New Doubts About Atlantic Yards Financing as Deadline Approaches
Eliot Brown Nov. 13, 2009, 12:26 p.m.
On Sept. 9, Bruce Ratner, the powerful developer scrambling to start building a new Brooklyn basketball arena for the Nets, gave a prediction: The credit ratings agencies would deliver ratings on about $700 million in bonds for the arena by the end of the month. The ratings are a necessary precursor of financing the arena, an act that must be finished by Dec. 31 to meet an Internal Revenue Service deadline.
On Sept. 30, still with no ratings, Mr. Ratner, chairman of development firm Forest City Ratner, updated the timetable: The bond ratings would be done by mid-October.
It’s now mid-November, and the word remains the same from the project’s backers: The bond ratings are still at least a week off–hopefully.
As the repeated missed internal schedules suggest, the project is running into trouble at the ratings agencies.
According to multiple people briefed on the situation, the agencies have been pushing back against Forest City in its attempt to get the arena bonds rated as investment grade (BBB-) or better, causing new concerns for the project. (Forest City’s representatives expressed confidence they will receive the needed ratings.)
This significant hurdle comes as the countdown clock ticks. Loudly.
Forest City must first get the bonds rated, then market them, then sell them–and it’s no forgone conclusion that anyone will buy them–and, finally, firm up all final agreements with the city, state, and M.T.A. on the complex real estate deal, all before Dec. 31 (with Thanksgiving and Christmas breaks mixed in). Each of these steps takes at least a few days, if not more than a week, making it hard to see how everything could get wrapped up if the bonds are not rated before the end of November, if not sooner.
ALL IS NOT TO say the deal is doomed. Mr. Ratner, with extraordinary stamina for this project and the outpouring of cash that comes with it amid a recession, has a history of executing. Further, many deals and financing arrangements go through rocky periods, where doubts are raised, before ultimately working everything out as deadlines approach.
Forest City’s underwriters, Goldman Sachs, have led the effort on the tax-free bonds through Gregory Carey, a managing director in Goldman’s public sector and infrastructure banking group. Mr. Carey, who has put together numerous stadium and arena financing deals, including the Yankees’ and the Mets’ new stadiums, acknowledged some bumps in the road, but professed confidence about receiving ratings and finishing the deal.
“We are working through it,” he said. “Nothing’s done until it’s done, but there’s nothing in the discussions I’ve had that would lead me to believe that we’re not going to get to where we need to get to. We have no other choice.”
Mr. Carey suggested the unfinished details over the team sale have slowed the process, perhaps adding caution in the rating agencies’ approach. (Russian billionaire Mikhail Prokhorov agreed in September to buy 80 percent of the Nets and 45 percent of the arena development for $200 million.)
“The sale agreement is not finalized yet, and that is part of the rating process, so we are in discussions with the three ratings agencies, finalizing things with them and the NBA, and we’re hoping to have things wrapped up, hopefully, before Thanksgiving,” he said.
“They are reviewing the project and, like everybody else, they are being cautious,” he added, referring to the rating agencies. “We’re creating a structure that works economically for the owners, that we can sell to the marketplace, and that’s O.K. with the rating agencies.”
The ratings process is one in which the agencies look over the risks of a deal and assign a rating based on that risk to a set of bonds. Only then can the bonds be sold to investors, providing the needed financing for the project. The less certain a deal, the worse the rating, and the better potential return for the bond holders. (The borrower can also buy insurance on the bonds, at a cost, to boost up the ratings, though the number of insurers in the market has essentially dropped down to one.)
“They look at the business plan,” said Aaron Barman, a financial adviser at North American Port and Infrastructure who has worked on numerous stadium financing deals. “They look at the economics of the sports market in New York, they look at fan loyalty, they look at the history of the team–obviously there’s no track record in Brooklyn, but the Nets do have a track record and they are an established NBA team.”
THE NETS ARENA IS perhaps the most expensive basketball arena in the country, as Mr. Ratner has said the cost is between $800 million and $900 million, depending on what’s included in that price tag. And while the Nets are an existing franchise (which loses tens of millions a year in its existing New Jersey home), there has never been an arena of that size in Brooklyn. That makes it’s uncertain just how much tickets will be able to sell for, and just how many other college basketball games, concerts and other events can be booked each year to fill the venue and bring in added cash.
Mr. Barman, who is not working on the Nets arena deal and has not seen specifics, said the market was tough now for a new facility, particularly for a new arena in a new market.
“There’s no doubt it’s challenging for them to get to investment grade,” he said.
Beyond the financing, the larger Atlantic Yards project–including the arena and 15 residential towers for a total of $4.9 billion in development–is awaiting a crucial decision from the state’s highest court. Based on the typical amount of time the court takes to decide cases after they’re heard–a bit more than a month–a decision is expected as early as next Tuesday.