Q&A: about Citi Field, Credit Rating and Debt

Martin Z. Braun of Bloomberg wrote yesterday:

“The credit rating on $695.4 million of municipal debt issued to finance a new baseball stadium for the New York Mets was cut to junk by Standard & Poor’s because of losses suffered by an insurance company that provided a surety bond.”

this sounded bad to me… of course, i have a difficult time balancing my check book, so i reached out to a good friend of mine, who holds a prominent position with an international accounting and consulting firm, not to mention he understands investing and finance as well as any one i know… here’s our exchange:

Matthew Cerrone: Is this bad?

Friend: It depends on your perspective.  Being downgraded means that the interest rate at which you can borrow is higher (because you’re not as good a credit).  So for companies that need to refinance their existing debt, or want more debt, it’s bad because now that debt will be more expensive (more interest).  But if, like Citi Field, you have no need to refinance or need for more money, it pretty much doesn’t matter.  It matters a lot to anyone who holds that debt an an investment (i.e., you could have bought those bonds).  For the holders of these bonds, their value goes down a lot when it’s downgraded.  Reason being that the bonds were issued assuming a certain quality of credit and the interest rate associated with it was based on that.  So let’s say 10 percent.  Now, the credit worthiness has gone down, so the bond should really pay 13 percent.  But it doesn’t.  So the 10 percent bond’s value comes down because it doesn’t pay an appropriate level of interest… Does that all make sense?

Matthew Cerrone: So, it’s bad for the investors (the bondholders), not necessarily the Mets?

Friend: Exactly.  Unless Mets/Ownership need access to the bond market for borrowing any time soon.  But given they already have a nice shiny new stadium, that shouldn’t be an issue.  It’s also likely a bad thing for someone like the Nets going out to raise money for their new stadium.  Again, the only way it’s bad is if you will need to go back to the market for more borrowing, either for new projects or to refinance your existing debt.  Aside from those scenarios, you’re still paying the same interest payment as you used to.  It’s the bondholder that’s getting screwed, as they are locked into your low rate compared to what’s fair given your downgrade.