DALLAS -- Lone Star Jockey Club plans to sell about $100 million of notes within 60 days to finance a major league horse racetrack in North Texas, but some investment industry sources are skeptical that the high-risk deal will leave the starting gate.

The project, a joint venture between a private investment partnership and Grand Prairie, Tex., already was rejected by the market earlier this year when Arkansas-based Stephens Inc. put together a financial package based on a proprietary structure. Institutional and other investors balked at buying into the deal, which relied on U.S. Treasury bonds to guarantee principal and arbitrage profits.

Now Lone Star has hired Oppenheimer & Co., a Wall Street firm with extensive experience in gambling ventures, to market the taxable notes and devise a more traditional financial structure that is palatable to investors.

Earlier this month, the private partnership also named horse racing magnate R.D. Hubbard as chairman of the Lone Star board in an attempt to attract institutional and individual investors.

Project officials said the moves should help the financing get out of the gate and result in the completion of a Class 1 thoroughbred and quarter horse racetrack on a 282-acre site in the Dallas suburb by the summer of 1995.

Construction began about two months ago, and the group needs more money soon to continue with the project, which is expected to cost more than $115 million when completed.

"We have every confidence that the project will be financed, and that it will be successful," said Wayne Usry, deputy city manager for Grand Prairie and treasurer for the sports corporation.

But some industry sources are skeptical that the bonds will be placed, despite the promise of steep interest rates of up to 11%. They point to flat racetrack revenues nationwide; the lower-than-expected revenues at the recently opened track in southern Texas, Sam Houston Race Park; low debt service coverage; and legal disputes.

In addition, no predictions of racetrack revenues have been publicized, although officials said they are detailed in the offering memorandum to be distributed to potential investors soon.

Some Details

"I don't think investors will be interested in buying that kind of paper," said one industry source. "Stephens tried it once and couldn't do it. Now Lone Star has brought in Oppenheimer, and they are having trouble again."

Oppenheimer investment bankers declined to comment on the financing, and David Ivory, chief financial officer for Lone Star, did not return numerous phone calls. But some financial details were provided by officials at the Grand Prairie Sports Facilities Development Corp., which the city created to help establish the racetrack in conjunction with Lone Star.

Under the plan, Lone Star would issue about $100 million of seven-year senior secured notes that would be interest-only obligations with a balloon payment due in 2001, when the debt would have to be refinanced. Plans call for paying interest of 10% to 11% on the taxable notes and offering investors equity warrants in the range of 8% to 10%.

After the notes are sold, Lone Star would use $62 million of the proceeds to purchase sales tax bonds issued by the city's sports development corporation and carrying a maturity of 22 years. The sales tax bonds would be paid through a half-cent sales tax, which was approved about two years ago by Grand Prairie voters and is expected to bring in $4.5 million annually.

In addition, revenues would come from a 30-year lease signed by Lone Star Jockey, which would pay rent on the racetrack buildings from project revenue. Lone Star Jockey is a private venture that has about 32 partners, including Dallas investors Preston Carter and Jim Musselman.

"The bondholder security will be from the leasehold mortgage and the sales tax revenue stream," Usry said.

Last month, he said debt service could be about $11 million a year, with $4.5 million to be paid from sales tax and $6.5 million from racetrack revenues, although those estimates could change.

However, two former city councilmen, Robert Gustafson and Walt Howey, said they were concerned that the city sales tax could not support $62 million of debt after Grand Prairie's financial adviser warned that only $35 million to $40 million

of debt should be under traditional debt service coverage standards.

Larry Jordan, First Southwest Co. managing director who is a financial adviser for Grand Prairie, declined to comment.

Grand Prairie deputy city manager Usry said, "We acknowledge that there is no additional debt service coverage in the first few years, but we think the sales tax will grow and cover the debt."

The sales tax revenue is expected to increase at least at the rate of inflation, Usry said. In addition, Lone Star would have to forgive debt that cannot be paid in 22 years from sales tax revenues under the agreement reached under the public-private partnership, he said.

