DALLAS – Moody’s Investors Service has left its junk ratings in place on the Harris County-Houston Sports Authority’s junior-lien bonds as the stadium builder’s bond insurer appeals a lawsuit over coverage of more than $1 billion of debt.
National Public Finance Guarantee Corp., the spin-off from the recession-stricken bond insurance firm MBIA, fears another Astrodome scenario, wherein an abandoned stadium remains in debt. Houston and Harris County officials have been struggling for years to find a way to use or redevelop the Astrodome, which carries historical status as the world’s first domed stadium.
While the Astrodome’s former tenant, the Houston Oilers, are now playing in Nashville as the Tennessee Titans, the expansion Houston Texans are playing in nearby Reliant Stadium, built with $352 million of voter-approved bonds backed by hotel tax and car-rental fees. The stadium, the first in the National Football League with a retractable roof, opened in 2002.
The authority also financed Minute Maid Field for Major League Baseball’s Houston Astros and the Toyota Center for the Houston Rockets of the National Basketball Association.
The travails of MBIA after the financial collapse of 2008 took the sports authority down with them. As a result of MBIA’s downgrade, the authority in 2009 was required to make accelerated payments on variable-rate junior-lien bonds. The 30-year amortization schedule was reduced to five years.
National is currently paying the authority’s semi-annual debt service, then taking reimbursements from the authority’s dwindling reserves. So, far, according to sports authority leaders, National has not lost any money, and the last of the accelerated payments is due in May 2014.
To prevent a future crisis, National is seeking ways to replenish the authority’s debt-service reserves and is concerned that the authority will divert cash flow to marketing efforts instead. The sports authority was a partner in Houston’s successful bid for the 2017 National Football League Super Bowl and has been a player in other sports recruiting efforts.
The authority contends that attracting more events to Houston stadiums will not hurt debt service but will, instead, bring more hotel and rental-car tax revenue to support the outstanding debt.
Without its own investment-grade credit, the authority is hitched to National’s fallen rating. The authority’s junk-bond status has effectively frozen it out of the refinance market, where other issuers are reaping major savings from historically low interest rates.
“The current lawsuit with National exemplifies the myriad of potential issues that could arise should the junior fixed-rate bonds default in the future,” wrote Moody’s analyst John Medina in a report issued Friday, the first from a ratings agency since the lawsuit and a legislative battle that ended in the authority’s favor.
While a state district court judge in Houston dismissed the lawsuit, MBIA and National have appealed the ruling. In the meantime, the insurance company sought to introduce legislation that would have required the authority to heed National’s demands for higher debt-service reserves and dedication of cash flows to outstanding bonds. That effort failed last month when the legislation was sent back to committee in the last two days of the legislative session that ended May 27.
In its report last week, Moody’s affirmed its underlying Ba3 senior, B2 junior, and B3 third-lien ratings with a stable outlook for the authority. National now has a positive outlook from Moody’s with an investment grade Baa1 rating.
“The below-investment grade ratings continue to reflect dependence on long-term revenue growth to match the rising debt service amortization schedule on the junior and third lien bonds,” analysts wrote.
The pledged hotel and motor vehicle rental special tax revenue streams are also considered volatile.
“At some point in the future the additional required reserve may be depleted if revenues do not grow faster than the junior lien debt service amortization schedule, and National may have to pay on the junior lien bonds,” Medina pointed out. “This could result in a cross default to the senior lien bonds, but neither the senior-lien nor the junior-lien fixed rate bonds can be accelerated as a remedy for the default.”
Moody’s projections indicate the authority pays off the variable rate bonds under low growth scenarios, the junior lien bonds would deplete the additional required reserve within a decade.
“The stable outlook reflects our expectation that the additional required reserve will be sufficient to cover the projected revenue shortfalls related to the accelerated junior lien variable rate bonds through May 2014,” Medina wrote. “The stable outlook also balances the higher pledged tax revenue collections in the near term with an increasingly contentious relationship between the Authority and the bond insurer National that may have unintended consequences or impacts on bondholders.”
Standard & Poor’s last year revised its outlook on the authority’s junk-rated junior-lien debt to stable from negative, citing the authority’s improving revenues and ability to pay debt service from other sources. The rating remains B. S&P also affirmed its BBB rating and stable outlook on the authority’s senior-lien Series 1998A, 2001A, 2001G and 2001I bonds.
Trouble with the variable-rate debt following MBIA’s downgrade in 2008 required the authority to pay the balance of the bonds in 10 semiannual payments.
In 2010, debt service on the bonds was originally scheduled to total $9.4 million. Under the accelerated payment schedule, the debt service due in fiscal 2010 totaled $27.4 million, an increase of about $18 million, and debt service due in fiscal 2011 totaled $28.4 million. Payments came to about $26.4 million in 2012, and $24.8 million in 2013, according to Standard & Poor’s.
The authority levies a 5% tax on gross rental receipts for vehicle rentals in Harris County. The authority also collects a 2% tax on hotel stays.
Pledged revenues from vehicle rentals and hotel occupancy tax collections fell 11.7% in 2009 and 1.1% in 2010. However, revenues improved 8.9% in 2011 to $42.2 million, driven by a 12.2% growth in hotel tax collections and 5.7% growth in vehicle rental collections.
The continuing growth of the Houston economy is expected to boost prospects for revenues.
