Bloomberg News

Noah’s Ark Depends on Faith in Default-Plagued Debt: Muni Credit

November 14, 2013

VisionLand Amusement Park

From the VisionLand amusement park that showcased the experience of mining and steel production in Bessemer, Alabama, to the Great Platte River Road Archway in Kearney, Nebraska, munis have financed tourist attractions aimed at boosting local economies. Source: Visionland via Bloomberg

Given the default history of unrated municipal debt, investors may have to pray for the success of bonds being sold to build a full-scale replica of Noah’s Ark.

The northern Kentucky city of Williamstown plans to offer $62 million of securities next month for affiliates of Answers in Genesis, a Christian nonprofit that operates the Creation Museum upstate. Proceeds will help build a 510-foot (155.4-meter) wooden ship, the centerpiece of a planned biblical theme park called “Ark Encounter.” Bond documents project the venue will attract at least 1.2 million people in its first year.

Investors who buy $100,000 of the taxable securities will get a lifetime family pass, bond documents show. Yet they may not get their money back, given the track record of unrated munis. Of the 438 issuers currently in default, 93 percent initially offered bonds without a credit grade, according to Concord, Massachusetts-based Municipal Market Advisors.

“If it’s something you believe in and you want to help them out, you can buy the bonds,” said Gene Gard, who oversees $1.3 billion in munis at Dupree & Co. in Lexington, Kentucky, about 45 miles south of the proposed site. He said he wouldn’t consider purchasing the debt.

“People give to charity all the time,” he said in an interview. “If you buy an issue like this and lose money, it could end up being deductible for you as well. Maybe you could think of these bonds as charity with some upside.”

VisionLand Hindsight

From the VisionLand amusement park that showcased the experience of mining and steel production in Bessemer, Alabama, to the Great Platte River Road Archway in Kearney, Nebraska, munis have financed tourist attractions aimed at boosting local economies. Many ventures have failed to repay bondholders. The Nebraska museum, which depicts the 19th century pioneer experience, this year offered investors $50,000 for $20 million of bonds.

About 2,500 issuers in the $3.7 trillion market for city and state obligations defaulted from 1970 to 2011, the Federal Reserve Bank of New York said in a report last year. Industrial-development bonds, like those for Ark Encounter and the Nebraska venue, represented 28 percent of the failures, the most of any segment.

“The history of theme parks and specialized projects like these has not been very good,” said Triet Nguyen, a managing partner at Axios Advisors LLC, a municipal-research company. “This is the first one I’ve seen in a while that reminds me of those debacles from the early days of the high-yield market.”

Cubit Calculation

The plan for the Kentucky site envisions visitors mingling with costumed villagers in a first-century community featuring period dining. A lake with special effects will mimic the subterranean explosion that the bond documents say triggered the biblical flood. The latter-day ark, eventually housing a petting zoo, will be built according to dimensions specified in the Book of Genesis in cubits, an ancient unit of measurement that bond documents say equals 20.4 inches.

The documents cite at least 39 risks to investors, ranging from the potential for the animals to catch infectious diseases to the unclear constitutionality of tax incentives for a biblically themed attraction. There’s also no assurance that projected results, which are based on data gathered as early as 2008, will materialize, bond statements say.

Nor is Answers in Genesis backing the debt. Bondholders’ sole revenue stream comes from money spent at Ark Encounter. The park “may never achieve positive cash flow,” which documents say would lead to default.

Creation Precedent

Michael Zovath, co-founder of Answers in Genesis, said the group’s Creation Museum, 48 miles away in Petersburg, shows why investors can have confidence.

The 70,000 square-foot museum, which features zip lines, camel rides and an exhibit about whether dinosaurs were dragons, attracted 404,000 people in its first year, compared with a projection of 400,000, he said in an interview.

Attendance has declined every year since the museum opened in 2007, offering documents show. Ark Encounter assumes annual visitor increases, according to a feasibility study prepared by the Nehemiah Group, which says it has consulted on religious and biblically sourced attractions worldwide since 1998.

