Bloomberg News

Washington State Arena Nears Default as Bailout Bill Work Stalls

December 01, 2011

Dec. 1 (Bloomberg) -- Default looms today on $41.8 million in bond-anticipation notes backing a money-losing regional arena in Washington, potentially harming other municipal issuers, according to state Treasurer James McIntire.

Lawmakers adjourned yesterday in Olympia without acting on a bill to aid the Greater Wenatchee Regional Events Center Public Facilities District and aren’t scheduled to reconvene until noon today, two hours after the payment is due, said Chris McGann, a McIntire spokesman.

The district is almost certain to default on debt sold in 2008 to build a 4,300-seat arena in Wenatchee, City Attorney Steve Smith said by telephone. McIntire called on lawmakers to pass the bailout measure in a Nov. 18 statement, warning of a default’s broader impact on issuers statewide.

“Even if they made a decision tomorrow, they would still have to wire the money and that probably wouldn’t happen the same day,” Smith said late yesterday. “Technically, you’d be in default, but I’m sure the noteholders would take the money the next day. Even if you miss by a day or two, I don’t think it’s an irreconcilable problem.”

Municipal-bond defaults for the year through September fell to $949 million from $2.89 billion in the first nine months of 2010, according to Richard Lehmann, publisher of the Distressed Debt Securities Newsletter in Miami Lakes, Florida.

Wider Impact

A default in Wenatchee “would have a significant impact on the borrowing costs of other public facility districts, cities, and counties,” McIntire said Nov. 18. “Investors generally seek large interest rate concessions from borrowers who are perceived to pose a higher risk of default -- or they avoid them altogether,” he said.

The 1983 default of the Washington Public Power Supply System, affecting $2.25 billion in bonds to finance nuclear power plants, contaminated issuers statewide, driving up borrowing costs, McIntire said.

The effect of a default on the Wenatchee arena bonds would be more local, said Robert Frey, president of Lakeside Advisors Inc., a Seattle-based investment firm. The issuing district consists of nine municipalities, including Wenatchee, a city of about 31,000 on the flanks of the Cascade Mountains about 140 miles (225 kilometers) east of the state’s biggest city.

“Most Washington paper is pretty clean stuff,” Frey said by telephone. “This had the appearance of being so.”

By the end of last year, Wenatchee’s Town Toyota Center had lost $6.5 million since opening in October 2008, according to a state audit.

Missing Forecasts

Arena revenue has fallen short of projections, and a court decision barred the district from borrowing from the city since the community had exceeded its debt limit, according to a legislative analysis.

The pending bailout legislation, backed by McIntire, would provide $42 million to the district and require repayment with interest over 10 years. If payments are missed, the state could withhold sales and use taxes collected on behalf of the nine member municipalities.

Unlike the original bill, the pending version wouldn’t let municipalities in the district raise local sales taxes without a referendum to meet the loan obligations.

A bailout may encourage irresponsible behavior by other municipal issuers, state Senator Karen Keiser, a Democrat from suburban Kent, near Seattle, said during a Nov. 29 committee hearing. She said it may give others an incentive “to kick back a little bit and wait for the state to come to their rescue.”

“I think that’s very dangerous precedent,” Keiser said.

The bill would discourage others from seeking similar relief through interest rates “significantly higher” than the market, said state Representative Ross Hunter, a Democrat from suburban Medina and a sponsor of the measure.

“I am unwilling to allow a small set of local governments take an action (default) that would damage the cost of credit for many other local governments in Washington, and have pushed this bill hard,” he said by e-mail yesterday.

Hunter said he is hopeful there will be a resolution later this week or early next week.

--Editors: Ted Bunker, James Gunsalus.

To contact the reporter on this story: James Nash in Sacramento at jnash24@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net


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