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Houston Stadium Bond Refinance Looms as Swaps Squeeze Taxpayers

Harris County-Houston Sports Authority, which built the Texas city’s 71,500-seat National Football League stadium, may need to refinance $1 billion in debt and pay as much as $142 million ahead of schedule on bonds and interest-rate swaps.

The agency, operator of Reliant Stadium for the NFL’s Texans, must pay $117 million over the next five years after JPMorgan Chase & Co. demanded accelerated retirement of variable-rate bonds due in November 2030, said J. Kent Friedman, the authority chairman. UBS AG may also get $25 million to unwind a swap designed to offset rising interest rates. The extra costs will push higher annual debt service by $20 million to at least $83.7 million in 2011 from $62.3 million this year.

“This is like suddenly having to pay a 30-year mortgage in five years,” Friedman, a Houston-based partner in the law firm of Kelly, Hart & Hallman, said in a phone interview. “There are a lot of moving parts.”

From New York to San Francisco Bay, government agencies have paid hundreds of millions of dollars to unwind bond-and- swap transactions officials initially said would cut borrowing costs. The deals fell apart when municipal-bond insurers lost their AAA ratings in 2008 and interest rates, instead of climbing, plunged to record lows in the worst credit crisis since the Great Depression.

Houston’s stadium authority, granted taxing powers by voters in 1996, may be forced to refinance its bonds if car- rental and hotel taxes continue below estimates, Friedman said. With debt service at $62.3 million in 2008, the sports agency collected $79.3 million from all sources, including lodging and auto levies, according to disclosure documents.

Overestimated Income

The authority overestimated income from taxes to cover debt, said Jack Rains, the agency’s first chairman from 1997 to 1999, who also served as Texas secretary of state.

“I’m deeply concerned about the financial stability of the sports authority and all its bonded indebtedness,” Rains said in a phone interview. “When you borrow for 30 years, you have to do prudent things, and they didn’t.”

The agency’s $142 million in unanticipated payments would be enough to improve about 20 miles of new toll roads in Harris County, based on the cost of the Sam Houston Tollway widening project that will add two lanes to a 2.4-mile (4-kilometer) stretch of the highway around the city by 2010.

Ninth-Highest Level

An investor paid 96.288 cents on Sept. 25, during a rally that pushed tax-exempt debt yields to the lowest level in four decades, for some of the agency’s 5.25 percent senior bonds maturing in 2022, according to Municipal Securities Rulemaking Board records. The securities traded as low as 86.8 cents on the dollar in April.

When bond insurance is taken into account, the issue is rated Baa1 by Moody’s Investors Service and A at Standard & Poor’s. On its own, the debt is ranked Baa2 by Moody’s and BBB at S&P, both the ninth-highest levels.

From 1998 through 2000, the authority sold $509.7 million of bonds for Reliant. It issued $461.6 million more the next year, including $117 million in variable-rate debt, to partially refinance existing securities and generate additional funds for the stadium.

To make the variable-rate securities eligible for purchase by money-market mutual funds, officials contracted with JPMorgan to act as a buyer of last resort if no purchasers could be found when yields were reset periodically. The authority bought insurance from MBIA Inc. to guarantee payments to investors and reduce borrowing costs by raising the bonds’ rating to AAA.

Swap Transaction

The authority also entered into swap agreements with UBS PaineWebber Inc., part of the Zurich-based bank, on the variable-rate bonds sold in 2001. The contract, an unregulated derivative agreement, was designed to reduce the impact of changes in borrowing costs on the debt, according to county disclosure documents.

Authority officials were informed about risks when they sold debt in 2001, said Michael Bartolotta, Houston-based vice chairman at the agency’s adviser, First Southwest Co. The possibility that MBIA’s ratings might be cut were disclosed in bond documents, he said.

The authority owes about $430 million on Reliant, said Edwin Harrison, Harris County’s director of financial services. The agency started buying insurance on its first bond issues in the late 1990s based on the recommendation of First Southwest, Rains said.

‘Ignored the Risks’

“First Southwest told them about the risks,” Rains said. “They ignored the risks and plowed full-speed ahead.”

After MBIA lost its AAA rating last year, money market funds couldn’t hold the variable-rate debt, Harrison said.

When no other buyers stepped in as rates reset, JPMorgan demanded that the county pay off in five years the debt that was due in 2030, Bartolotta said in a phone interview. The bank demanded $12 million, twice annually, for five years, beginning Nov. 15, according to Janis Schmees, the authority’s executive director.

