Archive for July, 2015

Smith’s Stadium Bond Gradings

July 16, 2015

Stadium bonds have been the subject of several articles in Smith’s Research & Gradings over the years. What started as a curious endeavor quickly became a more serious work upon discovering even the most serious Stadium Bond analysts appear to have overlooked the history of stadiums in Western Civilization.

Smith’s Stadium Bond Gradings reflect decades of researched on the subject matter. We have developed several interesting conclusions about the nature and durability of the revenue streams.

To begin, the word “Stadium” is a Latinization of the Greek word for the distance of a race (which measured 660 feet and is a distance of one “stadia”). For track fans, this race is still run today — the 220 yard or 200 meter dash — which is still the measure of endurance, cunning, and speed amongst sprinters. In contrast, the Greeks built amphitheaters for public festivals and ritualized plays, constructed so views were unobstructed on a steep incline, so even the highest tier of seats was within earshot of the stage.

The Greek stadiums eventually grew larger, but retained a horse-shoe shape. This allowed participants at earlier sporting events to compete both on the track and in the field — quite literally. The most famous of Greek stadiums was the Hippodrome.

However, the stadiums eventually became the site of horse races — more specifically, chariot races. The largest and greatest expression of this type of stadium is arguably the Circus Maximus.The first Etruscan King, Lucius Tarquinius Priscus, drained the swamps beneath the Capitoline Hill for the construction of the first Circus Maximus around 600 B.C. Perhaps the Circus Maximus was conceived as an engine of social homogeneity at a time when Etruscans ruled the larger population of Latins — within two generations, the Latins had overthrown the Etruscan Kings (ostensibly for the rape of the virtuous Lucretia).

Circus Maximus

Circus Maximus

Eventually, the horse-shoe shaped Circus Maximus was expanded — larger than the Yale Bowl by one and one half times — with a seating capacity of 250,000 (plus the “sky boxes” on Palatine hill). Indeed, standing on the patio of the home thought to belong to Julius Caesar, which is situated high atop the Capitoline Hill, visitors can well imagine the throngs of working class Romans filling the Circus Maximus. The vantage point provides a glimpse into a vibrant Roman economy, where people cheered for the chariots drawn by four horses on a track 2,000 feet long and 600 feet wide. It was the Indianapolis Speedway and the demolition derbies of the old Charlotte Motor Speedway on a grand scale.

Surely, societies that are growing are fascinated by machines that are driven dangerously fast. Speed was everything, whether you were digging ditches or laying bricks, in ancient Rome.

The Roman Coliseum — the first of the modem day “stadiums” — was constructed to provide unobstructed seating for 50,000. The “sport” at the Coliseum was the death of gladiators and Christians; seating bespoke a person’s station in life — Patricians, Senators, Tribunes, Equites, and Publicans. Indeed, the Coliseum had little to do with “sport” and everything to do with the exaltation of ego. It was about “seeing people and being seen.”  Stadium-building did not stir the public’s imagination again until late in the 1800s.

Perhaps the construction of Cathedrals and Universities provided sufficient employment for stone workers?

Modern Era
In any event, the modem era of stadium building began with the construction of a stadium in Athens for the Olympics in the late 1890s. It was built on a foundation from an earlier Greek stadium.

At the turn of the century, America embarked on a stadium-building binge that is still unrivaled by today’s construction craze. A whole series of massive stadiums were constructed, with seating capacity in excess of 100,000 people: The Yale Bowl, Ohio State University’s Stadium, The Los Angeles Coliseum, Soldier’s Field, JFK Stadium, Notre Dame’s Stadium. These were built as great football and Olympic stadiums.

Yankee Stadium became known as “The House That Ruth Built” and decks were constructed to accommodate more fans. However, baseball stadiums remained intimate environments that allowed fans to nurture the national past-time. Only Camden Yards and Wrigley Field remained relatively unaffected by stadium construction during the later half of the century. Cleveland’s municipal stadium was built as the largest baseball stadium in the world with seating over 70,000.  Dubbed “The Mistake By the Lake”, the Cleveland Municipal Stadium funneled winds from Lake Erie toward homeplate, making it a pitcher’s park.

