Glendale Punished as Hockey Deal Follows Baseball
Glendale, Arizona, which has borrowed more than $355 million for professional sports venues, has seen the yield penalty on its bonds jump after approving an additional $225 million outlay to keep the National Hockey League’s Phoenix Coyotes in town.
While Coyotes fans gathered in Glendale city council chambers cheered the deal that is poised to keep the team in the Phoenix suburb’s publicly financed arena, investors have been less enthusiastic. Interest rates on some Glendale debt set a two-year high and yield spreads swelled as much as 20 percent after the city council on July 2 cleared a lease paying the team’s prospective owners $15 million annually for 15 years to manage the facility.
The deal weakens the former farming community’s credit and detracts from its ability to serve its 232,000 residents, said Pat Liberatore, an analyst at Moody’s Investors Service. The city has already had its bond rating cut by both Moody’s and Standard & Poor’s since November, and fired workers and raised taxes to close a deficit last year.
“Without this obligation, they would certainly have less expenditures and could focus more on core services,” San Francisco-based Liberatore said of the annual fee. “Their resources are competing with a sports enterprise.”
As the NHL prepares to sell the team it bought out of bankruptcy in 2009, Glendale’s financial standing may suffer from efforts to keep the franchise. Arizona’s fifth-most-populous city, just west of Phoenix, is among localities seeing their credit weaken as revenue from municipally backed sports ventures fell short during the recession that ended in 2009. Support of professional sports, especially costs associated with the hockey arena, exacerbated the fiscal slide.
Moody’s cut Glendale’s general-obligation grade in November to A2, its sixth-highest rank. S&P followed in December with a cut to A-, four levels above junk.
Both companies cited the pressure on the city’s finances of the $50 million paid to the NHL to offset the team’s losses over the last two years and keep the Coyotes.
Attendance averaged about 13,900 last season, second-worst in the league after the New York Islanders, even though the Coyotes reached the Western Conference finals the year before. They missed the playoffs in 2012-13.
The franchise, which moved to the area from Winnipeg, Manitoba, for the 1996-97 season, has never reached the Stanley Cup finals since joining the league in 1979.
Yields on taxable Glendale Build America Bonds maturing in July 2015 reached a two-year high July 8. The extra interest rate investors demanded over benchmark debt swelled to 2.06 percentage points, from 1.72 percentage points two months earlier, data compiled by Bloomberg show.
Tax-exempt general obligations of the city were also penalized. Bonds maturing in July 2021 traded July 19 with a spread of 1.69 percentage points above AAA munis, 31 percent more than in May.
The council was looking out for the best interests of the city, including the benefit of guaranteed events at the arena for surrounding businesses, said Julie Frisoni, a spokeswoman for Glendale.
“The deal that came forward they felt was the best deal that had been brought to the city, with new revenue streams,” she said.
Few municipalities nationwide have spent more for professional sports than Glendale, said Michael Hamilton, who oversees $325 million of Arizona muni funds at Nuveen Asset Management in Portland, Oregon. He said he ignores when the city issues bonds or when investors offer its debt in the secondary market.
“They’ve really dug themselves into a financial hole trying to save an NHL team,” Hamilton said. “We’re pessimistic about convention centers and sports facilities contributing to the local economy the way politicians want to portray it. Glendale has really bet on that.”
The lease agreement is with IceArizona and its managing partner Renaissance Sports & Entertainment, headed by George Gosbee, a Canadian businessman, and Anthony LeBlanc, a former executive at Research In Motion Ltd., now known as BlackBerry Ltd.
David Leibowitz of Leibowitz Solo, a Phoenix public-relations firm representing Renaissance, said he didn’t want to comment until the purchase of the team is official. In a June memo to the city, Renaissance said it estimated that “the cost to the city, if the Coyotes leave, will be significantly higher” than under the lease agreement.
The city sought a deal with IceArizona to keep the anchor tenant at its arena, which was financed by $155.2 million in revenue bonds backed by sales taxes. The NHL warned that if the council rejected the lease the team would probably relocate. Glendale still has $140 million in debt for the arena, Moody’s said July 8.
The arena was part of the city’s bid to become the area’s sports and entertainment hub. It followed the selection of the city for a stadium for the National Football League’s Arizona Cardinals, financed by the Arizona Sports & Tourism Authority, which has its own taxes. In 2008, Glendale turned to baseball, issuing $200 million in debt to finance a spring-training facility for the Los Angeles Dodgers and Chicago White Sox.
As the national economy soured and Arizona’s real-estate market collapsed, development around the hockey venue slowed and planned development around the ballpark never happened. The city had been counting on the increased tax revenue to pay its debt.
After the owner of the Coyotes sought bankruptcy court protection, the NHL purchased the team for $140 million, with Glendale agreeing to pay its losses to keep the franchise from relocating.
Those payments took a toll: Last year, confronting a $32 million deficit, the city fired 49 workers and raised the sales tax rate from 2.2 percent to 2.9 percent.
In November, the council struck a $308 million, 20-year lease agreement with former San Jose Sharks Chief Executive Officer Greg Jamison, only to see his deal to buy the team from the NHL fall through. The new mayor and the city council budgeted $6.5 million this year for arena management and improvements to the facility.
Renaissance estimates that the city would make more than $7.3 million a year through its portion of ticket surcharges, arena naming rights, parking fees, sales-tax revenue and rent on the facility.
The company also offered to set aside money from another surcharge, projected to bring in almost $1.3 million annually, that the city could draw from if revenue falls short. The group based its estimates on the average attendance at Coyotes games for the last four years.
The city is at risk of a shortfall if revenue disappoints, Liberatore of Moody’s said.
“I cannot shake the concern for the level of risk expected to be borne by the city,” Richard Bowers, acting city manager at the time, said in a memo to council members last month.
Mayor Jerry Weiers, a Republican former state lawmaker who took office in January, was among the votes against the deal. He and other council members had sought an opt-out clause for the city equivalent to the one given the new owners, who can leave after five years or if losses reach $50 million.
IceArizona has until Aug. 5 under the agreement to close its purchase of the team.
Issuers led by the Ohio Turnpike and Infrastructure Commission are selling a combined $5.1 billion this week, down from $5.5 billion last week and the slowest non-holiday period since June. Offerings are tapering as yields remain close to a two-year high.
The ratio of the yields, a gauge of relative value, is about 112 percent. The greater the figure, the cheaper munis are compared with federal securities.
To contact the editor responsible for this story: Stephen Merelman at email@example.com