Church, State

Ark Encounter may also face legal hurdles stemming from its religious theme. The park’s 75 percent property-tax break from Williamstown has drawn scrutiny from groups such as Americans United for Separation of Church and State.

Attorneys for the Washington-based organization are “reluctant to proceed with litigation for something that may or may not happen,” said Alex Luchenitser, the group’s associate legal director.

Williamstown Mayor Rick Skinner said he has “a lot of faith” in attendance projections and that residents of the community of about 3,900 are eager for the park to open and draw tourists.

Talks about issuing bonds began last year, he said. The project has collected about $14 million of the $73 million needed for the park through donations.

“It’s an awful lot of money to ask for investors to put up,” Skinner said in an interview. “We thought bonds probably would be the ultimate answer to their financing.”

Ark Encounter will be built on about 200 acres, with 800 acres reserved for future expansion such as hotels and restaurants, the documents show. Construction will begin in March, and the park is slated to open in April 2016.

Popularity Prediction

The 1.2 million to 2 million visitors projected for Ark Encounter’s first year translates to $42.4 million of gross sales, according to the documents. The forecast is based on a study by American Research Group that found two-thirds of the U.S. population has interest in visiting such an attraction.

The site’s nearest competitor is Kings Island, an amusement park about 60 miles north in Mason, Ohio. It drew 3.2 million visitors in 2012, 16th most among North American theme parks, according to a report by the Themed Entertainment Association and Aecom Technology Corp.

Ark Encounter planners hope the biblical park will draw new visitors to northern Kentucky rather than siphon off from nearby attractions.

“We’re really trying to focus on the cultural heritage and religious travel market, not thrill-seekers,” Zovath said.

Plague Diversion

Earnings will fund future attractions such as the “Ten Plagues Ride” and a 100-foot-high “Tower of Babel,” according to the offering statement. The group will embark on major capital projects every other year starting in the third year the venue is open, documents show.

For the project’s risk, the extra yield isn’t sufficient, said Gard, Nguyen and Bill Black at Invesco Ltd.

The taxable bonds due in 15 years are projected to yield 6 percent, offering documents show. That’s equivalent to 3.62 percent tax-free for the highest earners. In comparison, benchmark revenue bonds with a similar maturity and rated five steps above speculative grade yield 4.32 percent, Bloomberg data show.

The projected yields “just boggle my mind,” Nguyen said. The rate on the 15-year debt should be at least 8 percent, he said.

Answers in Genesis is “pleased with the reception” for the bonds in the market, Joe Boone, the nonprofit’s vice president of advancement, said in a statement.

Boone declined to comment on how the yields were determined and if they could be raised.

Institutional Memory

Ross Sinclaire & Associates is the underwriter on the deal. Dan Blank, in the company’s Cincinnati office, said in an e-mail that it is against company policy to comment on bond offerings during order periods.

Williamstown may have to boost interest rates to entice investors who have limited cash. Individuals have pulled $7.6 billion from high-yield muni funds in 2013, Lipper US Fund Flows data show.

“It’s fair to say that high-yield municipal investors will approach this with a good deal of caution,” said Black, who oversees Invesco’s $5.8 billion high-yield municipal fund (ACTDX:US) from Oakbrook Terrace, Illinois. “We have a long memory of deals like this.”

Issuers nationwide are offering $5.4 billion in long-term debt sales this week with benchmark yields at the highest level in about three weeks.

The interest rate on AAA 10-year munis is 2.78 percent, compared with 2.71 percent on similar-maturity Treasuries.

The ratio of the yields, a gauge of relative value, is about 103 percent. It compares with an average of 94 percent since 2001. The smaller the number, the more expensive munis are compared with federal securities.

To contact the reporters on this story: Brian Chappatta in New York at bchappatta1@bloomberg.net; Priya Anand in New York at panand20@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net


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