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Bettman on AM 640 in Toronto - Latest updates on Coyotes ownership matter

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02-08-2011, 07:41 AM
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Bettman on AM 640 in Toronto - Latest updates on Coyotes ownership matter

http://coyotes.azvibe.com/2011/02/08...40-in-toronto/

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02-08-2011, 09:48 AM
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Not surprised this was his answer. That was expected.

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02-08-2011, 11:21 AM
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It'd be nice if you could provide a transcript of, or at the very least quotes from that segment in your article. I'm not going to click on this link, then another link to listen to the MP3, seek to 1:45 only to hear the guy say 'nothing to declare'.

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02-08-2011, 11:46 AM
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It was a decent listen. He says the bonds are in the process of being rated, after which they will be sold. I guess a higher rating makes them more attractive. I'm not sure if that has to do with interest rates. I know zip about government bonds. The rest was the same old stuff. I think that's a fairly accurate summary.

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02-08-2011, 12:10 PM
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It was a decent listen. He says the bonds are in the process of being rated, after which they will be sold. I guess a higher rating makes them more attractive. I'm not sure if that has to do with interest rates. I know zip about government bonds. The rest was the same old stuff. I think that's a fairly accurate summary.
Thanks so much, nice recap.

Yes, the rating dictates the interest rate. Without guarantees that the bond will have high priority in the list of bonds the city has to pay for, and without guarantees that it'll be paid back with, basically, taxpayer money (sales tax from the whole city and not just the district etc...), I could see this being considered very risky and rated low, which would lead to interest rates that'll hurt the city.

My guess is the city's hoping for a 5 to 6% interest rate, but could end up with 7 to 8% because of risk and current turmoil in the muni bond market. What I'd like to know is how high they're willing to go before pulling the plug.

I don't see a 1.5% or 2% gap as a deal killer. A 2% difference would cost them about 20% more over 30 years, or $ 20 M. That sucks, but considering how far they've gotten already, it's not enough to kill the deal IMO.

Now if the bond is rated junk and soars to double-digits, costing the city $50M+ more than originally intended, that's a whole other story.

Here's an Arizona Republic article explaining the issue:
http://www.azcentral.com/news/articl...nd-market.html

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02-08-2011, 12:13 PM
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It was a decent listen. He says the bonds are in the process of being rated, after which they will be sold. I guess a higher rating makes them more attractive. I'm not sure if that has to do with interest rates. I know zip about government bonds. The rest was the same old stuff. I think that's a fairly accurate summary.
Ratings are provided by separate agencies, which give them essentially a grade. Each agency uses a different scale, but, for example, standard and poors has ten grades -- AAA through BBB-. As long as it has one of those grades, it's considered "intestment grade," which means the ratings agency is saying, "this is at least of average investment quality." If it's below investment grade, it's typically regardes by a series of colorful names, like "junk bonds." That means they are at a greater risk of failing and you'll lose some or all your money if you buy them.

The higher a bond is rated by the agency, typically, the lower the interest rate on the coupon. So, if you invest in a highly rated bond, you have pretty good confidence you won't lose your investment, so you don't demand a higher interest rate. If a bond is a junk bond, it's tough to sell, and the only way to make it attractive is pay lots of interest.

So, in this context, it means that the higher the rating, the less Glendale (or the district) will have to pay each year in debt service. So, here's an example -- a high rated municipal bond with a 20 year maturity will probably have a yield around 4 to 5 percent. This means that to borrow $100 million, Glendale will have to raise at least $4 to $5 million a year from the special district in taxes just to service the debt on the bond. So, let's say Glendale thinks it will get about $10 million a year in taxes from the district. A highly rated bond means it can pay $5 million a year in interest and bank $5 million a year. After 20 years, it will have saved $100 million (plus some interest) and can pay back all the bond holders easily. If, however, the bond is rated poorly, then Glendale might have to offer 6.5 percent to get someone to buy it and would have to pay $6.5 million in year in interest and only bank $3.5 million each year. If you're only banking $3.5 million a year, it means you have a shortfall each year toward maturity (which makes ratings agencies rate your bond even lower, although that probably won't matter so long as they sell out the initial allotment). So, the ratings are important.