“The flow of funds was never structured to be able to handle those kind of payments,” Schmees said of the debt schedule.
Kevin Brown, spokesman for Armonk, New York-based MBIA, declined to comment on dealings with the authority. Joe Evangelisti, a JPMorgan spokesman in New York, also declined to comment.

Possible Termination

MBIA’s rating cut also triggered the possible termination of the UBS interest-rate swap, according to Friedman. The authority is negotiating with the bank and no decision has been made, he said.

Allison Chin-Leong, a UBS spokeswoman, said in an e-mail that her company is talking with the authority “and cannot comment any further.”

New York’s Metropolitan Transportation Authority paid $37.8 million more in interest on adjustable-rate debt in late 2008 than it received in payments from banks including UBS and JPMorgan, the agency said in November. The subway, railroad, bus and bridge operator also paid $9.6 million last month to end a swap agreement with Lehman Brothers Holdings Inc. after the bank’s bankruptcy triggered the termination.

On July 23, the Oakland, California-based Bay Area Toll Authority, which is financing a new bridge across San Francisco Bay, paid $105 million to get out of a $1.1 billion interest- rate swap with Ambac Assurance Corp., according to an official statement for a bond sale filed in August.

Oilers Move

Harris County and Houston, the fourth most-populous U.S. municipality, created the sports authority in 1997 when the previous local pro football team, the Oilers, moved to Tennessee. In October 1999, the NFL created the franchise that became the Texans. The agency’s board is appointed by the city and county.

Tony Wyllie, a team spokesman, declined to comment.

The agency also opened Enron Field, now the 40,950-seat Minute Maid Park, for Major League Baseball’s Houston Astros in 2000; Reliant, the first NFL facility with a retractable roof, in 2002; and the Toyota Center arena for the National Basketball Association’s Rockets the following year.

Reliant Stadium gained worldwide attention during the 2004 Super Bowl when singer Janet Jackson’s dance partner, Justin Timberlake, exposed her right breast for a split-second during a choreographed performance of his song “Rock Your Body.”
‘Wardrobe Malfunction’

The nationally televised incident, which Timberlake called a “wardrobe malfunction,” resulted in a $550,000 fine for CBS Corp., which broadcast the event. The U.S. Supreme Court in May ordered a reconsideration of the case after a federal appeals court in Philadelphia overturned the penalty.

The authority will meet its increased debt payments by supplementing car-rental and hotel taxes with $55 million in cash reserves and $4 million from annual parking revenue, said Friedman, the chairman.

Since the 2001 bonds were issued, car-rental and hotel tax revenue has been below estimates, according to financial reports. Auto-hire levies were 16 percent below projections in 2004 and 2006 and collections on lodgings missed estimates by 22 percent in 2004, according to disclosure documents. The shortfalls were caused by fallout from the Sept. 11, 2001, terror attacks and the closure of an amusement park, according to Orlando Sanchez, the Harris County Treasurer.

Revenue for fiscal 2009 will be $75.2 million, with 29 percent of that from hotel taxes, 28 percent from vehicle rentals and the rest generated by the stadiums and arena, the authority estimated. The total will need to increase to cover debt payments of $83.7 million in 2011.

Below Estimates

While taxes this year fell below anticipated levels in August, Friedman said it is too soon to know if that marks a trend. Through August, collections of the rental-car levy dropped 8.5 percent from the year earlier, according to the authority. Hotel-occupancy revenue declined 6.6 percent.

“You combine all these things and you can see why the sports authority might be in some financial difficulty,” Sanchez, a former Houston city council member who opposed creation of the agency, said in a phone interview.

“Houston was never a destination location, so when they said that they were going to pay for it with hotel occupancy and car rentals, I knew right away that that was sort of a problematic recipe,” Sanchez said.

Other than refinancing debt and getting assistance from the county, the authority has few other options, Friedman said.

The agreement creating the sports entity barred it from tapping property taxes and most other city and county levies, said Robert Eckels, Harris County’s top elected official when the financing apparatus was created and now a lawyer in Houston.
“The agreement at the time was that the authority wouldn’t be able to tap into revenue for regular county services,” Eckels said in a phone interview.

The public’s money “needs to be used wisely for the good of the whole community,” said Sanchez, the treasurer. “That means infrastructure, education, roads, security, not sports arenas for select sports franchises.”

By Darrell Preston, Edward Klump and Aaron Kuriloff
Bloomberg News:
To contact the reporters on this story: Edward Klump in Houston at; Aaron Kuriloff in New York at; Darrell Preston in Dallas at

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