Dan Tracy | Mark Schlueb and David Damron, Sentinel Staff Writers August 13, 2007

Orlando has a story to tell about its new downtown venues, but the plot is so convoluted it could cost $35 million or more to unravel the tale. That's how much extra the city could pay in borrowing costs to raise the nearly $1.1 billion needed to build a new arena and performing-arts center and refurbish the Florida Citrus Bowl.

Here's the problem: Lenders like simple transactions, but the finance plan that Orlando hopes to launch as early as October is complex, relying on multiple funding sources and repayment schedules.  So, to calm lender worries, Orlando expects to pay higher interest and insurance rates, as well as higher fees to the underwriters, or the people who will sell the bonds. The underwriters have a term for such a deal: "story bonds" -- as in, you have to tell the story behind the bonds to make the sale.

The Orange County Comptroller's Office estimates the additional costs of Orlando's story bonds at a minimum of $35 million over the life of what promises to be 30 years' worth of debt. The calculation was made at the request of the Orlando Sentinel.

"We don't know what it will be for certain until we get there [the sale]," said Jim Moye, deputy Orange County comptroller.  Even the city's chief financial officer, Rebecca Sutton, concedes the deal won't be cheap.

Orlando has a story to tell about its new downtown venues, but the plot is so convoluted it could cost $35 million or more to unravel the tale.  That's how much extra the city could pay in borrowing costs to raise the nearly $1.1 billion needed to build a new arena and performing-arts center and refurbish the Florida Citrus Bowl.  Here's the problem: Lenders like simple transactions, but the finance plan that Orlando hopes to launch as early as October is complex, relying on multiple funding sources and repayment schedules.

So, to calm lender worries, Orlando expects to pay higher interest and insurance rates, as well as higher fees to the underwriters, or the people who will sell the bonds.  The underwriters have a term for such a deal: "story bonds" -- as in, you have to tell the story behind the bonds to make the sale.  The Orange County Comptroller's Office estimates the additional costs of Orlando's story bonds at a minimum of $35 million over the life of what promises to be 30 years' worth of debt. The calculation was made at the request of the Orlando Sentinel.

"We don't know what it will be for certain until we get there [the sale]," said Jim Moye, deputy Orange County comptroller.  Even the city's chief financial officer, Rebecca Sutton, concedes the deal won't be cheap.

"I wouldn't be surprised to see higher costs," she said, although she pointed out that the additional expenses have been accounted for in the downtown-venues financing plan.  But those costs, she said, should be offset in the long run by the commerce that could be generated by the new buildings, from construction jobs to new patrons spending money downtown.

"There is significant economic benefit for the city that will pay us as a region for years to come," she said.

Here's how the plot got twisted.  13 funding sources.  Unlike the county -- which typically uses a single source of revenue to pay back what it borrows -- Orlando has bundled together 13 funding sources for what would be the city's largest-ever public-works undertaking.

More than half of the borrowed money -- $540 million -- would come from bonds to be paid back from the tourist tax, which is controlled by the county.  Orlando intends to issue an additional $242 million in bonds with backing largely from the state and the city's downtown taxing district. Other funding sources include selling land and raising money from development related to the new construction.
Sutton said the approach is innovative and spreads risk: "It's ambitious. I don't think it's imprudent."

Fred Winterkamp, Orange County's fiscal and business services manager, also defended Orlando's plans, predicting that the underwriters will negotiate as good a deal as possible.

"It's one of the ways to use the market that's provided good results in the past," he said.  But others point out that lenders tend to shy away from complex deals -- unless they are compensated by higher interest rates and more expensive insurance that guarantees a payback.

"You can always make a deal. You just have to pay for it," said Jim Gilkeson, an associate professor of finance at the University of Central Florida.

Underwriters' higher fees

All the money will go toward building a new arena for the Orlando Magic, constructing the Dr. P. Phillips Orlando Performing Arts Center and improving the Florida Citrus Bowl stadium.

There's little doubt that more money will be paid to the underwriters, who essentially receive a commission for each bond they sell to investors that typically include pension funds and large institutional investors.

The underwriters seeking the city work could be paid at least 3.5 times more money when compared with their counterparts in two recent bond-refinancing deals worth $309 million by Orange County, records show. That could work out to total fees of between $5 million and $6 million, according to the city's financial model, which was developed by the consulting firm PRAG.  The reason for the higher fees is the extra risk assumed by underwriters and the additional expenses they say they will incur as they court buyers with the "story" of the Orlando bonds.

Who wants in?

There has been no shortage of financial firms lining up for the work.  Some 22 companies bid for the business when the city solicited proposals last month, including Citigroup, a company that helped city officials develop the framework for the venues deal. Others included JPMorgan, Raymond James & Associates, Merrill Lynch, First Southwest Co. and Morgan Stanley.

Still, city officials said the contract wasn't advertised widely enough to attract minority companies, so they are accepting new bids until Aug. 22. Nearly 50 firms have expressed interest so far, records show.

The city will select 14 firms that would share all of Orlando's bond financing for the next five years. It's potentially lucrative work under any circumstance, and even more promising because of the venues plan.  "We're drawing attention that we've never drawn before because of the size of what we're doing," Sutton said.

She expects to start selling the bonds as early as October, though the city has to clear a number of hurdles first. They include:

Verifying that land for the arena is clear of contamination. Providing assurances the arena will meet certain ecologically friendly design standards.

The Magic making good on a pledge of $50 million before construction begins.
"We were trying to lock them down into a financial plan, and on the scope of the projects," said Assistant Orange County Administrator Eric Gassman. "If anything materially changes that, it has to come back to our board."

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