These fields were largely financed by the fortunes of the various teams. And, it was the ancient allure of unobstructed views that sent the Brooklyn Dodgers to Los Angeles: “Dodger Stadium” was the first three-tiered stadium constructed without columns. Such sedentary concerns had turned Ebbets Field into an apartment complex and sparked a stadium building craze.

Enter the “Astrodome”, which was the first completely enclosed stadium, in the early 1960s. Baseball franchise movement stirred the imagination of stadium builders and municipal finance executives. However, television increasingly put pressure on the margins of stadium and franchise owners, while the lucrative contracts provided enormous compensation. But, the profit motif inspired owners to fill every seat, which is still used by owners to cover the fixed costs.

Gradually, the public’s capital was used to entice private sector franchises to play at stadiums in “new” cities, such as New Orleans and Miami. The people approved bond referendums and politicians promoted the concept by stating “a major league town” moniker was necessary to attract corporations to a city — which has nothing to do with the love of sports and everything to do with power.

Cleveland Browns Leave Town
The Browns football team’s announcement that it wanted to move to Baltimore from Cleveland (eventually leading to buses leaving in the middle of the night)  prompted a lot of guffaws among backbench analysts who have been skeptical about the creditworthiness of stadium bonds. But, to understand the creditworthiness of stadium bonds, investors need to know that in many cases, repayment has little to do with revenue streams like stadium gate receipts.

For example, MBIA insured bonds that constructed a stadium for the winter “cactus” baseball league in the Southwest. However, repayment is largely secured by a tax on car rentals in the Phoenix area.

Indeed, a better name for “stadium bonds” might be “enterprise bonds”, which would lump them in with convention centers and other erstwhile endeavors by municipalities to stimulate economic enterprise. Municipal investors and analysts know that municipalities have a somewhat dubious track record in managing enterprises.

As a result, in the mid 1990s, rating agencies forced investment bankers to cobble together various revenue streams to support the debt service repayment of stadium bonds. In the 1990’s, Ernest Perez, who was one of SRG’s Regulars, provided several insights into the stadium bond financing frenzy. In 1995, he noted the St. Louis Rams -related financing essentially included a G.O. pledge from the State, which gives an indication of the importance given professional sports.

Mr. Perez agreed with SRG’s suggestion that bondholders should ideally have a “put” if the professional team leaves the stadium. But, to date, no exit signs have appeared for bondholders if a team fires the stadium.Stadium Cost

Preliminary work at S&P yielded an interesting feature, which is a sort of travelling first lien on the team’s revenues. Basically, the team ownership would agree to pay enterprise-type fees for a stadium, even if it moves to another stadium.

The Doghouse
Fresno State (California State University, Fresno) issued municipal bonds to finance the construction of a new arena. Hence, the Bulldog’s last game on March 1, 2003, at the old Selland Arena proved to be a sweet farewell as Fresno State finished atop the regular season in the Western Athletic Conference (WAC).

The WAC winning press release from Fresno State said, “Next year, the ‘Dogs will play in their new Doghouse…the Save Mart Center on campus.”

On the following Wednesday, Fresno State took harsh action by self-imposing sanctions to ban participation in the NCAA or NIT postseason tournaments because of academic fraud.

The next day, Thursday, the WAC announced the WAC-champion Fresno State Bulldog’s season would end on Saturday against Rice.

The Fresno Bee, a local newspaper, reported allegations made by some players that assistance was provided in completing writing assignments by an individual who was paid to complete those assignments. Subsequent investigations by the NCAA and Fresno State found the allegations to be true.

Yes, the Bulldogs were in the real doghouse.

Reaction among existing bondholders was one of absolute denial. “It means nothing. Well, not nothing. But, it’s not a professional franchise. If the team doesn’t have a winning season, Fresno State isn’t going to leave town.”

A trader said, “There isn’t any other form of entertainment in the region.”

NHL Strikes
Fitch Ratings determined that in the event of a complete cancellation of the National Hockey League’s 2004-2005 season, Fitch would place all currently rated sports arena debt associated with a NHL team on Rating Watch Negative.

The two publicly rated arena transactions — L.A. Arena Funding (Staples Center, Los Angeles) and the Denver Arena Trust (Pepsi Center, Denver) were both rated ‘A’.

