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March 30, 2008

Bond crisis costs stadium projects millions

The auction-rate bond crisis - surely you've been following the auction-rate bond crisis? - is beginning to take its toll on some stadium and arena projects that used the little-known financial instruments to pay for construction costs. In some cases, reports the Bloomberg wire service, monthly costs have more than tripled, leaving both teams and taxpayers in a massive hole.

The idea behind auction-rate bonds was that they were supposed to save money: Instead of a fixed interest rate, rates are set at auction every few weeks, which at one point was cheaper than fixed-rate borrowing. Not anymore, reports Bloomberg:

An index from the Securities Financial Markets Association shows the average weekly rate climbed to 6.56 percent on March 19 from 3.68 percent for the 12 months through January as investors retreated and the banks managing auctions refused to make their own offers. The average fixed-rate municipal bond maturing in 20 years yielded 4.28 percent the past 12 months, according to the Bond Buyer.

Among the projects facing skyrocketing bond payments: The state of Louisiana saw its monthly payments for refurbishing the New Orleans Saints' Superdome jump from $500,000 in January to $1.8 in February; the new New York Jets and Giants stadium saw part of its $650 million in auction-rate debt hit a staggering 22% interest rate last week; the city of Cleveland paid 12% on debt for the Cleveland Browns' stadium in February, up from 4% the month before; and the state of Indiana saw rates on its $611 million for a new Indianapolis Colts stadium leap to 15% in mid-February, before dropping back to 5% last week.

The biggest problems come when no one bids on the bonds at auction, causing interest to jump to the maximum "penalty rate." To prevent this, Louisiana is now considering bidding on the bonds itself, in a last-ditch attempt to bail them out and avoid junk-bond status. If the bond markets calm down, the rates should, too; if not, a bunch of states and teams could be looking at ten, if not hundreds of millions of dollars in added costs.

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