Legal problems incoming for Louisville

[upstater]

One would hope...because if not UL will have pulled off the ultimate boiler room scam on the City of Louisville and the taxpayers. They get an arena for pennies on the dollar and don't have to deal with the ramifications of defaulted bonds. Make no mistake Upstater...after reading the second link these bonds are going to default whether that contract is rewritten or not. Moody's wouldn't have rated them as junk status if they weren't. That is the real issue here...and UL (specifically Jurich) has it's hands DEEP in that cookie jar. In the world of academia/AAU and the such I very much value your opinion. But unless you have suddenly changed careers into Government Finance or Municipal Bond Sales I am going to have to defer to my wife on this one...again she has been a Finance Director of a municipal government since the late 80's with experience working for both a distressed municipality and a Moody's AAA rated municipality.

What that lawyer said about the clause being overturned just makes common sense. The other 3 lawyers have just as much of a conflict of interest. But yes, this is a layman speaking. I have no idea about this.

 

[FDNY99]

What that lawyer said about the clause being overturned just makes common sense. The other 3 lawyers have just as much of a conflict of interest. But yes, this is a layman speaking. I have no idea about this.

Basically in a nutshell what my wife told me last night after reading the second link is this: With the bonds being rated as junk status it doesn't bode well for the municipality. In the end those bonds were issued on the taxpayer's dime..with the municipality ultimately being responsible for repayment. She found that clause giving UL the right to purchase the arena if bonds are defaulted VERY interesting. Basically in the end...the taxpayers of Louisville will be pitted against UL in this.

 

[CardinalZen]

Just a couple of points...

1) UofL was looking into building an on-campus facility before the city got involved with an eye toward placing it Downtown. UofL didn't force anyone to come up with such a sweet deal and would've been okay playing in Freedom Hall until an on-campus arena could be constructed. It's the city that wanted an arena downtown so badly and they got the state to back them up. The only reason UofL had any leverage was because they didn't want to go Downtown.

2) UofL pays higher annual rents for the arena than all but maybe two NBA teams. There's one faction in town that thinks getting an NBA team would bring the arena more revenue, but NBA teams siphon funds from arenas they don't generate funds. So, I don't think this is a realistic solution.

3) The bonding authority comes from the Louisville Arena Authority, not the City of Louisville or the State. So, the city's bond ratings aren't in jeopardy.

4) Initially the State Fair Board ran the day to day operations and pretty much had things running as a crony reward system. This was thanks to the State's political involvement which was thanks to the City's getting involved. The Arena Authority eventually cancelled the Fair Board contract, replacing the management with AEG. AEG guarantees an annual surplus from operations of at least 1 million dollars, but has been running closer to 2 million, IIRC.

5) Removing the Fair Board caused another batch of conflicts because the Arena Authority was supposed to guarantee them any lost revenue from events leaving Freedom Hall for the new arena. Naturally, the Arena Authority could be considered in breach of this because they haven't been paying anything. But as the disagreement is between two state entities, there's no risk of lawsuits. The polities are fun to watch, especially the UK backers going apoplectic.

6) The financial agreement calls for the City to subsidize the arena up to around $10 million per year. There are differing reports, but this might not be enough extra to service the bond debt. It could be an ugly situation. The primary cause is that the TIF district has woefully under performed expectations. If there's a case for any fraud investigations, focus on that.

7) All this ugliness is the City's own fault for pushing to get the State involved, unleashing all the usual cronyism from that quarter. This included Jim Host the original chairman of the Arena Authority, a huge UK booster. It's cronyism all the way down when the State of Kentucky gets involved.

8) If the bonds default then UofL is supposed to have the right of first refusal to buy the Arena. I'm not sure how that would work, but assumably, they'd have to at least match any other bids. I'm sure the NBA advocates would be all over the opportunity.

9) My personal perspective is that the City and the State hoodwinked any bond investors by isolating all the liability of default within the Louisville Arena Authority as a separate legal entity. It's possible that some liability could leak to the State or the City but it's difficult to see how.

10) Let's not forget that UofL was not the driver of any of this, and worst case, will just return to Freedom Hall.

 

[CardinalZen]

Basically in a nutshell what my wife told me last night after reading the second link is this: With the bonds being rated as junk status it doesn't bode well for the municipality. In the end those bonds were issued on the taxpayer's dime..with the municipality ultimately being responsible for repayment. She found that clause giving UL the right to purchase the arena if bonds are defaulted VERY interesting. Basically in the end...the taxpayers of Louisville will be pitted against UL in this.

