Daily Archives: April 18, 2010

Calvin Oaten comments

Earlier today, the following item was uploaded to the Dunedin Tweetup thread.

Since that thread isn’t about stadium finance or theories about stadium finance, editorial discretion has turned Calvin’s comment into a post – this means his current views receive greater prominence and What if? enhances their searchability for readers.

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Calvin Oaten 2010/04/18 at 10:19am

It seems that Dunedin is to have its own ‘Ponzi’ scheme. Worse, it may well be setting up its own ‘Sub Prime’ fiasco. How can this be happening? Well, it all has to do with the stadium. In the current Dunedin City Council Community Plan 2009/10 on page 30 it shows the total cost of the stadium had moved from its $188m not a cent more, to $198.3m This was to be financed as follows: Otago Regional Council $37.5m, Community Trust Of Otago $7.0m, University of Otago $10.0m, Government $15.0m, Dunedin City Council $98.5m and Private Sector Funding $30.3m. Total $198.3m. The DCC has also allowed an additional $6.4m to be set aside as a capital maintenance fund (read interest costs etc).

Moving on to the current plan’ s Net Debt projections, page 152 we see it is to peak in 2010/11 at $383. 795m but reducing to $288.732m in 2012/13. A reduction of $95.06m. This presumably is the DCC’s amount which is to be offloaded to Dunedin City Venues Ltd, a new Council Controlled Operation (CCO) which is to take ownership of the stadium.

In the new Draft Annual Plan on page 98 we see that the peak Net Debt projection in 2010/11 is now $329.357m. It then reduces to $266.675m in 2012/13. A reduction of $62.68m. The difference between the 2010/11 peaks is $54.438m. So how does that come about? Well, we know that the land purchase cost $37.5m plus costs and we know that in Athol Stephens’ February 2009 report that he was allowing to capitalise $14.43m in interest costs. We now know that the land purchase was facilitated by the issuing of $40m worth of three-year bonds with an interest rate of 8.5% per annum. That interest would come to $10.2m so those bonds may have been denominated to cover the interest as well. Also, a body such as the Carisbrook Stadium Trust could administer the issue of those bonds to a third party/s with the DCC able to go guarantor for same. This could mean that the land changed hands for just the exchange of the bonds paper. No money involved with no debt appearing on the DCC’s books. Further, if the bond recipients were in fact the vendors, then if the 8.5% on the face value of $37.5m was transposed to the land value of just $15m (which was the original budget estimate) then the interest would be a healthy 21.25%. A good little earner. It is interesting to note that these bonds were not floated to the public, but rather, just to some “strategic investors”.

We know that the bond issue is true because an associate asked a council person of authority, who has replied to a request for information on the bonds, and he has agreed that they were for the land purchase, and went on to say, “when the bond expires, it will be repaid by raising a new bond and, depending on the terms available, may be for a longer term or a different amount”. This of course leaves an open ended situation, which now possibly explains a lot of unanswered questions. It would explain how the debt attached to the stadium construction can disappear off the DCC’s books as it apparently does. It also leaves an avenue to disappear some very substantial cost increases which seem to be cropping up.

Why? Well, if we look at page 112 in the new Draft Plan it outlines the new capital requirements for the stadium as well as the borrowing costs. It clearly shows that between 2009/10 and 2011/12 these will be $143.951m and $21.566m for a total of $165.507m. A substantial increase on the $108m last admitted as DCC’s contribution. In fact this pushes up the total stadium cost to over $265m. One would presume this is to cover the items such as the temporary seating, the turf placement, the pitch lighting and large screens, all of which do not appear to be in the main construction contract. It still may not cover the cost of the land, as this is also a separate item. Who knows? All this is another reason to use the issuing of bonds for financing. It keeps the debt off the balance sheet, out of the public’s knowledge and leaving only the DCC guarantees. As well, the rolling over and upgrading of the bonds would allow for the covering of any losses in operations of the stadium with DVML, the managing company under Mr David Davies, being unable to meet its obligations to fund interest and holding costs. The only moderating factor would be DCHL’s chipping in of its $5m per annum as budgeted for. In a word, it wouldn’t matter whether the stadium was profitable or not.

All this, together with the city’s projected net debt of $301.427m in 2013/14 plus the outstanding construction bond guarantees of $165.5m and the $40m land bond guarantees total $506.927m of liabilities the city carries.

The questions I would like addressed are, if when the bonds progressively come due and are unable to be renewed or rolled over how will the DCC honour its obligations? Where will they borrow the money from then? Would this mean the bankruptcy of the city? It’s this sort of ‘sub prime’ financial paper collapsing that caused the meltdown of the world’s financial position, and is about to impact on the property market, both domestic and commercial. I think we citizens should be worried, very worried.

Posted by Elizabeth Kerr
Edited by Paul Le Comte


Filed under Economics, Politics, Stadiums