Super Bowl Host Ends Swap Pain With Payment to BofA: Muni Credit
Louisiana residents set to welcome a record-tying 10th Super Bowl to New Orleans just got another reminder of the botched financing to repair the city’s National Football League stadium after Hurricane Katrina hit in 2005.
The Louisiana Stadium & Exposition District, which the state created in 1966 to operate the Superdome, sold $361 million of debt last week, most of it tax-free. Almost a third of the proceeds went to pay Bank of America Corp. (BAC) to end an interest-rate hedge.
Investors such as Nuveen Asset Management bought the securities on the view that the region has recovered from the most expensive hurricane in U.S. history. Yet the deal highlighted how taxpayers’ costs wound up being more than triple the agency’s $44 million share of renovating the stadium, now called the Mercedes-Benz Superdome, where thousands took shelter after the deadly storm.
“This is the most expensive addition to a domed stadium in the history of America,” said state Treasurer John Neely Kennedy, based in Baton Rouge, the capital. “It’s been a nightmare. It wasn’t a good deal for the state.”
The stadium authority joins issuers, including California’s water resources department and Detroit’s water and sewer unit, borrowing in the $3.7 trillion municipal market to unwind swaps as bets on the direction of interest rates proved wrong. Issuers have paid at least $4 billion to banks to end the contracts after the deals failed to protect them as designed.
“Municipal governments need to get out of this casino mindset,” said Robert Brooks, a professor of risk management at the University of Alabama in Tuscaloosa. “Voters aren’t electing officials to bet on where interest rates are going.”
The latest sale, which refinanced the 2006 bonds that paid for stadium repairs, increased the authority’s debt by about $82 million. Some proceeds also went to pay $108 million to unwind a swap with Bank of America Merrill Lynch, one of the underwriters of both bond issues.
This month’s deal also settled a lawsuit with the company, in exchange for $9 million in reduced fees and other offsets, said Whit Kling Jr., director of the State Bond Commission.
In the latest sale, the authority priced 10-year tax-exempt bonds to yield 2.68 percent, 0.01 percentage point below a Bloomberg index of general-purpose revenue debt.
Moody’s Investors Service raised its rating on the issuer this month three steps to A3, seventh-highest, citing rebounding hotel-tax receipts, revised leases with sports teams and changes to the debt structure.
The authority’s move to refinance the 2006 borrowing, which included auction-rate securities, and also take out the swap was a strength, said Steve Hlavin, a portfolio manager in Chicago for Nuveen. He bought some of the debt.
“What I particularly liked was what the bonds were sold to do,” said Hlavin, who manages $5 billion of munis for Nuveen, including a Louisiana fund. “Whenever we can see issuers cleaning up financial structures, we see that as an inherent strength.”
The hotel occupancy tax that goes to the authority generated $37 million last year, surpassing a peak of $36.2 million in 2005, according to bond documents.
After Katrina, state officials pushed to renovate the stadium because they wanted to have it operating for the New Orleans Saints’ 2006 NFL season. In 2005, the Saints played at sites including Baton Rouge and San Antonio, whose then-mayor told ESPN he wanted to bring the team to his city.
Kathleen Blanco, Louisiana’s governor at the time, pushed the 2006 bond deal, which Kennedy and Kling said they opposed. Blanco said in e-mail last year that “losing the Saints was not an option.” Blanco didn’t respond this week to requests for comment through her spokeswoman, Marie Centanni.
Greg Bensel, a spokesman for Tom Benson, owner of the Saints, declined to comment, and said Benson never suggested he’d move the team.
The 2006 deal included $294.3 million of auction-rate securities that covered the authority’s $44 million share of renovation costs for the Superdome, as well as refinancing older bonds and paying other costs. As for the rest of the $336 million repair bill, $121 million came from the state, $156 million from the Federal Emergency Management Agency and $15 million from the NFL, according to a release from the venue.
Auction-rate securities are long-term debt with interest rates set through periodic bidding. They were sold as a way to cut borrowing costs by taking advantage of relatively lower short-term rates. Merrill underwrote the bonds and sold the authority a swap that was designed to further hold down costs by locking in lower rates. Bank of America bought Merrill in 2009.
The deal helped return the Super Bowl to the city Feb. 3 for the first time in 11 years, tying it with Miami for hosting the most title games.
The auction-rate market collapsed in 2008 during the financial crisis. The state bought all the bonds to keep the authority from paying penalty rates.
After interest rates fell as the Federal Reserve dropped its overnight target close to zero in December 2008, the cost of unwinding the swap rose to $108 million. The district’s issuance costs from the 2006 deal also rose to about $42 million, data compiled by Bloomberg show. Combined, the agency wound up shouldering more than three times its original share of the repair bill.
Kennedy said at a 2006 bond commission meeting approving the sale that the swap could backfire and that he felt as if he had “a gun to my head,” according to a transcript.
“We got pushed into a corner,” he said this week. “Sometimes when you get pushed into a corner, you make bad decisions.”
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