Actually, all the liability for default accues to the Louisville Arena Authority, not the City of Louisville. The Louisville Arena Authority is an independent state legal entity. The City of Louisville has zero risk in the case of default. The arena was a state project.

 

[The Viking]

I'd like to say this matters but unfortunately it doesn't. They already got our invite.

 

[freescooter]

What is really weird, at least in my experience, is that the UofL gets 80% of the revenues before paying the bondholders. I've been involved in a few public-private deals and typically the payments have gone first to the bondholders, then the other parties have split the remainder. Of course this is apparently a tax-increment financing deal, and those are a bit different. The bonds are supposed to be paid off by the increased tax revenue that results from the project. They work best when the project is a taxable entity, a factory, housing complex, retail complex. But with an arena, its tougher because you are relying on the spinoff development for a good portion of the tax increases.

 

[freescooter]

Wow could end up being a bit of an embarrassment to the ACC. Fortunately Louisville is a quality academic institution so they always have that to fall back on.

then again, maybe not so much...
http://insiderlouisville.com/metro/...al-university-without-phi-beta-kappa-chapter/

 

[bobbyinaz]

One would hope...because if not UL will have pulled off the ultimate boiler room scam on the City of Louisville and the taxpayers. They get an arena for pennies on the dollar and don't have to deal with the ramifications of defaulted bonds. Make no mistake Upstater...after reading the second link these bonds are going to default whether that contract is rewritten or not. Moody's wouldn't have rated them as junk status if they weren't. That is the real issue here...and UL (specifically Jurich) has it's hands DEEP in that cookie jar. In the world of academia/AAU and the such I very much value your opinion. But unless you have suddenly changed careers into Government Finance or Municipal Bond Sales I am going to have to defer to my wife on this one...again she has been a Finance Director of a municipal government since the late 80's with experience working for both a distressed municipality and a Moody's AAA rated municipality.

This.

Moody's does not rate Muni bonds as junk unless there is an almost certainty there will be a default tied to them.

The reality is that the taxpayers will swallow the losses while Ville gets a brand new arena for pennies on the dollar

 

[ZooCougar]

Awwww shucks.

 

[freescooter]

Actually, these are revenue bonds, not General Obligation bonds, at least it appears that's the case. So the Louisville taxpayers might not get stuck directly. It isn't like they'll have to raise taxes to cover the bond payments. though most of these deals are pretty complex and sometimes there is at least a partial municipal 'backstop.' It will probably make it pretty difficult for Louisville to issue revenue bonds again for a while.

 

[ZooCougar]

Basically in a nutshell what my wife told me last night after reading the second link is this: With the bonds being rated as junk status it doesn't bode well for the municipality. In the end those bonds were issued on the taxpayer's dime..with the municipality ultimately being responsible for repayment. She found that clause giving UL the right to purchase the arena if bonds are defaulted VERY interesting. Basically in the end...the taxpayers of Louisville will be pitted against UL in this.

This seems 100% intentional.

 

[CardinalZen]

Actually, these are revenue bonds, not General Obligation bonds, at least it appears that's the case. So the Louisville taxpayers might not get stuck directly. It isn't like they'll have to raise taxes to cover the bond payments. though most of these deals are pretty complex and sometimes there is at least a partial municipal 'backstop.' It will probably make it pretty difficult for Louisville to issue revenue bonds again for a while.

The bonds were issued by the Louisville Arena Authority, not the City of Louisville. The City's credit/bonding rating is not at risk.

 

[noeynox]

Basically in a nutshell what my wife told me last night after reading the second link is this: With the bonds being rated as junk status it doesn't bode well for the municipality. In the end those bonds were issued on the taxpayer's dime..with the municipality ultimately being responsible for repayment. She found that clause giving UL the right to purchase the arena if bonds are defaulted VERY interesting. Basically in the end...the taxpayers of Louisville will be pitted against UL in this.

This Is My Take As Well. That Is Why I Say It Sucks For The Tax Payer, But They Are Not Powerless. They Can Put Tremendous Pressure Louisville, In The End Though, I Think Too Many People Down There Love The Cardinals To Cause Too Much Havoc. Ul, If They're Smart Will Reach A Middle Groun That Is Slightly Less Favorable.

 

[upstater]

The bonds were issued by the Louisville Arena Authority, not the City of Louisville. The City's credit/bonding rating is not at risk.

