SBJ/June 1 - 7, 1998/This Weeks Issue

Heat bundles salaries into financing deal

The Miami Heat have found a novel way to deal with escalating player salaries: They included them in the financing deal for their new arena.

And while the Heat may be the first to combine arena financing with salary needs, they probably won't be the last. As the pace of new arena and stadium construction accelerates, teams funding venues may follow the Heat's example and issue extra debt instead of relying on bank lines of credit.

Of the $180 million in bonds the Heat sold to investors in the last month, just over 70 percent will fund construction of the new American Airlines Arena in downtown Miami. The extra $45 million replaces a line of credit with SunTrust Banks that needed to be refinanced every five to seven years.

"Typically, you fund the project separately from the team needs," said Aaron Barman, the Prudential Securities investment banker who helped sell the deal to bond investors. "As rates continued to drop, it became clear that the Miami Heat could package in one financing both the team needs and the arena capital needs at relatively low costs."

The Heat locked in an average interest rate of 6.7 percent for the bonds.

Removing a bank creditor also impressed bond insurance agency MBIA Corp., which insured the bonds. It was the first time private bonds issued for a new arena received bond insurance.

The Heat expect a $10 million loss in the 1998-99 season — the last before the new arena opens — so the extra capital will help pay player salaries, rent and other general costs, said Jay Cross, team president.

Because the Heat pledged the team as collateral for venue financing, Cross said the team actually had little choice in terminating the SunTrust line of credit. Without the team as collateral, he said, a bank will not provide money.

The Heat lost roughly $6 million this year after eking out a profit in the 1996-97 season. Their current arena is owned by the city government and generates relatively little revenue for the team.

American Airlines Arena, which will open for the 1999-2000 season, is designed to be a revenue bonanza. There will be 65 luxury suites, including four $500,000-a-year courtside suites.

The team has already signed four of 10 expected sponsors: Carnival Cruises, Citicorp, Lucent Technologies and Florida Power & Light. Most of the others, which will include beer and soft drink sponsors, should be announced by the end of the summer.

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