Springtime for Arizona Baseball Whets Debt Appetite: Muni Credit
Competition between Arizona and Florida cities over Major League Baseball teams’ spring training business is proving a boon for investors in the $3.7 trillion municipal-bond market.
Mesa, the southwest state’s third-largest city, sold $94 million of tax-exempt debt last week. Most of the proceeds will go to build a stadium for the Chicago Cubs to keep them from moving their annual preseason camp, which they’ve held in Arizona since 1952. Mesa, which may cut services and leave jobs unfilled to close a budget gap of about $8 million for fiscal 2014, risked losing the Cactus League team to Florida, said City Manager Chris Brady. MLB’s regular season started this week.
Demand was so strong that the city lowered yields during the sale, said Larry Given, Mesa’s financial adviser at Wedbush Securities. Resulting yields still eclipsed those on similarly rated debt. Investors betting interest rates are set to rise were drawn by call dates that may return the cash as soon as 2017, said Michael Hamilton, who runs about $345 million of Arizona muni funds at Nuveen Investments in Portland, Oregon.
The early call is “very popular for people right now who want to deal with money in three years when yields might be higher,” said Hamilton, who bought some of the issue. “It’s a defensive bond,” he said of the segment callable in 2017.
Mesa joins cities nationwide that have taken on debt for sports facilities or other commercial ventures to boost their economies. The moves don’t always pay off. In the case of Camelback Ranch, the preseason home built by Glendale, Arizona, for baseball’s Los Angeles Dodgers and Chicago White Sox, development expected around the stadium hasn’t materialized.
Mesa, a municipality of 447,000 about 20 miles (32 kilometers) east of Phoenix, is also using some bond funds to refit a stadium for the Oakland Athletics so the team can move its spring operations from the state capital.
There are 15 teams in the Arizona spring league, with the remainder in Florida. Training typically starts in February and winds down about six weeks later, though some facilities remain in use for minor-league play.
The Mesa bonds are backed by excise taxes including city sales levies. Mesa plans to sell 11,000 acres of farmland it bought three decades ago for water rights it no longer needs. It would repay debtholders with the proceeds, which is why it used the early call structure. It expects to receive more than $100 million for the land, according to Brady.
Debt maturing in July 2027 and callable in July 2017 was priced to yield about 1.6 percentage points more than benchmark bonds, data compiled by Bloomberg show. Yields were more than double those on like-rated general obligations. Moody’s Investors Service grades the bonds Aa3, fourth-highest.
With the U.S. economy showing signs of strengthening amid a housing rebound, investors are speculating interest rates will rise. Ten-year Treasury yields will climb about 0.7 percentage point to 2.5 percent in a year, according to the median forecast of 68 analysts in a Bloomberg survey.
“The relatively short maturity of the bonds played well to what the market was looking for,” said Given, the Phoenix-based adviser for Mesa. “This thing was structured to meet the needs of the city, to have a deal that we could pay off quickly.”
Phoenix, Arizona’s largest city, is taking a different approach. The city where the Cactus League got its start in 1947 has signaled it is getting out of the spring training game.
It will lose the A’s to Mesa in 2015 and is exploring alternative uses for the stadium of its other team, the Milwaukee Brewers, whose lease allows them to move as soon as next year, said Rob Harman, deputy parks director for the city of 1.5 million. Phoenix isn’t looking for a replacement.
Spring training has become an “arms race,” said Harman.
“The Cactus League is good to the Arizona economy,” Harman said. “I just think it is time that folks look at it a little more carefully, especially as resources are tight. They need to look at it against swimming pools and parks and other things the community needs.”
The Cubs in 2009 and 2010 considered moving to Collier County, Florida, which includes Naples. Mesa offered to build a stadium to keep the team, which played in facilities in Mesa and nearby Scottsdale before moving to Mesa’s Hohokam Park in 1979. The current stadium was built in 1997. A 2010 study paid for by Mesa found a move to Florida by the team would cost Arizona’s economy $138 million per year.
Mesa residents approved the $99 million plan in 2010. The 15,000-seat stadium, dubbed Wrigleyville West, is under construction on a 144-acre site that was formerly a city golf course.
The new facility “will increase tourism and business for the area,” Julian Green, the Cubs’ vice president for communications, said from Chicago. “We have a strong national fanbase and we were able to work out a really good deal with the city.”
With the pledge of the new stadium to the Cubs, Mesa began recruiting a team from Florida for the old facility, Brady said. Meanwhile, the A’s approached Phoenix seeking $40 million in improvements at the nearly 50-year-old Municipal Stadium, Harman said. Officials capped their offer at $10 million, Harman said.
The city, home to the Arizona Diamondbacks in the regular season, doesn’t need its own team to reap the rewards of the Cactus League, Harman said. Many visitors will still fly into Phoenix’s airport, rent cars within its boundaries and stay in Phoenix hotels, Harman said.
Mesa offered the A’s as much as $17.5 million for improvements to Hohokam and nearby facilities. Phoenix will lease Municipal Stadium, near the city line with Tempe, to Arizona State University’s baseball program. The deal will reduce the city’s costs related to the stadium by $900,000 per year, Harman said.
Back in the Cubs’ home state, Illinois is set to sell $800 million of general-obligation bonds today via auction, its largest issue in 11 months. Proceeds will go in part toward school construction and transportation projects, according to Moody’s.
The offer comes as yields on local debt maturing in 10 years have exceeded those on Treasuries for the longest stretch since September. At 1.96 percent, the interest rate on the muni benchmark compares with 1.84 percent on federal debt. The ratio of the two is 107 percent, the highest since September, signaling munis have become relatively cheaper than Treasuries.
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