Are you saying this is a State authority? Obviously it's not a private entity. Under whose auspices is it housed? Sounds like a State concern, since most "authorities" are related to the state. If so, it's Kentucky's credit rating that will get dinged in a default.

 

[freescooter]

This was an independent authority created under State of Kentucky enabling legislation. There are lots of them, usually created for some special purpose, in almost every state. Those entities often have the ability to issue tax exempt bonds, and sometimes taxable bonds as well, for specific purposes. The bonds are typically revenue bonds, as opposed to general obligation bonds. They are not backed by the full faith and credit of the State or a municipality, but rather the source of payment is the revenues from the project. The easiest example is something like a highway authority. When it wants to build a new bridge over a river, it issues bonds. the source of repayment of the bonds isn't the general tax revenues of the state, but the tolls people pay to use the bridge. Most of the major New York-New jersey Hudson Crossings, and the Delaware Memorial Bridge between New Jersey and Delaware were built using this model. In the case of the Yum Center, the Arena Authority issued the bonds, to be paid off from the increased revenues from the taxes generated by new development. I have read that the city also guaranteed up to $10 million, which might suggest that nobody really thought this deal would work, so they are on the hook for that. by the way, because this is a revenue bond deal explains why the interest rates are as high as they are. these deal do in fact have more risk than G.O. bonds. The collapse of this deal, if it happens, wouldn't directly impact either Louisville or the State, but it could make it harder for other public authorities to borrow, especially for arenas and the like.

 

[CardinalZen]

This is exactly correct. The Louisville Arena Authority is actually setup as a now profit, non stock corporation and the bonds were issued by a state economic development authority. I had that wrong originally.

Here's a link to most of the documents. And here is the Bond Trust Indenture.

Including this paragraph from page 31 confirming freescooter's opinion of no jeopardy to the State:

The Bonds do not constitute a debt or liability of the State or of any agency or political
subdivision thereof, other than a special and limited obligation of the Authority, or a pledge of
the faith and credit of the State or any agency or political subdivision thereof, other than a special
and limited obligation of the Authority, but shall be payable solely from the funds pledged
therefor in accordance with this Bond Indenture. The issuance of the Bonds under the provisions
of the Act does not directly, indirectly or contingently obligate the State or any agency or
political subdivision thereof to levy any form of taxation for the payment thereof or to make any
appropriation for their payment, and the Bonds and the interest payable thereon do not now and
shall never constitute a debt of the State or any agency or political subdivision thereof within the
meaning of the Constitution or the statutes of the State and do not now and shall never constitute
a charge against the credit or taxing power of the State or any agency or political subdivision
thereof. The State shall not in any event be liable for the payment of the principal of or interest
on the Bonds or for the performance of any pledge, obligation or agreement of any kind
whatsoever which may be undertaken by the Authority. No breach by the Authority of any such
pledge, mortgage, obligation or agreement may impose any liability, pecuniary or otherwise,
upon the State or any charge upon its general credit or against its taxing power.​

 

[upstater]

This is exactly correct. The Louisville Arena Authority is actually setup as a now profit, non stock corporation and the bonds were issued by a state economic development authority. I had that wrong originally.

Here's a link to most of the documents. And here is the Bond Trust Indenture.

Including this paragraph from page 31 confirming freescooter's opinion of no jeopardy to the State:

The Bonds do not constitute a debt or liability of the State or of any agency or political
subdivision thereof, other than a special and limited obligation of the Authority, or a pledge of
the faith and credit of the State or any agency or political subdivision thereof, other than a special
and limited obligation of the Authority, but shall be payable solely from the funds pledged
therefor in accordance with this Bond Indenture. The issuance of the Bonds under the provisions
of the Act does not directly, indirectly or contingently obligate the State or any agency or
political subdivision thereof to levy any form of taxation for the payment thereof or to make any
appropriation for their payment, and the Bonds and the interest payable thereon do not now and
shall never constitute a debt of the State or any agency or political subdivision thereof within the
meaning of the Constitution or the statutes of the State and do not now and shall never constitute
a charge against the credit or taxing power of the State or any agency or political subdivision
thereof. The State shall not in any event be liable for the payment of the principal of or interest
on the Bonds or for the performance of any pledge, obligation or agreement of any kind
whatsoever which may be undertaken by the Authority. No breach by the Authority of any such
pledge, mortgage, obligation or agreement may impose any liability, pecuniary or otherwise,
upon the State or any charge upon its general credit or against its taxing power.​

Who bought the bonds?

