Saturday, February 23, 2008

Auction Rate Bond Meltdown Spells Trouble For Lucas Oil Stadium

The IBJ's Peter Schnitzler, who is running circles around the Star's business reporters these days, has another great story today on how the meltdown of the auction bond market recently could have a huge, negative financial impact on the debt funding for the Lucas Oil Stadium. Schnitzler writes:

The debt strategy Gov. Mitch Daniels’ top financial officials developed to save the state money on major projects like Lucas Oil Stadium has turned sour. To pay for construction, the administration over the last few years issued $810 million in “auction-rate” bonds—a form of variable-interest-rate debt that once promised to shave costs. But this month’s unexpected meltdown of the U.S. auction-rate securities market has opened the state to risk of sudden spikes in interest.

And now, to avoid extraordinary payments for debt service, Indiana may have to spend millions of dollars on fees to issue replacement bonds.

As far as Wall Street credit rating agencies are concerned, the sooner Indiana addresses its problem, the better.

“We’d expect for a state as highly rated as Indiana, in this situation, that they would take some sort of action relatively quickly,” said Nick Samuels, a vice president for New York-based Moody’s Investors Service. “The state certainly understands what this issue is. And my understanding is they’re working on finding a solution.”

Auction-rate bonds are long-term securities that behave like short-term debt. Interest rates on the debt are reset through auctions staged no more than 35 days apart. The Daniels administration turned to the burgeoning auction-rate market in a bid to keep interest costs low on major projects.

But over the last month, the once-obscure auction-rate market has become the latest victim of the global credit crunch. Recent auctions have failed to generate sufficient investor interest, raising the specter that interest rates on state projects could soar from the low single digits to 15 percent or more.

In other words, we'll soon be paying double-digit credit card interest rates on the construction debt for Lucas Oil Stadium if something isn't done right away. But to hear Daniels' budget director describe the situation, it's no big deal. "Ryan Kitchell, director of the Indiana Office of Management and Budget, downplayed the state’s challenges, saying it intends to refinance," Schnitzler writes. "And because early interest costs on Lucas Oil Stadium bonds were below expectations, he said, the state now is positioned to absorb higher-than-expected rates." Other experts Schnitzler talked to advise their clients against using such a high-risk strategy. Schnitzler notes that the person in charge during the previous Democratic administrations avoided the use of auction rate bonds. “These things change in the market a lot, and typically with auction-rate debt, you need to purchase bond insurance," Diana Hamilton said. "And also the ... fees paid to the investment banker were higher.” That latter statement is the key. "Fees paid to the investment banker were higher." Go back and check how much campaign money Gov. Daniels has collected from investment bankers who have done business with his administration and start putting two and two together.

Ironically, the same self-serving people who got us into this mess are likely to make a lot more money at our expense fixing the problem. According to Schnitzler's story, the fees alone for refinancing this debt could easily top $10 million. "[John Reed] said the biggest problem he had with auction-rate debt was that 'borrowers took all the risk, and the investment banker crowd made a lot of money off of it," Schnitzler writes. "And in many cases, they sold it to people who had no basis being in it to begin with. I hate to be a cynic, but that’s the way it is.”

The timing on this fiasco couldn't be worse. The CIB still has to figure out how to come up with the more than $10 million it will take annually to operate and maintain Lucas Oil Stadium once it opens up later this year, a small matter overlooked by the Peterson administration. Anyone heard what Bob Grand's plan is to fix that problem?


Wilson46201 said...

Maybe cricket matches in the new stadium? Add eggrolls to the food menu?

Anonymous said...

Maybe his lawfirm can be bond counsel too at only 10% of the bond for their attorney fees?

Anonymous said...

When some 30% of all property taxes collected go to service bond debts it might be surmised that the Constitution XIII isn't being adhered to. It would be best for us to follow the advice in that article and VOID all bonds that are in excess of 2% of AV (using AV as the writers of the Constitution intended it to be meant rather than our current legislators).

Anonymous said...

Don't forget the additional $12 million lost in a bad bet to lock in interest rates right after the Staduim Commission took over the project from CIB.

Anonymous said...

Amazing how no one is highlighting the melt down in this stadium deal until now.

The cost of the stadium has significantly increased to over $1 billion.

The original budget estimate of $923 million with a 50/50 split between the new Lucas Oil Stadium and the convention center expansion is now closer to 80/20.

The budget for the convention center expansion is in jeopardy because of mismanagement of the white elephant Lucas Oil Stadium.

The Colts deal cut with CIB does not provide enough funds to pay the light bills for the new stadium continues to be an outstanding problem.

Our cities future pipeline of conventions, trade shows, concerts, and events scheduled to pay for these projects has continued to decline with our largest customers deciding not to return and no new replacements being announced.

Anonymous said...

The big problem with these bond issues is the enormous fees that the attorney's and the issuers of the bonds collect in fees. I would truly like to see a line item audit of the billing that ends up being picked up by the taxpayer. If the mayor truly wanted to find the fat in the budget just start auditing all of the bond issuers and attorney fees that the city pays through out the year. I know and have talked to many of the people in the legal profession and they have stated that city and state contracts are the easiest to over bill since no one in government has the expertise or time to really take a good look at the billing process.

Anonymous said...

I have had several friends make comments about playing cricket matches in Indy and now there is a comment here. People in Indiana dont play cricket and dont know anything about it...why is there all of this sudden interest in cricket?

Wilson46201 said...

It comes from a recent spectacular gaffe by our Accidental Mayor as reported by Matt Tully in the Indpls Star:

Anonymous said...

11:05,I'm with you when you're right, and I'm with you in spirit on this one, but...

A casual read of the Constitution will tell you, our framers didn't know AV from V-8.

Would that they could've.

Aren't we all thrilled the dutiful governor rescued our experienced Capitol Improvement Board, with the services of a no-tenure group of folks called the Stadium Authority or solme such nonsense?

Love or loathe the CIB, they've got multi-decade experience in financing large and important public projects.

In these tricky capital markets, a reasoned mind might be helpful.

Anonymous said...

The CIB still has to figure out how to come up with the more than $10 million it will take annually to operate and maintain Lucas Oil Stadium once it opens up later this year, a small matter overlooked by the Peterson administration. Anyone heard what Bob Grand's plan is to fix that problem?

The Ir$ay Property Tax Levy. It will _only_ be for Marion County this time.

Anonymous said...

A bond is a loan. It's a debt. What we have with Lucas Stadium is simply one helluva HUGE MORTGAGE. That HUGE MORTGAGE is for the same term as most of our own home mortgages, 30 years.
The real kicker is that the idiots who contracted this HUGE MORTGAGE did so using a horrible VARIABLE RATE interest plan.
Well, we all know what's happened with foreclosures on home mortgages due to variable interest rates but I'm afraid the bond holder's on the Lucas mortgage won't ever need to forclose. They just look to the taxpayers to pay additional taxes to make up for the increased cost of that HUGE MORTGAGE.
They may be able to refinance but it isn't going to be easy with tightening credit worldwide. In the end, we will pay upwards of $1.5 billion or more FOR 30 YEARS, during which time, the city of Indianapolis could very well go bankrupt. Correction: You and I go bankrupt, cities default.
The shame of it all is that the people who cut this deal for Lucas Stadium will probably all be dead before this damn HUGE MORTGAGE is ever paid off.

Playboy said...

I am an auction lover. So every news related to the auction makes me very happy. Thanks for keeping us updated.

Penny Auction Online