DENVER - In Utah, conservative fiscal management and strong credit ratings are a way of life, and tomorrow's $60 million lease revenue bond sale by a Salt Lake County authority is no exception.
The country's Municipal Building Authority plans to price the issue with insurance, so, like a third of Utah debt sold over the past five years, it will carry triple-A ratings. But analysts say that for a transaction of this sort even the underlying ratings are unusually strong.
The bonds, which the authority is selling to finance the partial demolition and renovation of the Salt Palace Convention Center, will carry underlying ratings of A1, A-plus, and AA-minus by Moody's Investors Service, Standard & Poor's Corp., and Fitch Investors Service, respectively.
Bankers say lease revenue issues don't normally carry such strong ratings, but thanks to a conservative public fiscal policy that prevails in the state, the authority will benefit when the issue is priced. Strong economic fundamentals in a growing state also helped the credit. And Salt Lake County's regular debt is rated triple-A by Moody's and Fitch and AA-plus by Standard & Poor's.
The lease revenue bonds will be repaid through four county revenue sources approved by the state legislature: a 0.5% hotel room tax, a 3% car rental tax, a 1% restaurant tax, and a county property tax levy dedicated to the Salt Palace. The property tax was due to expire in 1996, but will be extended to pay off the new bonds. The county must appropriate funds annually to pay the lease securing the bonds.
"It's a little unusual in that it's more secure than most lease revenue transactions in that it has sources of funding that only can be used for limited purposes," said Marshall Crawford, managing director of Smith Barney Shearson Inc.'s Denver office. "Salt Lake's such an unusually good credit."
"Even though this isn't a conventional revenue bond, it's rated like one," said Cheryl Cook, manager of Dain Bosworth Inc.'s Salt Lake City office.
Smith Barney is the bookrunning senior manager on the negotiated issue and Dain Bosworth is financial adviser to the authority.
Eight other firms comprise the selling group, all with Denver or Salt Lake City offices. They are: George K. Baum & Co., Kemper Securities Inc., A.G. Edwards & Sons, Merrill Lynch & Co., Zions First National Bank, First Security Bank of Utah, Piper Jaffray Inc., and Dougherty, Dawkins, Strand & Bigelow Inc.
As of last week, bankers were looking for evenly staggered annual maturities from 1996 to 2010, with coupons from 4.5% on the 1996 series; 5.8% on the 2004s to 6.3% on the 2010s. At those yields, the true interest cost to the issuer would be about 6%, Cook said.
The county is considering a call provision on the bonds 10 years out and further, she said, but the decision won't be made until the bonds are priced.
Noting that the longest term bond is 16 years, Crawford said the authority "wanted to make sure [the convention center] is paid off before they make any serious renovations."
The Salt Palace, built is 1969, has grown obsolete during the past decade. Once the home of the Utah Jazz basketball team, which moved to the Delta Center in 1991, the center had 200,000 square feet of space, but only about 160,000 of that is usable. The expansion will leave the new Salt Palace with 254,000 square feet when it opens in March 1996.
In addition to the enabling legislation, the state legislature and Salt Lake City each contributed $15 million toward the project.
"Cooperation has allowed us to get this done in the most cost effective method," Cook said.
In its analysis of the issue, Moody's analyst Jerry Caden noted the four revenue sources, adding: "A modest debt burden and above average bond payout, along with adequately funded capitalized interest and reserve accounts, are additional positive credit factors.
"Soundly managed financial operations and the annually renewable lease's expected minimal claim on county funds support the above average rating on these bonds," Caden wrote.
Fitch analysts David Pink and John Klinges said in their analysis that the deal's master lease structure helped to elevate the issue to Fitch's AA-minus rating.
Master lease financing for lease revenue bonds is a technique commonly used in Utah, Cook said. In this case, the authority issued $8 million of revenue bonds to build Riverbend Golf Course. The golf course bonds are tied to the convention center bonds, so if one project is unable to make an interest or principal payment, reserve funds from the other can be used to cover the difference. A default on either throws the other bonds into technical default. Linking the issues provides further incentive to the authority to prevent default.
The project is scheduled to the completed in March 1996, with bond payments beginning a couple weeks later.
Fitch said that "construction risks do exists; however, the lease provides for partial lease payments on the basis of the project's operational status after the projected completion date, and capitalized interest covers interest payments four months beyond the anticipated completion date."
Kevin Higgins, administrative assistant to the Salt Lake County Commission, said there was no community opposition to the renovation - probably, he said, because no property or sales tax increases are required to repay the bonds. The public is also aware of the benefits of tourism, he said.
"The fact we're financing its construction through means that will not increase their taxes tends to give you support and take away some of the negatives," Higgins said.
Higgins said the amount of business booked for the center for 1996 is double that of 1992, the center's best year. In 1992, the center's revenues of $3 million were subsidized with $3.6 million from the property tax levy.
In 1993, the country subsidized operating revenues of $2.3 million with $3.9 million.