Yankee Stadium: Grand slam

The US sports press calls it a subway series – a match-up between New York's two baseball teams. In the middle of August, the two teams priced large bond offerings for new stadiums on consecutive days. Of the two, and in stark difference to the respective teams' play during the 2006 season, the Yankees financing was much the more interesting.

The Yankees deal, a $967.6 million mixture of taxable and tax-exempt bonds, employed a mixture of highly-engineered swaps and a hard-nosed approach to debt service that left the Mets' deal, a popular and solidly-priced deal, looking nonetheless dowdy. The Yankees financing is also the largest deal for a stadium project anywhere.

The two projects, however, are not the product of competition between the teams for fans, so much as the fulfilment of a long-held desire on the part of the city's government to overhaul the two team's stadiums. Yankee Stadium dates back to the 1920s, although it underwent a substantial renovation in the 1970s. Shea, which once hosted the Beatles and the Pope, was built in the 1960s.

New York's previous mayor, Rudolph Giuliani, had proposed that the city would build the two stadiums using its own capital resources, and then lease them back to the teams. The current mayor, Michael Bloomberg, killed this deal, and the two teams then had to rely largely on their own resources.

The city, however, still offers some material support to the project. The stadium as a standalone building has a cost of $800 million, comfortably the largest to date in the US (although the UK's Wembley was larger), but associated works bring the project's total cost to $1.2 billion. This number includes additional infrastructure costs such as a new rail station, the cost of demolishing the old stadium, and acquiring the necessary land for the project, all of which the city is paying for.

According to Randy Levine, president of the Yankees, and also a senior counsel at Akin Gump, "after the plan for the city to pay fell through we had to look at alternative structures." The Yankees proceeded from the assumption that debt service could not exceed $50 million per year. Within this stricture, and given the high cost of the stadium, wringing all possible debt service savings from the financing package was key.

One key element of the city's support was allowing the stadium to benefit from payment-in-lieu-of-taxes (PILOT) treatment. Under PILOT the stadium, a for-profit enterprise, can gain tax-exempt status on its bonds. PILOT has been a key part of the building and redevelopment boom in New York, and has been extensively used in developing commercial office space in the Times Square area.

The Yankees selected Goldman Sachs and Bank of America as bookrunners, and tasked them with assembling a financing for the project that stayed within its debt service guidelines. The Yankees are only offering lenders the proceeds of ticket and seating sales, rather than also including the proceeds of food concessions, merchandise sales, naming rights and parking spots, as the Mets did. Still, both stadiums gained investment grade ratings, since the Yankees' large, nationally diverse and often prosperous fanbase compensates for the team contributing fewer assets to the financing than the Mets.

The Yankees also had to contend with the strictures of Major League Baseball's (MLB) revenue sharing arrangement. This is designed to foster greater competition between clubs by transferring money from clubs with high wage bills to those with smaller payrolls. The sport, however, has recently permitted clubs to deduct the cost of new facilities from what they owe under these arrangements.

But the stadium's owner must be the New York City Industrial Development Authority, which then issues the bonds in order for these bonds to qualify for tax-exempt treatment. The Yankees persuaded MLB that this still allowed the team to deduct the cost, rather than use convoluted structuring, and the team still leases the stadium from the issuer.

The Yankees, in an attempt to further lower borrowing costs, entered into a series of swap arrangements, many of which have not been used before for such an infrastructure financing. The senior debt breaks down into $942.55 million in tax-exempt debt and $25 million in taxable bonds. According to Greg Carey, managing director at Goldman Sachs, the bookrunners had considered an approach to the floating-rate debt market, coupled with a swap back into floating rate debt service payments. "But the cash market began to look more attractive as we approached the launch."

Nevertheless, $198 million of the bonds, which mature in series at numerous points up until 2046, feature a CPI swap, the largest ever executed in the US tax-exempt market, and still others feature a fixed annuity basis swap, which essentially exploits the arbitrage between the floating rate BMA market, where debt is priced over one-week tax-exempt note yields, and the Libor market. The swap generates savings of roughly $4 million per year, with a net present value of over $68 million. The swap is vulnerable to changes in tax law that might depress yields in the muni market, but would likely not leave the Yankees substantially out of the market.

Additional firsts for the deal include the length of the reinvestment contracts, both for the proceeds, and also for cash held in the months before a coupon payment, and the deal is also the largest use to date on a stadium of Zurich's Subguard insurance for subcontractors. Turner and Tishman Speyer are managing the construction process.

The Yankees initially chose to wait a respectable period after the Mets sent $603 million in taxable and tax-exempt debt to market. But demand was so strong for the Mets that the Yankees brought forward pricing to the following day. The debt, insured by FGIC and MBIA, priced for an all-in yield of 4.51%, slightly inside the Mets' 4.57%.

The convergence of the project finance and municipal finance markets in US stadium financings has been an overlooked phenomenon of recent years, in part because of the relative infrequency with which leisure assets come to market. Nonetheless, the deal, the largest in the capital markets ever for a stadium, will be imitated. Not only do the swap arrangements show a creativity that infrastructure developers should emulate, but the structure of private activity bonds, should they come to market, will closely resemble this deal. More immediately, the much-criticised new stadium in Brooklyn for the New Jersey Nets basketball team will also use PILOT financing.

New Yankee Stadium
Status: Priced 16 August 2006
Size: $1.2 billion
Location: New York City
Description: New 53,000-seat stadium for New York Yankees
Sponsor: New York Yankees
Debt: $967.6 million
Issuer: New York City Industrial Development Authority
Underwriters: Goldman Sachs, Bank of America
Swap counterparties: Goldman Sachs, Bank of America, Wachovia, Societe Generale
Monoline insurers: MBIA and FGIC
City bond counsel: Nixon Peabody
Underwriter counsel: Winston & Strawn
Team counsel: Mintz Levin; Fried Frank
Monoline counsel: Winstead Sechrest & Minick