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02-08-2011, 12:22 PM
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I don't see a 1.5% or 2% gap as a deal killer. A 2% difference would cost them about 20% more over 30 years, or $ 20 M. That sucks, but considering how far they've gotten already, it's not enough to kill the deal IMO.[/url]
I think your math might beoff here. A 2 percent difference would be $2 to $2.5 million per year, assuming an issuance of $100 to $125 million in bonds. Over 30 years, that's $60 to $75 million. Also, you have to take into account the fact that the city would itself be investing the money that it takes in over and and above what it has to pay for interest. So an extra 2 percent means an extra $2 million less to invest and gain interest on.

A 2 percent interest rate difference on a $100 million issuance over 30 years can be as much as a $100 million difference.

I think 7 percent is pretty high. Even California muni bonds with decent ratings are trading in the 6 percent area right now. Remember that a 6 percent return on a municipal bond is really a much higher return because you don't pay tax on the interest -- and most investors in municipal bonds are investing in them because they in the highest tax brackets.

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02-08-2011, 03:28 PM
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I think your math might beoff here. A 2 percent difference would be $2 to $2.5 million per year, assuming an issuance of $100 to $125 million in bonds. Over 30 years, that's $60 to $75 million.
Oh you're probably right. I just used a 30 year amortized mortgage calculator to come up with that number. I don't know much about how the bond stuff works. And yes, I definitely made a mistake, the difference between a 5% and 7% 30-year loan comes out as $ 40 M. Not sure what I did earlier, but it was definitely off.

How do you get to that $ 60 M number? Just curious.

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02-08-2011, 04:40 PM
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Originally Posted by zz View Post
Oh you're probably right. I just used a 30 year amortized mortgage calculator to come up with that number. I don't know much about how the bond stuff works. And yes, I definitely made a mistake, the difference between a 5% and 7% 30-year loan comes out as $ 40 M. Not sure what I did earlier, but it was definitely off.

How do you get to that $ 60 M number? Just curious.
You didn't make a mistake. Using a mortgage calculator would have had you paying off a portion of the principal every year. And depending on the bond issues and terms, it is very possible shorter-term issues can be retired earlier than 30 years, as some issues for the Arena construction are scheduled to do.

Hopefully kdb still has that link to the construction bonds, how they were sold, and the terms on years before they're retired. IIRC there also some issues that can be paid off early, some that carry penalties and some that do not.

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02-08-2011, 06:38 PM
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When I am ready to sleep tonight, I'm gonna re-read this post and crash right out!

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02-08-2011, 06:40 PM
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Quote:
Originally Posted by zz View Post
It'd be nice if you could provide a transcript of, or at the very least quotes from that segment in your article. I'm not going to click on this link, then another link to listen to the MP3, seek to 1:45 only to hear the guy say 'nothing to declare'.
The MP3 is embedded in the article. I'll see what I can do about transcribing it.

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02-08-2011, 07:45 PM
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Oh you're probably right. I just used a 30 year amortized mortgage calculator to come up with that number. I don't know much about how the bond stuff works. And yes, I definitely made a mistake, the difference between a 5% and 7% 30-year loan comes out as $ 40 M. Not sure what I did earlier, but it was definitely off.

How do you get to that $ 60 M number? Just curious.
I'm just assuming that the bonds that will be issued are very straightforward 30-year municipal bonds with yearly interest payments.

In the old days, you used to get actual bond certificates. Now it's electronic. But basically, it works like this -- you get the bond which has a face amount (let's call it $100 million) with a maturity date -- let's say 1/1/2042. Now, you get 30 coupons, which are attached to the bond at, say, 5 percent. The way it works is that each year, you trade in your coupon and get your 5 percent on your face amount (so, $5 million). After 30 years, at maturity, you turn in the bond and get the face amount (so, $100 million.)

So, if you're the City, what you have to pay out on a bond like this is $5 million per year for 30 years and then the face. That comes out to $250 million. ($150 million over 30 years, then $100 million when the debt comes due.)

Now, let's say the coupons are 7 percent. Now you're paying $7 million per year. That's $210 million over 30 years, plus you have to figure in the cost of money of paying an extra $2 million per year.

