Madoff-Tarnished Mets Catching Yankees in Ballpark Bond ReturnsAaron Kuriloff and Darrell Preston
Thomas Metzold, who helps oversee $29.7 billion of municipal debt for Eaton Vance Corp., generally roots for the New York Yankees. In the bond market, he likes the New York Mets, too.
Since both Major League Baseball teams sold tax-exempt bonds for new ballparks starting in 2006, the funds Metzold helps manage at the $255.1 billion, Boston-based mutual fund company have traded in and out of Mets and Yankees debt more than 100 times as the relative values have changed, he said.
“We would only favor the Yankees’ bonds over the Mets’ if they’re trading at the same yield,” said Metzold, a 26-year municipal-market veteran. “The difference in yields is what creates a market. You’re constantly looking for bonds where the historic relationships are out of whack.”
The Mets’ finances were battered by their owners’ links to the Bernard Madoff scandal, and the team’s bonds, after underperforming the Yankees’ for most of the last two years, are starting to catch up in the $3.7 trillion municipal-bond market, according to data compiled by Bloomberg.
The Mets are 22-33 on the field this season, in fourth place in the National League East. The Yankees are 33-25 and tied with the Baltimore Orioles for second place in the American League East behind the Boston Red Sox. Last week, the Mets took all four games from the Yankees in their annual interleague meetings, the first time the NL club has swept its AL rival.
Both teams sold tax-exempt bonds in 2006 and 2009 through the New York City Industrial Development Agency, backed by payments in lieu of taxes.
The Mets actually have more sources of revenue pledged to repay bondholders, but the team has been hurt by so-called headline risk in some years, Metzold said. Some of that was tied to ownership’s dealings with Madoff, who was arrested in 2008 and pleaded guilty to running the biggest Ponzi scheme in history.
A New York court last year approved a $162 million settlement between the Mets’ owners and the liquidator of Madoff’s firm. Irving Picard originally sought $1 billion from the team’s owners for the benefit of former Madoff customers. Standard & Poor’s cut the outlook on Mets bonds to negative in December 2011 after falling attendance in the team’s third straight losing season.
After the Madoff case, the Mets’ bonds “traded off,” even though it had little effect on the actual revenue streams that back the team’s debt, Metzold said.
“The ownership really has nothing to do with the security of the bonds,” Metzold said. “Now the bonds have rallied considerably as a lot of money has been chasing high-yield.”
Bonds sold to build the Yankees’ $1.5 billion stadium that pay regular coupon interest have produced a total return of about 27 percent since the end of 2010 through May 31, according to data compiled by Bloomberg. That’s similar to the return for a benchmark Bank of America Merrill Lynch index of BBB-rated muni bonds.
Total return since December 2010 on bonds sold to build the Mets’ $800 million Citi Field is about 28 percent. The Mets’ bonds underperformed against the Bank of America Merrill muni index in 2011 and half of 2012 before closing the gap and then outperforming, according to the Bloomberg data.
Alice McGillion, a Yankees spokeswoman who works for Rubenstein Public Relations, declined to comment. The Mets also declined to comment.
The returns on the Yankees’ and Mets’ bonds since the end of 2010 outpaced corporate bonds and U.S. Treasury bonds. The Bank of America Merrill Lynch U.S. Corporate Index of investment-grade company bonds had an 18 percent return in the same period and the U.S. Treasury Master Index returned 10.8 percent. The BofA Merrill High Yield Index of company bonds with lower credit ratings had a 25.8 percent return.
“The bonds are trading relatively rich because there is so much demand for high-yield bonds,” said Metzold. “People are willing to pay a higher price to get more yield.”
The Mets sold $695.4 million in bonds, all interest-paying with coupon rates between 3.9 and 5 percent, ranging in maturity from early next year to January 2046. Some shorter-term bonds already have matured.
The Yankees borrowed more than $1.3 billion through the city agency to finance the new stadium in the Bronx, including about $67 million in capital appreciation bonds in 2009.
Those zero-coupon bonds have returned about 72 percent, higher than 42 percent for a Bank of America Merrill Lynch index of taxable muni bonds with at least 10 years to maturity. The zero-coupon bonds, which are sold at discounts to face value, have implied interest rates ranging from about 4.6 for the shortest maturity (2014) to 7.9 percent for the longest (2047). The Bank of America Merrill index is composed of bonds with an average coupon rate of about 6.1 percent.
Zero-coupon bonds typically are more sensitive in value to changes in prevailing interest rates and market yields. As rates and yields have dropped since 2008, the Yankee zeros have risen in price more than conventional coupon bonds.
Metzold said he doesn’t much worry about which team is better on the field when it comes to buying their bonds. He knows some buyers feel differently.
“People have favored credits, and when the price is right I sell it,” he said.