They may be interested in that special provision for UL.

 

[CardinalZen]

I have no clue really. Goldman Sachs was the lead underwriter, and I know some were placed through the local Hillard-Lyons Brokerage. But that's the extent of my knowledge about any of that.

 

[freescooter]

right. having the State Development Authority issue the bonds on behalf of the Arena Authority is also pretty standard procedure. State laws vary as to how it works, but typically these smaller authorities aren't necessarily set up to actually issue the bonds themselves. But as I said, while the state and the City won't get dinged directly, these kind of things have impacts on other projects. I've had to create extra reserve accounts because of something that happened in Texas, for example, and it increased our costs. We just happened to be doing a similar deal in Connecticut. Basically it makes it more costly for everyone, but if I were say Lexington, I would not want to be trying to finance a Civic Center next year.

 

[CardinalZen]

right. having the State Development Authority issue the bonds on behalf of the Arena Authority is also pretty standard procedure. State laws vary as to how it works, but typically these smaller authorities aren't necessarily set up to actually issue the bonds themselves. But as I said, while the state and the City won't get dinged directly, these kind of things have impacts on other projects. I've had to create extra reserve accounts because of something that happened in Texas, for example, and it increased our costs. We just happened to be doing a similar deal in Connecticut. Basically it makes it more costly for everyone, but if I were say Lexington, I would not want to be trying to finance a Civic Center next year.

Funny you should mention that. Lexington was trying to arrange a similar placement to finance a renovation of Rupp Arena for UK. It was also in the $300 Million plus range, IIRC. The Legislature didn't move on it in the just completed session because the UK President is marshaling his forces for major campus upgrades/expansion and is keeping his powder dry for now.

UofL fans are understandably upset that issues with the Louisville arena deal might make it less likely for a similar improvement for UK.

 

[FDNY99]

Funny you should mention that. Lexington was trying to arrange a similar placement to finance a renovation of Rupp Arena for UK. It was also in the $300 Million plus range, IIRC. The Legislature didn't move on it in the just completed session because the UK President is marshaling his forces for major campus upgrades/expansion and is keeping his powder dry for now.

UofL fans are understandably upset that issues with the Louisville arena deal might make it less likely for a similar improvement for UK.

I see that the SEC is involved. They are VERY thorough in their investigations of this kind of stuff. If anyone in the UL Athletic office (specifically Tom Jurich your AD) had ANY kind of knowledge that the bonds couldn't be paid back because of insufficient revenue then he may have earned himself a ticket to jail. This isn't good for your school...no matter what conference you are in!

 

[Stinger92860]

I have no clue really. Goldman Sachs was the lead underwriter, and I know some were placed through the local Hillard-Lyons Brokerage. But that's the extent of my knowledge about any of that.

Ah, Goldman Sachs, the leader in transparency and compliance. I was going to tell you to go back to your own board, but you have me here.

EDIT: UL had better hire at least 8 law firms for discovery.

 

[CardinalZen]

I see that the SEC is involved. They are VERY thorough in their investigations of this kind of stuff. If anyone in the UL Athletic office (specifically Tom Jurich your AD) had ANY kind of knowledge that the bonds couldn't be paid back because of insufficient revenue then he may have earned himself a ticket to jail. This isn't good for your school...no matter what conference you are in!

I guess it's possible that the SEC is involved, but the source linked by the OP isn't know to be very reliable. I'm not sure why the SEC would be involved already before there was an official default. Anything is possible, I reckon.

 

[CardinalZen]

Ah, Goldman Sachs, the leader in transparency and compliance. I was going to tell you to go back to your own board, but you have me here.

EDIT: UL had better hire at least 8 law firms for discovery.

If UofL is smart, and I trust that they are, then they already have everything of interest already collected for instant accessibility in the case of a discovery order.

Interestingly, UofL did make some income concessions to the Arena Authority last year. Maybe they were just being nice, or perhaps a simple demonstration of good faith on the part of the primary tenant?

 

[Stinger92860]

If UofL is smart, and I trust that they are, then they already have everything of interest already collected for instant accessibility in the case of a discovery order.

Interestingly, UofL did make some income concessions to the Arena Authority last year. Maybe they were just being nice, or perhaps a simple demonstration of good faith on the part of the primary tenant?

It's called duty to preserve. Spoliation can be a b it ch