What Goldman’s muniland charm offensive doesn’t tell you
When I did a Google search earlier yesterday for “Louisville Arena Authority bonds,” which were recently downgraded to junk by Moody’s, I saw this paid ad from Goldman Sachs alongside the results:
|How Goldman Sachs helped Louisville build a home for college basketball|
It’s part of a series of ads touting the investment bank’s underwriting of the $349 million bond deal from 2008 that financed the construction of a new basketball arena at the University of Louisville. The ad says:
When Louisville wanted to build a state-of-the-art arena for their men’s and women’s college basketball teams, the city knew it would have a big impact on the local community. See why basketball fans weren’t the only ones cheering when Louisville built a new arena downtown.
I’m not sure that hyping a junk muniland deal that threatens to swamp a city with unexpected bond payments is the best way for Goldman to redeem its tarnished reputation.
Goldman must have understood how flimsy this deal was when it was initially structured. The original Moody’s and Standard & Poor’s ratings were Baa3 and BBB-, respectively, the lowest possible ratings a deal can receive to still be considered investment grade. It’s not a big surprise that after three years the deal is junk.
The Goldman ad campaign for the Louisville arena deal includes a glitzy video from 2011 that’s been viewed over 3,500 times on YouTube (Goldman has disabled embedding for their videos and does not allow comments, but you can watch it here). This is a big story for Louisville, though, and there have been plenty of comments in the local media in recent months about how poorly the financing was structured (emphasis mine):
With the stark realization that the KFC Yum! Center business model ain’t cutting the mustard, the Louisville Arena Authority (LAA) is meeting today to try and figure out what’s next. They had better come up with something good as the city of Louisville is facing a serious dilemma because the city is ultimately responsible for repayment of the $349 million in bonds used to pay for construction of the arena.
When interest is added to the principal, the bondholders are owed $573 million. Either Louisville pays this amount or defaults on the bonds, which really isn’t an option as it would destroy the city’s credit rating. However, reduced city services to make up the shortfall could be a real possibility…
…With the ULAA [University of Louisville Athletic Association] getting the majority of arena income, the LAA was supposed to get its revenue to repay the bonds from the tax increment financing district (TIF) in the area surrounding the arena, which in actuality is most of downtown as the TIF creators were very generous in stretching out the TIF. Despite this generosity, the arena TIF district generated only $2.1 million in 2011 versus the forecasted $6.7 million. Add in operating costs double what were forecasted and arena finances are perilous by any sense of the definition.
Even if you factor in the recession, the revenue miss on the tax increment financing is enormous. The cash-flow forecasts, found in the bond deal’s official statement (page 26 of the Leib Advisors report in the appendices), assumed an annual increase in TIF revenues of 5 percent. It would seem the underwriter, Goldman Sachs, should have pushed back a little more on that assumption as being overly optimistic. But since the city of Louisville was there to backstop the payments, Goldman had less to worry about. If the majority of municipal bond deals were financed this poorly, muniland would be in real trouble.
EMMA: KENTUCKY ECONOMIC DEV FIN AUTH LOUISVILLE ARENA PROJ REV CAP APPREC
Louisville Arena Authority: July 18 conference call to discuss the status of the bonds
Business First: Moody’s downgrades Louisville Arena Authority bonds