Olympia shifts arena debt to its own books

$188.5 million was drawn to pay Little Caesars Arena capital costs

Total project cost stands at $863 million

Citing a rosier Wall Street perception of Detroit, the Ilitch family said Wednesday it will pay off early nearly $200 million in bonds used to finance construction of the $863 million Little Caesars Arena.

Under a deal approved Wednesday afternoon in a special meeting of Detroit's Downtown Development Authority, which owns the new arena, the 2014 bonds known as Series B (and backed by revenue collected by the Ilitches from events at the building) will be moved entirely onto the books of Olympia Development of Michigan, the family's real estate arm.

The Ilitches are pledging to use the savings from refinancing the debt to accelerate downtown investment in their $1.2 billion, 50-block District Detroit mixed use development anchored by the arena, but didn't specify any projects.

"Detroit's well-documented comeback is being recognized by third-party financial entities, which will drive even more investment in the city, region and state," Christopher Ilitch, president and CEO of Ilitch Holdings Inc., said in a statement. "For our organization, savings realized from the retirement and private refinancing of these bonds at a lower rate will contribute to our expanding vision for The District Detroit."

Another $250 million in bonds (called Series A) are purely a DDA obligation and remain on the economic agency's books. They will be retired through 2045 by a special downtown property tax.

Arena capital costs beyond the two bond series are paid by Olympia.

Under the original deal between the DDA and the Ilitches, the $200 million non-tax-exempt Series B bonds were to be retired by Olympia via payments that averaged out to $11.5 million annually over 30 years. Olympia keeps all arena revenue — generated primarily by Detroit Red Wings and Pistons games along with concerts and other events — under its venue management deal with the DDA.

Now, the Series B debt will be entirely a private Olympia obligation and will be refinanced at a to-be-determined lower rate. The company didn't disclose its repayment source for the bonds once they're entirely private, but the assumption is that the money will be from arena events. The Series B bonds, which were bought entirely by longtime Ilitch financier Comerica Inc., were originally forecast to have $132.5 million in interest over 30 years.

Olympia ended up drawing only $188.5 million of the Series B bonds, according to information provided by the DDA.

One immediate effect of the bonds shifting to Olympia's books is that the DDA now has bonding capacity free for future projects — although nothing is planned right now, said Glen Long, the DDA's CFO and interim president and CEO. He said the Olympia-backed debt should be off the DDA's books by the end of the month.

Getting rid of the Series B bonds also eliminates any risk posed to the DDA by an interest rate swap it executed when the bonds were sold. Interest rate swaps are a complex financing gamble often used as a money-saving hedge. However, when they backfire, the results can be calamitous: The city of Detroit's bankruptcy filing was, in part, because of interest rate swaps in the mid-2000s that turned sour for the city. Such swaps are under tighter financial controls since Dodd-Frank, the 2010 Wall Street reform act.

Now, the swap is entirely an Olympia risk.

Under the terms of the original 2014 bond sale, both short-term variable-rate bond series were to mature in 2045. That could change when the bonds are refinanced.

The DDA and Olympia used short-term variable-rate bonds because of concern in the marketplace about financing a major project as Detroit emerged from bankruptcy, they said in 2014.

The initial interest rate on the DDA tax-backed Series A bonds was 4.125 percent, according to online records of the sale. Remaining interest on Series A is estimated at $205 million, which should decrease under the a refinance scheduled for 2018. Those bonds were entirely bought by New York City-based Merrill Lynch, a division of Bank of America.

Wednesday's financial maneuvers don't affect an additional $34.5 million in arena bonds issued by the DDA in a private placement with Bank of America earlier this year to cover construction costs to retrofit the arena to accommodate the Detroit Pistons alongside the Red Wings.

The arena project's $863 million capital cost includes the 20,000-seat bowl that opened in September along with adjacent offices buildings, parking garages and retail and commercial space on about 12 acres. The long-rumored project was formally announced in 2012, with the financing mechanisms approved by the state in December of that year. Ground broke in 2014.

Much like homeowners, stadium and arena owners refinance construction debt when they can at better rates to save money. For example, in the summer of 2012 the Detroit-Wayne County Stadium Authority refinanced the approximately $66 million in remaining debt on the $85.8 million in 30-year tax-exempt bonds issued in 1997 to pay for a portion of Comerica Park. The refinancing was estimated at the time to save the authority $5.86 million. Those bonds mature in 2027. Instead of general fund tax dollars or DDA property tax capture money, the baseball stadium public bonds are paid off by a 2 percent rental car tax and 1 percent hotel room tax approved by Wayne County voters for the stadium in 1996.

The remainder of Comerica Parks' $310.3 million cost came from $145 million financed (and repeatedly refinanced) by late Tigers owner Mike Ilitch. His son Christopher now oversees the trust that owns team as Tigers president and CEO, and the family's stadium debt is paid via revenue generated by the Tigers.