Friday, October 30, 2009

ESDC’s Bond Buyer Happy Talk About Restructuring and Refunding Arena Bonds

We can’t help noting that our critique of ESDC’s sloppy work vis-à-vis its hoped-for issuance of tax-exempt bonds for an Atlantic Yards Nets basketball arena (So Many Unchecked Approval Boxes: Why Any Sensible Bond Buyer Should Probably Steer Clear of Buying Atlantic Yards Nets Arena Bonds) published Wednesday has been quickly followed up by two happy talk articles in which Frances Walton, ESDC’s chief financial officer, endeavors to convey the notion that ESDC’s preparations are in better shape than we and the Wall Street Journal asserted. Specifically, an article in Reuters, Thursday (NYS sets big bond sale, waits on other large issues) and one in the Bond Buyer today (Atlantic Yard Bonds May Be Sold, Escrowed: Official, By Ted Phillips).

Of the two articles, the one that interests us the most is the one in the Bond Buyer. (The Reuters article, and its headline, also addresses an unrelated proposed issuance of bonds for the World Trade Center site.) Develop Don’t’s Destroy has a report of the Bond Buyer article up at: Atlantic Yards Arena Bond Sale Still a Big Struggle, 10.30.09.)

In the Bond Buyer article Ms. Walton says, “The structure and the timing of the bonds are still in flux.” No kidding. Apparently things are so much “in flux” that Ms. Walton envisions the “flux” about how the bonds would be structured would carry right through until after the bonds were issued. The Bond Buyer article has Ms. Walton providing the information that the arena bond transaction would be issued:
. . . with the expectation that it would be coming out of escrow to be restructured. That’s one of the possibilities they are looking at,” Walton said. “But they’re also looking at the structure with an early call ... if something changes, if the court ruling went against you, you’d just refund the bonds. Those are the two different approaches.”
The article then notes that, “Forest City Ratner spokesman Joe DePlasco declined to comment on the deal.”

We are sure that Ms. Walton (who used to be in the habit of taking our legal advice when she joined us at the state agencies where she began in public finance) knows that a bond deal that is issued in order to be immediately “restructured” is pretty dead-on target to be exactly the kind of “black box” deal that the IRS has repeatedly found doesn’t meet its requirements for tax exemption (thus making bonds taxable). We also find curious the notion that if, as Ms. Walton suggests, the “court ruling went against you” (which is to say that no arena could be built) that ESDC would “just refund the bonds.” We can definitely understand Ms. Walton’s reference to an “early call” to redeem the bonds when for various reasons* the arena can’t be built, but the phrase “refund the bonds” in general public finance parlance means keeping bonds outstanding (i.e. not its not like “refunding” a ticket price and sending people home when your headline act doesn’t show up). Issue the bonds in order to immediately refund them and keep bonds outstanding with a different structure? The IRS surely ought to like that.- Not! (We refer once more to our comment about “black box” transactions.) Why talk about keeping bonds outstanding when you find out that the arena can’t, in fact, be financed? It wouldn’t be possible. The IRS would consider that an over-issuance prohibited by the tax code, making the bonds taxable (once again) as “arbitrage bonds” (retroactively to their date of issuance).

(* In Ms. Walton’s attempt to paint an optimistic picture she refers to only ONE “court ruling” as preventing the building of the arena. As per the more detailed analysis of our previous post there are a number of separate rulings that could make the arena unfinancible. One ruling would prevent the developer from getting the southern half of the site needed for the arena. An entirely separate legal action is likely to prevent the developer from getting the northern half of the property needed. Other rulings would simply deprive ESDC of any ability to proceed, period. Ironically, a number of the legal actions brought against the mega-project highlight the very poor record ESDC officials have when it comes to making accurate representations about the megadevelopment and its financing.)

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