I'd say where you go wrong is using a mortgage model. There is no mortgage here. The City is going to get its $100 million and spend it almost immediately. It's not putting it in the bank. It's paying nearly $40 million per year to Hulsizer to do the deal. So what will it get back? First, it gets $6 million per year (hopefully) in parking revenues. Second, it gets to tax the special district created to issue the bonds. Not sure what that will be. But let's assume go crazy optimistic and hope it's $10 million. So, now the City has $16 million per year coming in. From that, it needs to (1) pay the interest on the bonds, (2) put the rest toward the 5 year x $40 million payments to Hulsizer, and (3) put money in the bank to pay the $100 million when it comes due in 30 years. So, as you can see, the difference between paying $7 million per year in interest (on 7 percent coupons) or $5 million per year (on 5 percent coupons) affects the bottom line directly -- it's the difference between whether Glendale can bank $10 million or $8 million each year.

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02-08-2011, 10:50 PM
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I'd say where you go wrong is using a mortgage model. There is no mortgage here.
I thought the 30 year term meant the bonds would be paid back over 30 years. Didn't know the amount usually gets paid back in full at the end of the term. Interesting.

Well, that is one crazy amount of money, that's for sure.


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02-09-2011, 08:39 AM
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Well, that is one crazy amount of money, that's for sure.
Sure is. As you mentioned, the City is issuing municipal bonds in a pretty crappy market. There was a time a while back when interest rates were low and the economy was good that municipal bonds paid much less. Back in those glory days where nobody entertained the idea that cities could fail!

On the other hand, 2042 is a long way away. I'll likely be bringing a drool cup and walker to Coyotes games at that point. If the Yotes are still here and the city is doing well -- even assuming there still is a city called "Glendale" that isn't just part of some massive metro complex -- they'll just refinance before they pay the $100 million balloon.

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02-09-2011, 12:28 PM
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Originally Posted by CitizenCoyote View Post
I'm just assuming that the bonds that will be issued are very straightforward 30-year municipal bonds with yearly interest payments.

In the old days, you used to get actual bond certificates. Now it's electronic. But basically, it works like this -- you get the bond which has a face amount (let's call it $100 million) with a maturity date -- let's say 1/1/2042. Now, you get 30 coupons, which are attached to the bond at, say, 5 percent. The way it works is that each year, you trade in your coupon and get your 5 percent on your face amount (so, $5 million). After 30 years, at maturity, you turn in the bond and get the face amount (so, $100 million.)

So, if you're the City, what you have to pay out on a bond like this is $5 million per year for 30 years and then the face. That comes out to $250 million. ($150 million over 30 years, then $100 million when the debt comes due.)

Now, let's say the coupons are 7 percent. Now you're paying $7 million per year. That's $210 million over 30 years, plus you have to figure in the cost of money of paying an extra $2 million per year.

I'd say where you go wrong is using a mortgage model. There is no mortgage here. The City is going to get its $100 million and spend it almost immediately. It's not putting it in the bank. It's paying nearly $40 million per year to Hulsizer to do the deal. So what will it get back? First, it gets $6 million per year (hopefully) in parking revenues. Second, it gets to tax the special district created to issue the bonds. Not sure what that will be. But let's assume go crazy optimistic and hope it's $10 million. So, now the City has $16 million per year coming in. From that, it needs to (1) pay the interest on the bonds, (2) put the rest toward the 5 year x $40 million payments to Hulsizer, and (3) put money in the bank to pay the $100 million when it comes due in 30 years. So, as you can see, the difference between paying $7 million per year in interest (on 7 percent coupons) or $5 million per year (on 5 percent coupons) affects the bottom line directly -- it's the difference between whether Glendale can bank $10 million or $8 million each year.
Thanks for the explanation, very much appreciated. I never completely understood how bonds worked but this makes sense. I have to say though, I got myself into personal financial problems by using the don't pay a cent deals. This sounds very much like the same thing. The problem is you can't always assume the future is going to pay for the past.

It sound's like the city is in a real bind. There are really no good answers for them right now. If they let the team go, they lose tax dollars from the local businesses and possibly some even shut down. I'm surprised they don't go after Elman...he's the one that started all of this. They should have got a personal guarantee from him. He brought the team there and then sold them to release himself from the money pit called the Coyotes and the tie to the long term lease. Man Moyes was stupid to take that deal. I don't know why everybody is letting Elman off the hook.

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02-10-2011, 12:56 PM
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I havent let Ellman off the hook for anything. If anything some people here in AZ seem to be more forgiving of him now that he is willing to step up some to save his precious WestGate and future development within.

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