Ballpark Bonds Will Carry Heavy Interest
Higher Risk Boosts Rate to About 7.8%
BY MIKE ALLEN
Senior Staff Writer
When San Diego finally issues $166 million in bonds to pay for its share of the Padres ballpark, the price paid on the funds will be much higher than usual.
To offset the higher risks to bond investors while litigation is pending, the city was forced to offer a much higher interest rate, and spend more for its bond insurance, officials said. “We’ve never issued bonds before with litigation pending,” said Assistant City Attorney Les Girard.
Because of the lawsuits, the city’s bond attorneys could not issue an “unqualified opinion” or full endorsement that the bonds are both valid and exempt from state and federal income taxes.
Instead, the city’s bond counsel issued a “qualified” opinion on the bonds, which caused the city to pay a higher interest rate for the theoretical higher risk investors assume.
While the exact interest won’t be determined until the bonds are issued, city finance specialists earlier this month estimated it could be 7.84 percent. Most recent AAA-rated municipal bonds were going out at rates between 5.25 percent to 5.5 percent, according to several bond professionals.
Had the bonds been given an unqualified opinion, the estimated interest rate would be 5.68 percent, according to the city manager’s office.
Kaye Woltman, chairman of Girard Securities in San Diego which specializes in municipal bonds, called the interest on the ballpark bonds “incredible” and the highest she’s seen in about two decades for government bonds.
“I haven’t seen any AAA-rated debt pay that kind of rate of interest since the Eighties,” she said, referring to a time when interest rates were much higher.
She noted a $176 million, 25-year bond issued by the San Diego Unified School District last month paid 4.76 percent.
City officials say the higher-than-usual interest rate and an insurance premium were required by the city’s underwriter, Merrill Lynch, before it agreed to resell the bonds to institutional investors.
“Essentially, Merrill Lynch is indemnifying the city for the risk that the bonds might be declared invalid if the city doesn’t prevail in the outstanding litigation,” said Elizabeth Kelly, the city’s finance services manager.
Under the plan approved by the city earlier this month, the entire bond offering will be sold to Merrill Lynch.
The securities dealer will then turn around and resell the bonds to no more than 32 institutional investors with a net worth of at least $25 million, Girard said.
Limiting the sale to large institutional investors was a policy decision made by the city to make it easier for the city to recall the bonds once all the litigation is resolved. The city plans to re-issue the bonds at a lower interest rate.
“We wanted to have an easier time (in recalling the bonds) by knowing where the bonds were going,” Girard said.
Woltman and others say limiting the sale to large investors is unfair to individual investors who would be thrilled to get the type of yields the Merrill Lynch investors will receive.
“This (bond issue) is a total anomaly,” Woltman said. “I think it’s unfortunate because the facility is here, but local individuals aren’t being given the opportunity to buy the bonds.”
For an investor in the mid-tax range, the tax-free bonds would yield an equivalent of 11.8 percent taxable, while for an investor in the highest tax bracket, the yield is about 14 percent, she said.
Woltman said she could easily sell the bonds without any trouble.
Kelly said another reason behind the higher borrowing costs is the fact these bonds contain a shorter call provision to allow the city to reissue the bonds at a lower rate once the lawsuits are resolved.
While most tax-exempt bonds are protected from being called or paid off by a minimum of 10 years, these bonds will be able to be called after three years.
Norm Ryan, managing director for Wedbush Morgan Securities public financing in Los Angeles, said the estimated interest rate on the ballpark bonds “seems a little high.”
Ryan said most AAA-insured bonds would start the interest rate at a base between 5.1 to 5.2 percent. From that point, the rate rises to accommodate the costs for issuing the bonds, such as insurance and attorneys’ fees. Even with those costs figured in, that would bring the total rate to about 7 percent, he said.
Complicating the bond sale was the disclosure last week that Gil Johnson, a board member for the Centre City Development Corp., had a long-term business relationship with the Padres while he was casting votes for the ballpark.
On the advice of its bond counsel, both the CCDC board and the City Council took a revote on a package of ballpark measures Dec. 13 and 14.
Mayor Dick Murphy said the revote was being done at the behest of the city’s bond attorneys.
“Just to be on the safe side and to satisfy bond counsel, we will also revote on the pertinent ballpark issues,” Murphy said in a prepared statement.
Johnson’s business, Procurement Concepts, Inc., purchased Padres merchandise for resale at several stores he operates at Lindbergh Field. While he brought the business relationship to CCDC attorneys, he was advised the relationship did not constitute any conflict of interest.
However, when Johnson expanded his business, the matter was again brought to the city’s attention which consulted with the city’s bond attorneys. That firm, Orrick Herrington and Sutcliff LLP, recommended that Johnson cut his ties with the Padres and disclose his past relationship publicly.
“Because I do not want any actions by my company to be misconstrued, and due to the litigious nature of the ballpark opponents, I have concurred with bond counsel’s recommendation and will terminate my relationship with the Padres and have agreed to full disclosure regarding this prior relationship before the city’s bonds are sold,” said Johnson, who abstained from the CCDC revote.
The city was still analyzing what impact the latest lawsuit against the ballpark would have on the bond sale. Girard said a team of city attorneys and other city finance workers along with the underwriters and other consultants were all working hard to bring the bonds to market before the end of the year.
“We’re trying to close this as quickly as we possibly can. This is a complicated action,” he said.
The bond sale would provide the city with about $130 million for the city’s share of the $450 million ballpark. In addition, the city is putting up $75 million in cash, and CCDC is pumping in another $76 million, bringing the total city investment in the ballpark to $282 million.
Along with the San Diego Unified Port District’s contribution of $21 million, public funds for the project total about $300 million.
The Padres are putting up $146 million, most of which will come from proceeds on the naming rights from the ballpark.