Sacramento received a strong credit rating Monday on the bonds it will sell for the Kings arena project, enabling city officials to move swiftly on the first phase of its financing.
Standard & Poor’s gave the city’s arena bonds an unexpectedly high “A-plus” rating in an announcement late Monday afternoon. That means the city now has two credit ratings for the bonds, after Fitch Ratings assigned the project an “A” rating last week.
With two ratings in hand, the city can now proceed with Phase 1 of financing its $255 million contribution to the downtown arena: completion of a short-term loan from Goldman Sachs & Co., to provide cash until the city can complete its long-term financing.
City Treasurer Russ Fehr said the short-term IOU will be completed in a week to 10 days. He said the S&P rating is “a very pleasant surprise” that will provide greater cushion to the city’s general fund as the arena deal proceeds. Higher-rated bonds generally enjoy lower interest rates.
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The city is operating under some urgency to put its share of money into the project, nine months after the Kings broke ground on the new $507 million Golden 1 Center. If the city doesn’t have its financing in place by Sept. 1, the Kings’ lender could place the team’s $265 million loan into default, according to city documents.
The urgency is a key reason why the city agreed to a settlement last week with three Sacramentans who sued to try to block the arena subsidy. A judge had already ruled for the city and awarded it court costs, but the city agreed to forgo those costs when the residents agreed not to pursue an appeal.
City officials said they don’t believe a default would put the project in any peril but that they are working to avoid any hiccups. Regardless of whether the team’s loan goes into default, city officials say the project needs the city’s share of the money to stay on track.
The Kings have declined comment on the prospect of a default, saying only that they expect the arena to open on time, in October 2016.
The city is borrowing $282 million, although only $212 million will be plowed directly into the project. The rest of the bond proceeds will go into a series of reserve funds, including a fund to pay the last year’s debt service on the bonds 35 years from now. The rest of the city’s $255 million subsidy will come from land donations and other resources.
Under the short-term loan, Goldman Sachs will buy all of the bonds from the city. Sometime in September, the bonds will then be marketed to investors as 35-year notes. City documents say the city’s annual debt service could be as high as $20.5 million, although Fehr said something closer to $18 million to $18.5 million is more likely.
Much will depend on whether interest rates move up in September, as many experts believe. Although rates are lower than they were in May 2014, when the city made its deal with the Kings, they have crept up in the past few months. Fehr said the city will probably pay an extra $1 million a year in debt service because of delays caused by the just-settled lawsuit.
The bonds will represent a mortgage against future city parking revenues, although about two-thirds of the debt service will be paid by the Kings in the form of a lease on the arena and property tax payments.