This from today’s good U-T article by Matt Hall on the dance between the Ballpark Financing and the publishing of the “Blue Ribbon Report” on city fiscal woes:

The city’s $169 million ballpark bond offering closed Feb. 14, 2002.

San Diego paid, for the time, an unusually high 7.66 percent interest rate in its private bond deal with Merrill Lynch because of the lawsuits and controversy that had dogged ballpark construction. After paying $39 million to issue the bonds, the city netted $130 million.

There are a few interesting items here.

First, the $39 million “friction” for fees on the offering was a full 23 percent of the gross sales of the bonds.

Second, the $12,945,400 in interest paid every year ($169 million multiplied by 7.66 percent) actually significantly understates the real cost of those funds. That’s because you pay interest on the $39 million of funds you never got because you used them to pay fees. When you calculate the real cost of funds you actually received ($12,945,400 divided by $130 million), your effective rate is 10 percent. And, if an interest reserve was required (known as “Dutch interest”) then the effective rate is even higher because even less of the gross funding is actually available for the city to use.

It’s no wonder the city was so interested in re-financing that facility in 2004.

Third, it is clear that bond financing is not a good idea if the bonding is not intended to be held to term, because the fees are all front loaded and only a tolerable cost if amortized over the entire term. If you re-fi early, your real cost of funds on an annual basis goes through the roof.

If you consider the “friction” fees as the equivalent of interest (which is reasonable because it is just a “cost” for the use of funds, like interest) and you amortize it over the short period, the city would have been in the bonds if its financial condition would have allowed them to be refinanced in 2005 (it was first raised at Council in April of 2004, so let’s assume the city would have re-fied February 14, 2005, had it been able to), the numbers (approximately) look like this:

Three years of interest at 7.66 percent = $38,836,200
Fee “friction” costs = $39,000,000
Total Cost = $77,836,200
Divided by 3 (number of years) = $25,945,400 per year
Real cost of funds per year ($25,945,400 /$130 million) = 20 percent

Kind of interesting.

Pat Shea

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