The City of Glendale plans to put the municipal bonds that will pay for the purchase of the Phoenix Coyotes on sale next week, although the city received mixed reviews from Moody's Investors Service.
While Moody's gave the $110.9-million (all currency U.S.) bond offering a decent rating of A1, it downgraded Glendale's overall credit rating from Aa1 to Aa2 because of its high debt levels.
However, A1 is not the highest rating Moody's gives municipal bonds. The highest rating is Aaa, with A bonds ranked third. Moody's describes A bonds, of which A1 are the top-rated, as showing "above-average creditworthiness relative to other U.S. municipal or tax-exempt issuers or issues."
Moody's noted the bonds are backed by Glendale's excise taxes, rental payments from the city for the sports facilities and future parking revenue from events at Jobing.com Arena. The city has also pledged $8.6-million from a revenue-stabilization account, which will be made up of proceeds from the sale of the new bonds.
However, Moody's also said the bonds are subject to litigation risk from the Goldwater Institute, a public watchdog group. It is considering legal action against Glendale because it believes the city is violating Arizona laws against excessive public subsidies by handing over a total of $197-million to prospective Coyotes buyer Matthew Hulsizer as part of the sale.
Hulsizer will get $100-million up front from the city in order to buy the Coyotes from the NHL for $170-million. He will also get $97-million over the next five years as a payment for managing the arena.
In a statement issued Thursday, the Goldwater Institute said "the city appears to be taking an extreme and possibly illegal gamble with taxpayer money." The watchdog group said it plans an extensive financial analysis of the bond issue and the agreement with Hulsizer before it decides if it will take legal action.
The institute also pointed out that since Glendale pledged a second lien on its excise tax revenues, "that means that Glendale taxpayers will pick up the tab for bond repayments if costs exceed parking revenues. If the Coyotes fail once again to become a money-making team, the financial exposure for Glendale taxpayers could be significant."
Also called into question was the projection of parking revenue at Jobing.com Arena by T.L Hocking & Associates, which stated there will be enough to cover the city's bond payments. The city used that consultant's projection instead of another company that offered a far more modest projection.
Goldwater said T.L. Hocking is currently the defendant in a lawsuit filed by Allstate Life Insurance Company. Goldwater said: "Hocking provided a similar analysis and financial projections to the Town of Prescott Valley in connection with the construction of an event facility, for which $35-million in bonds were sold in 2005. The bonds were issued at investment grade and later were downgraded to junk-bond status. Allstate was the largest bondholder."
The A1 rating from Moody's is an important step in the sale of the Coyotes but it does not mean the deal is finished. Once the bonds go on sale, at an expected interest rate of 6 per cent, there is no guarantee financial institutions will buy them because the public municipal bond markets are flat. This could mean the city would have to try and sell them on the private market at a higher interest rate, which means adding to its already considerable overall debt.
Moody's noted that debt is now $592.6-million for the city of 250,000 people, which is why its credit rating was lowered.
"With the current offering, Glendale's direct and overall debt burdens remain high and are well above similarly rated cities across the nation," Moody's said in a press release. "The city's direct debt burden of 4.8 per cent is nearly five times the national median of 1 per cent. Overall debt measures 6.9 per cent of full value, well in excess of national medians for all cities of 2.6 per cent."
But Moody's did raise Glendale's economic outlook to stable from negative because it expects "slowly stabilizing economic conditions in the region will enable the city to maintain its current satisfactory financial position despite ongoing budgetary challenges."
At the same time, though, Moody's lowered the state of Arizona's outlook to negative due to an uncertain economic outlook for the 2012 fiscal year.