Bond Deal Puts Disney on the Hook

In what promises to be one of the largest and most closely watched municipal bond deals of the year, Anaheim said Monday that it will pay out more than $1.7 billion in principal and interest over 40 years to expand the city’s convention center and improve streets for the Disneyland Resort expansion.

Under the terms of the $518-million municipal bond offering unveiled Monday, Walt Disney Co. will not only guarantee a portion of the bonds, but will also be on the hook to pay off the entire debt if its highly touted new companion park to Disneyland is not open by July 1, 2002.

“It’s critical for repayment of these bonds that the park be open,” Anaheim Finance Director Bill Sweeney said. “This provides us the assurance that it will be done in a reasonable period of time.”

The debt, expected to go to market Feb. 4, consists of $518 million in bonds of varying maturities, the longest coming due in 2037. The bonds are to be repaid through a complicated financing arrangement in which Anaheim would pay an amount equivalent to 3% of the city’s 15% hotel bed tax, plus some sales and property taxes generated within the Disneyland Resort expansion area.

About $395 million of the bond sale proceeds will be used to fund the expansion of the Anaheim Convention Center, plus the improvements near Disneyland.

The balance will be used to make interest payments to bondholders during the construction period, as well as to pay legal fees, underwriting costs, insurance premiums and a host of other administrative costs associated with the offering.

Disney has agreed to guarantee 50% of the $242 million in subordinated debt, the riskiest piece of the financing since those bondholders have the last claim on revenues.

Bond experts say corporate guarantees in municipal financing deals aren’t unique and have been used for development projects, industrial revenue bonds and the like. Still, they said they doubt that many communities the size of Anaheim could pull off a deal as large and complex as the one unveiled Monday.

“It’s a hard deal to duplicate,” said David Brodsly, vice president of Moody’s Investors Service. “It’s hard to imagine a combination of Disney and Anaheim anywhere else in the nation, maybe the world, where you have such a strong business activity and a strong city with such clearly linked destinies. I think this model is pretty much custom-made.”

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Bond experts said Monday that Anaheim’s 40-year structure is a little longer than the traditional 30-year maximum term preferred by municipal bond investors. However, the Disney name and the fact that the city purchased private insurance for the entire issue should translate into strong demand from investors, said Joe Piraro, a Chicago-area money manager who oversees a $2.5-billion bond portfolio.

“Disney has an impeccable reputation in the financial markets,” said Piraro of Van Kampen American Capital in Oakbrook Terrace, Ill. “The perception is very positive.”

The city’s first full annual interest payment of about $24.3 million will begin in 2002, a year after the new park, called Disney’s California Adventure, is to be up and running. The deal is structured so that payments escalate to nearly $76 million annually before the bonds are paid off in 2037.