouldn’t impact taxpayers or the city’s general fund. He declined to identify the source.
Paulson also needs the state Legislature to pass a bill that would allow the state to tax player salaries and use them to help pay for the stadium.
The bill, which would yield an estimated $5 million a year, isn’t likely to be resolved until mid-summer.
If any of the pieces fall apart, and the stadiums aren’t built, Major League Soccer Commissioner Don Garber said the league could rescind the franchise.
“Without a resolution of the financial package, we wouldn’t have a stadium to play in,” Garber said.
The stakes are high, and the clock is ticking. Paulson and the city need to reach a conclusion to the financing issue by Sept. 1.
“We’re confident we can hit the deadlines,” Paulson said. “There’s a tremendous amount of urgency to make this happen.”
Financial plan
What is a bond?
Essentially a bond is a loan. In the case of municipal bonds, a government entity would receive capital upfront — a loan — and repay both the principal and interest back to the investor — or lender — over time.
What is a zero-coupon bond?
A long-term bond in which the investor receives no payments until the bond matures.
What is tax-increment financing?
A method of public financing in which a municipality can access future tax revenues to fund improvements to a district. In this case, the city will issue bonds backed by TIF funds generated from an urban renewal district around the Oregon Convention Center to fund $18.5 million of the $55.1 million Beavers stadium.
Next steps|
April 15: Deadline for the Portland City Council to act on pre-development agreement with Portland Timbers and Beavers owner Merritt Paulson. Design work on both stadiums would start after the agreement is finalized.
Aug. 1: City Council action on development agreement, including details on the lease and operations of the stadiums.
Sept. 1: Deadline for the council to act on a final financing agreement on the stadiums.
Jan. 2010: Demolition of Memorial Coliseum would begin, an estimated three-month process. Construction of the new Portland Beavers baseball park would begin once the site is prepared.
Sept. 2010: Construction at PGE Park begins.
April 2011: Both stadiums open.
esiemers@bizjournals.com | 503-219-3418
http://portland.bizjournals.com/port...30/story1.html
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