However, other legal questions have emerged. The two city councilmen asked the state attorney general's office to block the sale of the bonds, partly because the city, they say, misled voters and violated state and federal laws when the half-cent sales tax was approved.

Among the many charges, Gustafson and Howey said a city flier distributed at the time of the sales tax referendum stated Lone Star would put in $30 million of equity into the project before sales tax bonds would be issued, and that has not occurred.

'Deception'

They also said the city told voters that the Texas Racing Commission would grant only one Class 1 racing license in North Texas. In fact, under a settlement agreement, Lone Star and Trinity Meadows, near Fort Worth, will both operate Class 1 tracks.

"There is no way they can justify the deception employed to advance the process," Gustafson said.

So far, the attorney general's office has said it will consider the legal issues.

Meanwhile, the two councilmen point to a federal grand jury in Austin that subpoenaed city records several months ago in connection with the sales tax referendum. The subpoenas were reported to be part of an investigation into the Texas racing industry, although federal officials have not commented on the issue.

If those problems weren't enough, industry observers are concerned that casinos, lotteries, and other types of gambling will draw dollars away from horse racing at a time when three Class 1 Texas racetracks are expected to come on line.

In the past few months, Sam Houston Race Park opened in Houston, and another racetrack, Retama Park, is under construction in San Antonio. The tracks, which are expected to be on the same racetrack circuit as Lone Star, both ran into trouble obtaining financing on the first attempt.

"The financial community perceives it as a high-risk business," said Malcolm Gable, managing associate of the parimutuel industry group for Coopers & Lybrand's Dallas office. "It does appear to be a risky industry if you don't know much about it."

However, both projects did eventually get financing. In Houston, Maxxam Inc. purchased a 28% share to help realize the $85 million project, which was financed by taxable bonds carrying a steep 11.75% interest rate. In San Antonio, Rauscher Pierce Refsnes rescued the $75 million project by arranging for a suburb to own the track and to issue tax-exempt financing, with a rate of 8.75% on 25-year bonds.

Despite the financing success, the Houston racetrack has faced some difficulties because its daily handle, or the total dollars wagered, are less than half of what was expected, Gable said.

"I think the whole industry is concerned based on the experience of Houston," said Gable, although he added that he thought the Lone Star Jockey group could surmount the problems.

Gable, who is a consultant to Lone Star Jockey and the sports corporation, said North Texas is perceived to be a better market, and residents in the region frequent racetracks in Louisiana and Oklahoma City.

Mitchell Zeitz, a consultant with Public Financial Management in Philadelphia and financial adviser to the sports corporation, agreed. "Clearly, the investors will look at Houston, but we will try to differentiate the deals," Zeitz said. "I am confident Oppenheimer will be able to place the bonds."

Oppenheimer plans to visit investors and mutual fund managers in cities from Boston to New York City in the next few weeks, Zeitz said.

"If run properly, racetracks can generate a number of jobs, and the revenues they throw off can be quite significant," he said.

Bob Dransfield, the bond attorney for the Grand Prairie sports corporation, said the notes were taking more time to be marketed than many had expected because of legal issues. "The holdup is the complexity of the transaction," said Dransfield, who works in the Dallas office of Fulbright & Jaworski, a law firm. "It raises a host of legal issues and business issues when sales tax and project revenue financing are combined."

Many of the legal issues already have been resolved, not only regarding the financial structure, but also the lawsuits pressed after the Texas Racing Commission awarded the Class 1 license in North Texas to Lone Star Jockey.

All three losing applicants sued, and Lone Star subsequently reached settlements with them. The last settlement was with Trinity Meadows, a racetrack near Fort Worth, which was granted a Class 1 license.

Now a key issue is whether Lone Star can arrange financing rapidly enough to continue with construction or whether it needs to arrange a bridge loan to pay for expenses in the meantime.

Usry said he preferred not to comment on that issue because he is confident the project will succeed.

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