Orlando Dreaming of Jogo Bonito Amid Record Tourism: Muni Credit
Florida and its local governments, seeking to draw a record 100 million tourists this year, are tapping revenue from vacationers to build stadiums and lure sports teams.
Orlando, near the Walt Disney World Resort, is selling $239 million of tax-exempt bonds this week to build a Major League Soccer complex and renovate a downtown arena. The city will back the securities with its share of a Florida levy on hotel stays that has almost doubled since 2009 to an all-time high of $645 million statewide.
At least six other localities, including Miami-Dade and Palm Beach counties, are weighing stadium deals. While they are negotiating during flush times, the ventures present a risk. Should the economy weaken and depress tourism proceeds, communities that borrowed for the projects may have to use their general funds for debt service.
“This is a fairly volatile revenue source that they’re pledging, and that’s typically one of the concerns that we have from a credit perspective,” said Michael Schroeder, chief investment officer at Naples, Florida-based Wasmer, Schroeder & Co., which manages about $3.5 billion in munis.
“The positive is there’s been a significant local economic-activity rebound in the last three years, especially with the recovery of the tourism aspect of the local economy,” said Schroeder, who may buy the Orlando bonds.
From a soccer arena in Bridgeview, Illinois, to hockey and spring-training facilities in Glendale, Arizona, the cost of hosting professional sports has taxed municipalities’ finances during recessions. Localities are on the hook for about $10 billion of stadium bonds, data compiled by Bloomberg show.
In Orlando, the volatility of the tourist tax -- derived from a 6 percent levy on hotel stays -- was evident last year when revenue failed to cover payments for bonds issued in 2008 for a $480 million arena. The city tapped reserves to pay the riskiest segment of debt it sold for the Amway Center, home to the National Basketball Association’s Orlando Magic.
Those bonds carry a AA rating from Standard & Poor’s because of bond insurance. Without that protection, the debt is ranked CC, 10 steps below investment grade.
Fitch Ratings gives an AA+ grade, second-highest, to the new Orlando bonds, based on the city’s pledge to cover any shortfalls in the hotel tax with general revenue. That backstop may be triggered if growth in Orlando’s tourism-driven economy fails to keep pace with debt service, said Larry Levitz, a Fitch analyst in New York.
“We did consider coverage to be a little bit thin,” he said. The stream of tourism-tax revenue that will go toward the new bonds tallied $11.7 million last fiscal year. Yet debt service on the securities will grow to $16 million in 2018 from $11.9 million this year, according to Fitch.
Revenue from tourism taxes, which surrounding Orange County collects before remitting any surplus to Orlando, must increase to prevent the debt from straining the city budget, Levitz said.
Local officials pointed to a history of growth in tourism as visitors flocked to theme parks. The county’s annual revenue from the levy has dropped only in four years since it was first collected in 1978.
The largest declines -- 12.6 percent in 2002 and 15.4 percent in 2009 -- followed the the Sept. 11, 2001, terrorist attacks and the 18-month recession that began in December 2007.
Orlando’s portion of the tourist tax collections for the new debt is on pace to reach $13.5 million this year, up 15.3 percent from 2013, according to Fitch. It was $4.8 million in 2012.
With Burbank, California-based Walt Disney Co. (DIS) and Comcast Corp. (CMCSA) adding attractions and hotels in the region, the bonds are more likely to be paid off early than drain city coffers, said Christopher McCullion, Orlando’s treasurer. Philadelphia-based Comcast owns Universal Orlando Resort.
The Central Florida city of about 250,000 gets Fitch’s top general-obligation grade.
Orlando City Soccer Club, owned by a Brazilian who has pledged to recruit a marquee player from that country, will boost the economy by attracting South American travelers, said Brett Lashbrook, the team’s chief operating officer.
Orlando is also putting more than four years’ worth of debt service in reserve, McCullion said. The reserves and the city’s pledge of general revenue make the debt safer than the 2008 bonds, McCullion said. After exhausting a liquidity fund, the city tapped $1.2 million in reserves for debt service on those bonds as tourist-tax revenue trailed projections made before the recession.
The extra yield investors demand on some of those bonds over benchmark munis has averaged about 3.3 percentage points since the city tapped the reserves on Nov. 1, Bloomberg data show. That’s up from about 2.4 percentage points in the five months before the unscheduled drawdown.
Major League Soccer awarded Orlando an expansion team in November after Brazilian investor Flavio Augusto da Silva bought a majority stake in the franchise and signed an $84 million stadium deal with local officials. The team, which is also seeking as much as $60 million in state tax breaks, will contribute about $40 million, said Lashbrook.
The downtown venue will seat 19,000 under covered stands when it opens next year. Attendance at regular season games will average 18,000, according to projections made by Conventions, Sports & Leisure International and paid for by the team. In comparison, the Magic are drawing 16,094 fans on average this season, according to ESPN NBA Attendance Report.
Officials with the soccer team said they want to capitalize on Orlando’s growing number of Brazilian tourists, who may flock to see “o jogo bonito,” or “the beautiful game,” on their trip. They trail only Canadians among non-U.S. travelers to Florida, state figures show.
More than a third of the 1.8 million Brazilians who traveled to the U.S. in 2012 visited Orlando, which led New York as their top destination, according to the U.S. International Trade Administration.
Brazilians, “stay twice as long and spend three times as much” as tourists from other countries, said Lashbrook.
Other localities are eyeing the tourist tax for stadiums after almost 95 million people visited Florida in 2013.
Miami-Dade is negotiating with the Miami Heat to extend a deal giving the National Basketball Association champions about $6.4 million annually in hotel taxes. The team wants to renovate the county-owned arena where it plays.
Palm Beach County lawmakers are considering using hotel taxes and other revenue to build a spring-training facility for Major League Baseball’s Houston Astros and Washington Nationals.
Miami-Dade prepares for the volatility of the tourist tax revenue with reserves and “reasonable” growth projections, said Deputy Mayor Ed Marquez. Lisa De La Rionda, a spokeswoman for Palm Beach County, didn’t have an immediate comment.
Orlando’s bond sale includes $20 million to build the soccer complex and $167 million to renovate the Florida Citrus Bowl, where the soccer team will play its first MLS season next year. About $50 million will go toward building a performing arts center, said McCullion, Orlando’s treasurer.
Orlando had $1 billion in debt as of Sept. 30, 2012, with about half backed by hotel levies, according to its most recent annual financial report. The city received no money from that revenue stream in 2009 and 2010, when the county’s collections didn’t produce a surplus.
“The long-term trend is increasing tourist tax revenue,” McCullion said. “Not to say there may not be some disturbances along the way, but we’ve never seen a disturbance last longer than a year or two.”
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