Win or Lose El Paso Guarantees Baseball Bondholders: Muni Credit
El Paso, Texas, the second-largest U.S. city without a professional sports team, is borrowing $53 million with yields at record lows as it joins municipalities nationwide betting that stadiums will rejuvenate downtowns.
The city of about 666,000 demolished municipal offices in April to make room for a minor-league baseball stadium seating 9,000. It is preparing to issue bonds as soon as next month, part of a $500 million urban renewal project to attract companies and young professionals. The city will use general-fund revenue to make up for any shortfalls on bond payments.
From Birmingham, Alabama, to Hillsboro, Oregon, municipalities are building stadiums to lure teams and spur their economies. The venues appeal to localities trying to boost revenue after the 18-month recession that ended in 2009. David Jaderlund at Jaderlund Investments LLC in Santa Fe, New Mexico, said he’ll consider the El Paso bonds even though he typically avoids stadium debt because sports aren’t an essential city service.
“They have been very conservative about their indebtedness,” said Jaderlund, a general partner at the money manager, which owns about $15 million in munis of the city and county of El Paso and a local agency.
Only Austin, with 821,000 residents 600 miles (965 kilometers) to the east, exceeds El Paso in population while also lacking a franchise related to the four major U.S. sports. El Paso officials want to follow the path of AAA rated Oklahoma City, which lured the National Basketball Association’s Thunder.
El Paso has the highest poverty level of Texas’s six biggest cities. Yet it benefits from a diverse economy anchored by the Fort Bliss Army base, Standard & Poor’s said in a report. Troop levels at the site rose to 33,000 last year from 9,000 in 2007 amid base realignments.
Situated across the Rio Grande from Mexico, El Paso has a AA credit grade, Standard & Poor’s third-highest level. The city plans to issue revenue debt for the ballpark within 60 days as investors in the $3.7 trillion municipal market have pushed its yields to historic lows.
Taxable El Paso Build America Bonds maturing in August 2034 traded May 22 at an average yield of 3.46 percent, the lowest since their September 2009 issue, data compiled by Bloomberg show. That was 2.38 percentage points more than benchmark Treasuries, the narrowest spread since February.
At the same time, tax-free bonds due in August 2026 traded this month at an average yield of 2.41 percent, the lowest since they were issued in August 2011, Bloomberg data show.
While sports projects in Oklahoma City and other municipalities sparked development, some left localities worse off.
Harrison, New Jersey, lost its investment-grade status in 2011 after a $200 million venue for Major League Soccer’s Red Bulls failed to meet projections. Vadnais Heights, Minnesota, built a $25 million sports complex that didn’t generate sufficient revenue, prompting the city to stop appropriating payments this year. Rating companies cut the city to junk.
“Sports stadiums have gotten to be very expensive and they’re not necessarily going to have a full payback to the community,” said Richard Ciccarone, managing director at Oak Brook, Illinois-based McDonnell Investment Management LLC, which oversees $8 billion in munis. “They squeeze out tax dollars that are needed for more essential purposes.”
El Paso acted last year when business leaders Paul Foster and Woody Hunt bought a San Diego Padres minor league team in Tucson, Arizona, with plans to move it to the new ballpark in 2014. Foster is chairman of El Paso-based Western Refining Inc. (WNR), with oil operations in Texas and New Mexico. Hunt is chairman of Hunt Cos. Inc., which owns or manages $16 billion in real estate, its website says.
The plan sparked lawsuits because El Paso tore down the 10-story municipal hall built in 1978 and approved a new park without a public vote. The lawsuits have been dismissed or withdrawn, Josh Hunt, Woody Hunt’s son and a part owner of the team, said in an interview.
The city skipped a feasibility study and a public vote because Hunt and Foster said any delay might cost El Paso the team, said Bill Studer, deputy city manager. Buying lots for a ballpark elsewhere downtown would have taken more time and money, Josh Hunt said.
“There’s a very high probability we would have lost the chance to have a team,” he said.
Four hundred pounds (181 kilograms) of dynamite knocked down the city hall in less than 10 seconds on a Sunday morning in April, leaving 1,000 truckloads of debris that took about two weeks to remove.
To pay for the ballpark, El Paso voters in November approved a 2 percentage-point increase in hotel taxes to back the bonds. Voters also passed $473 million in borrowings for other projects, including a $180 million arena that officials want to use for minor-league hockey and basketball. It won’t be built for at least five years, Studer said.
The hotel tax, parking fees, ticket surcharges and the baseball team’s rent won’t cover all of the ballpark bonds’ debt service, so the city will spend about $500,000 annually from its general fund initially, subject to appropriation, Studer said. That amount would decline if the city takes in more hotel taxes, Studer said.
To replace city hall will cost about $35 million to buy and rehab four downtown buildings. To pay for the move, the city will issue bonds, which also don’t require a public vote, Studer said.
The Tucson team moving to El Paso sold 3,000 tickets per game last year, the lowest attendance in the 16-team Pacific Coast League. El Paso’s team will do better, said Mike Feder, general manager of the Tucson Padres.
“They’ve never had Triple A baseball, their downtown stadium will be fantastic and their ownership group has deep roots in the community,” said Feder, who isn’t moving with the team.
Elsewhere in the municipal market, yields on benchmark 10-year munis are close to a seven-week high. The iShares S&P National AMT-Free Municipal Bond Fund, the largest exchange-traded fund tracking the municipal market, is at the lowest price since July.
The ratio of the two interest rates, a gauge of relative value between the asset classes, is about 88 percent, the lowest since January. The lower the figure, the more expensive local-government bonds are compared with federal securities. The ratio has averaged 92 percent since 2001.
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