Anaheim Unveils Terms of Disney-Backed Bonds

In what promises to be one of the largest and most closely watched municipal bond deals of the year, Anaheim on Monday said it would pay out more than $1.7 billion in principal and interest over 40 years to expand the city’s Convention Center and improve streets for the Disneyland Resort expansion.

Under the terms of a $518-million bond offering unveiled Monday, the Walt Disney Co. will not only guarantee a portion of the bonds but will be on the hook to pay off all the debt if its highly touted new companion park to Disneyland, called Disney’s California Adventure, is not open by July 1, 2002.

“It’s critical for repayment of these bonds that the park be open,” said Anaheim Finance Director Bill Sweeney. “This provides us the assurance that it will be done in a reasonable period of time.”

Expected to go to market on Feb. 4, the debt consists of $518 million in bonds of varying maturities, the longest coming due in 2037. The bonds are to be repaid through a complicated financing arrangement in which Anaheim would pay an amount equivalent to 3% of the city’s 15% hotel bed tax, plus some sales and property taxes generated within the Disneyland Resort expansion area.

About $395 million of the bond sale proceeds will be used to pay for the Anaheim Convention Center expansion, as well as street improvements and parking near the Disney parks.

The balance will be used to make interest payments to bondholders during the construction period, as well as to pay legal fees, underwriting costs, insurance premiums and a host of other administrative costs associated with the offering.

Disney has agreed to guarantee half of the $242 million of subordinated debt, which is the riskiest piece of the financing, as its bondholders would be the last to be paid.

Bond experts say corporate guarantees in municipal financing deals aren’t new and have been used in other development projects. Still, they doubted that many other communities could pull off an agreement as large and complex as the one unveiled Monday.

“It’s a hard deal to duplicate,” said David Brodsly, vice president of Moody’s Investors Service. “It’s hard to imagine a combination of Disney and Anaheim anywhere else in the nation, maybe the world, where you have such a strong business activity and a strong city with such clearly linked destinies. I think this model is pretty much custom made.”

However, that custom-made deal has some quirks that could concern municipal bond investors.

Bond experts said investors tend to prefer traditional 30-year bonds over the 40-year debt proposed by Anaheim. And they also may be concerned that the deal is structured so that interest payments increase every year, while the tourism revenue the city is counting on to repay that debt tends to move up and down with the economy.

However, the Disney name and the fact that the city purchased private insurance for the entire issue--which automatically gives it a top-flight credit rating--should translate into strong demand from investors, said Joe Piraro, a Chicago-area money manager who oversees a $2.5-billion bond portfolio.

“Disney has an impeccable reputation in the financial markets,” said Piraro, of Van Kampen American Capital in Oakbrook Terrace, Ill. “The perception is very positive.”

Noting that Disney’s bond guarantee covers only a portion of the issue, critics complained Monday that the deal is a far cry from the “partnership” that city officials touted last summer when Disney unveiled plans for its new park.

City officials “campaigned that there was no risk on the part of the city of Anaheim, but if an even greater part of it is not underwritten by the Disney, then certainly the general fund is at risk,” said Steve White, president of Anaheim Home, a local activist group that has fought expansion of Disney’s operations for six years.

“It’s a betrayal of what they said, but are we shocked? No. There’s a 20-year history of duplicity on the part of elected officials who simply don’t represent the people, they represent Disney.”

However, City Council members, who in October voted unanimously for the project, defended the bond deal.

“It’s a win-win situation for the city because we’re bringing Disneyland and the Convention Center up to date,” said Councilman Lou Lopez.

Councilman Bob Zemel, who has opposed previous deals between Anaheim and Disney, also favored the bond issue.

“We need these street improvements anyway. The Disney expansion allows us to issue the bonds to do something that we needed,” Zemel said.

The bonds will consist of three classes of debt: $217.3 million in tax-exempt senior lease revenue bonds, $58.7 million in taxable senior lease revenue bonds, and $242 million in subordinated debt.

The city’s first full annual interest payment of about $24.3 million will begin in 2002, a year after Disney’s California Adventure is set to be up and running. The deal is structured so that payments escalate to nearly $76 million annually before the bonds are paid off in 2037.

In total, the city will pay more than $1.7 billion in principal and interest over the life of the bonds.

In the event that revenue falls short of the debt payments in any given year, New York-based Financial Security Assurance Inc., Anaheim’s bond insurer, must step in to pay bondholders.

City officials say the insurance will save the city “tens of millions” in borrowing costs over the life of the bonds through lower interest rates. And it will pay bondholders in the event the project is a bust and the projected extra city revenue never materializes.

“Taxpayers are not at risk under this deal,” Sweeney said. “The city’s general fund isn’t at risk. This is a fully insulated deal.”

However, if the insurance company needs to step in to pay bondholders and it is still owed money in 2037, it would be entitled to claim up to 50% of the project’s cash flow for up to 10 additional years.

“Looks like the insurance company wanted a little extra security,” said Zane Mann, publisher of the California Municipal Bond Advisor.

Indeed, the deal is not without risk.

Although the bonds will carry the highest credit rating available because they are fully insured, Fitch’s Investors Service on Monday rated the senior bonds BBB+, to give investors an idea of how the bonds would fare if they didn’t carry insurance. That rating is still investment grade, but several steps below the company’s highest rating.

In citing reasons for its rating, Fitch’s said in a release that the economic activity projected for the new Anaheim projects “is inherently vulnerable to uncertainty.”

Likewise, Anaheim already has nearly $200 million in municipal bonds outstanding, for which it has pledged Anaheim Stadium, Convention Center and other properties as security.