Here's the anatomy of a bond default:
August 2006: Issuer sells bonds for project.
May 2008: Project opens for business.
September 2008: Issuer says bonds are in default.
Man, that was a fast hook.
This is how it goes in the municipal market, though, especially with tourist-attraction finance. The securities themselves may have long lives -- these particular bonds were supposed to mature in 2010 and 2019 -- yet the fuse is short.
These bonds haven't blown up, yet. In mid-September, the issuer sent out a terse announcement ``that it is in default of certain payments under the loan agreement,'' and that it was ``in early discussions with the holders of the Bonds with respect to a restructuring of the terms of the Bonds, and with its equity holders with respect to additional equity contributions.''
So ends the dream.
Or at least the dream of a small number of institutional bond investors, who received 6.125 percent tax-exempt yields at a time when top-grade revenue bonds were paying about 5 percent.
Very often, too, a developer's dreams end here, though in this case the proponents of the project will succeed in keeping it alive, at least for a while.
Muni Junk
That's because the project we are talking about here is the Sports Museum of America, an attraction conceived just before the Sept. 11 terrorist attacks.
After the attacks, supporters of the idea suggested the project might be a good way to help rebuild Lower Manhattan. The museum was the beneficiary of $57 million in bonds sold by the New York Liberty Development Corp., an entity set up to attract construction in the financial district with tax-exempt money. Of the $57 million in bonds sold by the corporation for the museum, $52 million is free of tax.
And that's why I wrote about these bonds back when they were first sold in a private placement to institutional investors. At the time, it looked like a rebirth of the municipal junk-bond market, which ground to a halt in the fall of 2000 after two municipal-bond funds that specialized in such stuff collapsed.
This followed a five- or six-year period when it seemed like any project, no matter how far-fetched, could be financed in the municipal market. Those were fun days.
Hot Location
The Sports Museum didn't seem especially nutty. Its backers kept referring to it as an ``Attraction-Museum,'' in the private- placement memorandum for the bonds, an ``attraction-museum'' defined as the visitors being bombarded with a series of multimedia presentations rather than static priceless artifacts displayed under glass.
There was a lot to recommend the museum. It was for-profit, and its proponents were putting up $35 million. So they, unlike so many nonprofit organizations that have financed projects in the municipal market before, had an incentive to get it right.
And there was the location: 26 Broadway, which once housed John D. Rockefeller's Standard Oil Co. office, and across from the bronze statue of the bull at Bowling Green.
That was all on the plus side. On the minus side, the thing so reminiscent of the heyday of the municipal junk-bond market, were the projections of attendance: 800,000 the first year, rising to 875,000 in four years.
U.S.S. Intrepid
The biggest risk factor in tourist attractions like the sports museum is people. If you don't get enough, you're not going to make the money that pays off the bonds. And 800,000, to me, seemed extravagant, even insane. The nearest example I could think of, in New York, was the U.S.S. Intrepid, the World War II- era aircraft carrier docked off the west side of midtown Manhattan.
When the Intrepid museum was first financed back in 1982, the feasibility study projected that the carrier would attract 1.38 million visitors in the first full year of operation, 1984. It hasn't achieved anywhere near that level, yet, and now claims annual attendance is 770,000. That took almost two decades.
The original bond issue used to finance the Intrepid went bust, and in 1988, bondholders got 23 cents on the dollar. The ship earlier this month returned to its mooring after a two-year, $115 million refurbishment, and is set to reopen on Nov. 8.
The Sports Museum isn't saying what attendance has been since it opened in May, beyond saying it isn't enough. In a rare instance of executive humility, a director of the museum, Caleb Koeppel, said in a prepared statement: ``The central issue for us was ticket pricing. It was too high.''
Hordes of Supporters
The museum opened in May, with adult tickets priced at an eye-gouging $27. The original private-placement memorandum said they would be $18. The new price is $16.
When these bonds were first sold, I spoke with Ron Fielding, who oversees $23 billion in municipal bonds at Oppenheimer Funds Inc. in Rochester, New York. He bought as many as he could, about $2.5 million, and said he thought ``hordes of young, sports- crazed Wall Streeters'' would help support the deal.
We shall see. There are fewer young Wall Streeters these days, and there will be fewer foreign tourists visiting New York in 2009, now that their pounds and euros are worth less than they were at the start of this year.
This won't be the last we hear of the Sports Museum revenue bonds.
(Joe Mysak is a Bloomberg News columnist. The opinions expressed are his own.)
