SBJ/October 19 - 25, 1998/No Topic Name
Slipping by sport's financial
Published October 19, 1998
Want a quick snapshot of the progress sports finance has made this decade and the obstacles that still remain? Look no further than the America West Arena.
Before the arena opened in 1992 as the home of the Phoenix Suns, team owner Jerry Colangelo pitched in tens of millions of dollars of his own capital to get the project off the ground. This private-public partnership was one of the first cracks in the long-standing tradition of municipally financed stadiums and arenas. To pay his contribution, Colangelo got a bank loan.
"When that took place at that given point in time, it was unique," Colangelo said of the transaction. But that is hardly the case today.
The big money generated by sports has brought sports finance to another level, introducing a degree of complexity unthinkable six years ago when Colangelo took out a loan to pay part of the new arena's cost.
In 1998, with interest rates low, Colangelo refinanced his debt and got insurance for the bonds he issued to replace the loan. Bond insurers, who until then had been unimpressed by arena revenue, had never before insured private bonds for a sports facility. This also started a trend, Colangelo said.
Bond insurance may seem obscure to the casual sports fan, but Colangelo recognized that it was just as important as any player transaction. If he could persuade a bond insurer to bless his refinanced debt, it would not only give his bonds a low interest rate but also stamp sports revenue as credible, reliable collateral. In 1992, he would have been laughed off Wall Street had he gone knocking for bond insurance. He was lucky enough to get a loan.
As he would later do with Bank One Ballpark, however, Colangelo used America West as a virtual revenue showcase. Sponsorships, luxury suites and concessions were put to work like never before. He crammed as many teams into the arena as possible, including squads from the WNBA, the NHL and the Arena Football League.
The financial institutions wanted revenue; Colangelo gave them revenue. Even just a year ago, sports-facility revenue was considered suspect as collateral for bonds and loans. No longer. America West management expects gross revenue from fiscal 1995 through fiscal 1999 to jump 23 percent to $21 million.
"It is important for those in ownership and management to recognize that just as technology continues to change, so does the financial world," Colangelo said. "You have to recognize the opportunities that are available for those of us within the industry. The financial institutions have become much more aggressive and have looked upon the sporting world as a new opportunity."
Colangelo succeeded in winning bond insurance since duplicated by the American Airlines Arena financing in Miami. Nonetheless, America West was not a slam-dunk. Investors insisted on more attractive terms than Colangelo was hoping to pay. A hesitancy still exists among investors when it comes to buying debt issued for sports facilities.
"The bonds were treated like low investment grade," said Greg Carey, a vice president with Salomon Smith Barney, who helped sell the America West bonds earlier this year. "We can only sell to very sophisticated investors. We are paying a price in liquidity."
What Carey means is that because private arena bonds are still not well-understood and widely circulated, the handful of investors willing to buy them insist upon favorable terms.
So even if Colangelo has the best story in the world to tell what with $100,000 luxury suites and lucrative sponsorships at America West he is still paying higher interest rates than his case should merit. That can translate into millions of dollars over the life of the debt.
Add in global financial turmoil that has caused credit terms to worsen, plus the NBA lockout, and the sports finance road becomes quite bumpy.
The labor difficulties in basketball are causing problems for several deals, said Angela Brock-Kyle, a finance executive at TIAA-CREF, a large buyer of sports facility debt.
"There are now deals in the marketplace that involve basketball, and with the lockout situation, people are focused on that issue," she said. Brock-Kyle declined to identify the deals, which have yet to be announced.
In fiscal 1998, the NBA's Suns contributed more than 40 percent of America West Arena's event revenue. If the America West refinance had come along today, it would have been far more difficult for Colangelo because of investor uncertainty. Investors would want to know how bonds could be paid for if there is no NBA season.
In America West's case, a one-year reserve fund exists to pay the debt in the event the NBA season is canceled. If the lockout lasts longer, however, the bond insurance probably would take effect.
For teams hoping to refinance, Brock-Kyle said, the main choice other than a reserve fund is to have a deep-pocketed corporate parent to guarantee the debt.
Despite the unhappiness over the interest rates for transactions like America West, the deals represent a sea change from just a few years ago. The America West bonds are known as investment grade notes, meaning they earned a solid score from rating agencies.
Previously, bonds issued by private entities to fund sports-facility construction received very low marks and had to pay higher rates.
"It is getting closer and closer to what you find in the regular corporate market, investment grade and just below," said Patrick McAuliffe, Fleet Financial Group's head of sports banking.
The corporate market is where creditworthy companies issue their debt. This market is highly liquid and enjoys more advantageous terms than sports debt. But the gap is narrowing, say experts such as McAuliffe.
The importance of that narrowing cannot be underestimated. It means that teams hoping to build facilities have a much wider pool of capital available than they ever had.
Stadium and arena construction is not the only beneficiary of the change in sports finance. The major leagues are also enjoying a sudden boon.
The NFL and Major League Baseball, flush with media dollars, both redid credit facilities this year. The previous credit facilities, which make loans available to teams, simply parceled out a large loan to the teams.
But the new credit facilities will securitize media revenue. The media dollars contractually obligated during the next several years will be bundled into a security and then sold to investors. Proceeds will be placed into the credit facility, which will then make low-interest loans to the teams.
Another sign of the transformation in sports finance: the sudden stream of financial institutions targeting the area.
In just the last few months, Chase Manhattan Corp. and Legg Mason have added sports banking teams, and other sports financial groups have bulked up.
"As a team we dealt with local bankers, but now you have a situation where major banking companies like First Union and Bank of America all have divisions that specialize in sports finance," said Ed Snider, vice chairman of Comcast-Spectacor, which owns the Philadelphia Flyers and 76ers plus the First Union Center and the Spectrum. Snider owned the two teams before selling them to Comcast several years ago.
"There was no reason for them to set up special units before because the numbers weren't large enough," he said. "Now with multi-hundreds of million-dollar deals ...it behooves them to have a piece of the action."
Many teams are also using what is known as the private placement market. The bonds Colangelo sold to investors require public disclosure and are made available to a wide range of investors. Teams and individuals looking for more discretion can sell bonds to select investors with no public disclosure, a private placement.
Once the province of elite companies, sports teams increasingly are using this method. Recently, Tom Hicks and Ross Perot Jr. placed $180 million of private notes with investors to fund their contribution to the new Dallas arena.
What will the future bring? Even wily types like Colangelo are unsure.
"I am sure there will be another round of something new and unique," Colangelo said. "What it is is beyond me."