Bonds issued for a development project at Elvis Presley’s Graceland have missed a beat.
The borrower missed an interest payment on largely tourist tax-backed municipal bonds issued in 2017 for a development project at the rock n' roll legend's former Memphis, Tennessee, home, now a tourist attraction.
The $205,218 payment to bondholders was missed Jan. 4, according to
The default affects the $5.005 million Series 2017D taxable bonds, issued through the Economic Development Growth Engine Industrial Development Board (EDGE) of the City of Memphis and County of Shelby.
The unrated series 2017D bonds were subordinate to three other series issued at the same time for a total of $89.3 million. They are backed by a mix of three revenue streams from the 120-acre Graceland property: incremental property tax revenue gains; a share of state an local sales taxes; and a special 5% sales tax surcharge at Graceland.
Loss of revenue from fewer visitors during the coronavirus pandemic was blamed as the reason the bonds were unable to generate enough revenue to debt service. While
In its weekly default newsletter Jan. 13, Municipal Market Analytics noted that the bonds had been under pressure during the height of the pandemic.
“Graceland’s bonds became impaired last July, blaming the decline in tourism on the pandemic,” MMA said.
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On July 1, a $235,557 draw on the Series D debt service reserve left the fund with less than $15,000, according to the notice.
Created in 2011, EDGE is the economic development agency for Memphis and Shelby County. Neither EDGE, which issued the bonds, nor the city or county, has any responsibility for the debt service or other payments associated with the bonds.
The other three series from the issue are $40.49 million of Series 2017A tax-exempt senior tax increment revenue bonds, $24.43 million of Series 2017B taxable senior tax increment revenue bonds and $24.375 million of Series 2017C taxable subordinate tax increment revenue bonds, underwritten by KeyBanc capital markets.
On Jan. 8, MuniCap posted a
“On Jan. 4, 2021, the trustee made an unscheduled draw on the Series 2017C debt service reserve fund in the amount of $267,449.21 to fund the Jan. 4, 2021 interest payment with respect to the Series 2017C bonds," the notice said. "The balance in the Series 2017C debt service reserve fund after the draw is equal to $547,432.77. As of the same date, the Series 2017C debt service reserve requirement is equal to $1,218,750.00.”
The Graceland campus is the centerpiece of a $137 million redevelopment project that also aims to revitalize the Whitehaven neighborhood of Memphis.
A mix of public and private funds was used to finance the project, with $124 million of private funds, public incentive funds and $125 million of municipal bonds planned.
With the state’s help, a tourism development zone (TDZ) was created with sales tax revenues going toward the project. The TDZ surcharge, an extra 5% charged on all purchases made on the Graceland site, went to help finance the development. Tax increment financing, with increases in property taxes from the Graceland, was also used. The bonds were to be repaid from the TDZ, the TDZ surcharge, the TIF and other revenues.
Of all the Graceland bonds, only the Series 2017B taxables were rated, and only by S&P Global Ratings. They have a unique flow of funds compared to the other series.
In August, S&P downgraded the Series 2017B bonds three notches to BB from BBB and continued the negative outlook it assigned in April.
“The rating action reflects our opinion that prospective annual debt service coverage on the 2017B bonds for the 2021 bond year may fall to less than 1x given curtailed visitor and revenue activity within the Graceland Development as a result of the ongoing effects of COVID-19,” S&P said. “While we do not view a default on the 2017B bonds as being imminent given liquidity support from a fully funded debt service equal to net maximum annual debt service, and while revenue-generating activity may improve marginally, we do not view the prospect of less than sum sufficient coverage as in line with the investment-grade category per our priority lien methodology.”
As travel declined during the coronavirus pandemic, municipal bonds backed by tourists' cash have come under increasing financial pressure.
Tennessee tourism had been on track to hit record numbers in the first three months of 2020. Then the COVID pandemic hit, which the state tourism board called “the single largest crisis to hit the industry and halted a decade of growth for Tennessee.”
According to U.S. Travel, travel spending in Tennessee fell 87% in April 2020 and the industry was expected to see losses of between 35% and 45% statewide for the full year.
“While the state is beginning to see gains as visitors resume travel, the recovery is slower in some parts of the state,” the board said.
Tourism is the Tennessee’s second largest industry. In 2019, the board said visitors to the state spent a record $23 billion and generated $1.92 billion in state and local tax revenue, with Nashville and Memphis being top destinations.
In April, Fitch Ratings placed all U.S. local government bond ratings backed by hotel and tourism-related tax revenues on negative rating watch. The bonds placed on watch were secured by various tourism-related taxes, like those on hotels and car rentals.
“The move to [rating watch negative] is in response to the coronavirus outbreak and the widespread collapse in discretionary tourism and travel spending since early March [2020]," the agency said. "Fitch expects continued pressure on the U.S. travel and tourism industries to lead to a dramatic decline in local government tourism-related revenues."
S&P said in its ratings report that as a result of the pandemic, most of the Graceland campus, other than the guest house, was closed from March 21 through May 20, and this resulted in substantial revenue declines due to curtailed taxable activity.
In April, collections on the sales tax surcharge were only 1.3% of 2019 levels, according to S&P.
"Upon the campus' reopening, May and June collections increased to 9.0% and 27.3% of 2019 levels, respectively. TDZ revenue, remitted to the trustee each September based up monthly collections in the prior July 1-June 30 period, will be affected in materially the same fashion," S&P said. "With capacity restrictions, an absence of international visitors, social distancing measures, and lingering effects on the tourism and hospitality industry, the developer reports that revenue activity is approximately at 44% of 2019 levels. Amid a resurgence in the number of COVID-19 cases and uncertainties surrounding a vaccine, we view improvements in taxable activity as unlikely to materially improve.”
S&P added the unscheduled debt service reserve draws on the unrated Series 2017C and Series 2017D were needed to support the project amid revenue weakness.
"Should taxable activity remain muted over the next year, a default on these obligations may occur," S&P said.
Moody’s Investors Service noted in a report released last August that weak demand in the travel and tourism sectors was caused by people worried about their health, government-mandated restrictions and the loss of personal income and warned that this might continue for some time.
“Governmental response, including lengthy quarantines for visitors, will also limit the pace of recovery … A true ‘return to normal’ is unlikely,” Moody's said. “While a vaccine and treatment for the coronavirus would increase demand across travel and tourism dependent sectors, lingering health concerns could result in permanent behavioral changes.”
Graceland said last week it would begin offering selected two-hour virtual guided tours starting at the end of the month. The paid tours will be presented live through a private Facebook group and be held once a month — on Jan. 27, Feb. 25 and March 25.
“We are thrilled to now offer Graceland Virtual Live Tours to Elvis fans around the world,” Debbie Miller, CMO of Elvis Presley Enterprises Inc., said in a release. “Although Graceland remains open for limited capacity in-person tours, now, more than ever, people are looking for quality entertainment experiences they can enjoy from the comfort of their own home.”
Elvis Presley Enterprises manages the operations of Graceland and its related properties including Elvis Presley's Memphis, the entertainment and exhibition complex, the exhibition center, the AAA Four Diamond Guest House and the Graceland Archives. EPE also produces and licenses Elvis-themed live events, tours, and attractions worldwide. Graceland Holdings LLC is majority owner of EPE.