Of course, the NHL did cancel the entire 88th season in 2004-2005. It was the first time a professional sport league cancelled an entire season due to labor disputes.

Once again, the NHL had a lockout (strike) in 2012-2013. Fitch placed one private arena rating with a NHL anchor franchise on Rating Watch Negative and continued to closely monitor the operations of other arenas with a NHL anchor franchise. Currently, Fitch rates L.A. Arena Funding’s (Staples Center, Los Angeles) $201 million revenue backed notes ‘BBB+’, Stable Outlook and the Denver Arena Trust’s (Pepsi Center, Denver) approximately $46.7 million revenue backed notes ‘BBB-‘, Stable Outlook.

Fitch did not rate the NHL league-wide borrowing facility secured by national television contracts and other league revenues.

Despite the canceled games Fitch said that the Pepsi Center, Staples Center and other Fitch-rated private arenas with an anchor NHL franchise retain some, albeit limited, financial flexibility. Fitch noted that the above-mentioned arena ratings also have an NBA franchise as an anchor tenant and host a significant amount of other events, providing some level of revenue certainty to support operations. Additionally, the arenas maintain a significant level of contractually obligated revenue in the form of multi-year suites and club seats, sponsorship and advertising and other long-term contracts. However, renewals of these revenue agreements may be impacted in the event of a canceled season. The pressure on renewal rates stemming from local economic conditions and, in some cases, recent on-ice performance could be exacerbated by labor uncertainty.

The lockout shortened the 2012–13 NHL season, originally scheduled to begin on October 11, 2012, from 82 to 48 games, a reduction of 41.5 percent.

Troubled Stadiums and Towns
Standard & Poor’s Ratings Services downgraded Bridgeview Illinois’ bond rating on general obligation (GO) bonds in 2014. The outlook is negative, S&P reported:

“The downgrade reflects the significant level of stress placed on the village’s finances by its underperforming soccer stadium. To minimize property tax increases, the village has used general fund revenues and issued additional debt to pay debt service on its GO bonds related to the stadium. The village’s very high debt level is mainly due to its series 2005 GO bonds, of which $128.4 million is outstanding, to build a soccer stadium.

The village also issued $50 million of variable-rate GO bonds in 2008, proceeds from which the village mostly used to refund economic development notes and bank lines that it incurred to buy land around the stadium and other parts of the village for future development. Because of the uncertainty about the extent to which the stadium fund will be able to support debt service from net revenues, the village is faced with either levying property taxes or using general fund resources to make up the difference.

The city of Glendale, Arizona, tried to sell its City Hall so they could pay off their hockey arena in 2013. They also considered mortgaging the police station. The city had already tapped out its land-fill fund and the water and sewer fund to pay sports debts. When Glendale residents collected signatures for a referendum, city council changed the rules. They placed the proposed City-Hall sale on the agenda as an “emergency measure” in order to bypass the referendum and prevent the voters from having a voice.

The city’s promise of economic development, stores and restaurants, vanished in the recession. Glendale’s reserve fund is gone, and the city has now approved another sales-tax hike.

Many other cities suffer from crushing debt as a result of bad stadium investments.

Hamilton County, Ohio, sold a municipal hospital to pay just one year’s worth of stadium debt. They also cut their operating budget, slashed social services, and raided the rainy-day fund.

The town of Harrison, just across the Passaic River from Newark, had its bond rating cut a rare eight notches in a single year, when it was unable to pay the debt on a soccer stadium.


Stadiums are the coronation of public construction on a grand scale in the history of Western Civilization.  The public’s capital provides a glorious return to great and growing cities by promoting civic pride in the community. For medium scale cities, smaller scaled stadiums (“right sized”) support local sports and attracted world class entertainment.

However, Smith’s Research & Gradings has found stadiums provide little in the way of economic development.  Moreover, the use of tax-incentives to lure sports teams to play in stadiums in tiny townships can lead to financial ruin.  Particular attention needs to given to claw-back mechanisms and make-whole provisions that will allow the municipality (and bondholders) to recoup their capital investments in the event a sports team wants to leave.

When it comes to stadium finance, the broader the base, the better the bonds.