Fun with Financing in Nashville

Some rather alarming headlines have appeared in the past few days in the Nashville Press, the best of which was WDEF’s Nashville Symphony Mired in Debt:

The Nashville Symphony is in danger of defaulting on $102 million in bonds that were used to build the Schermerhorn Symphony Center.

Symphony CEO and President Alan Valentine told The Tennessean on Friday that the organization needs a “comprehensive financial restructuring.”

The symphony’s board of directors sent a letter to patrons Wednesday saying have decided to take action that will lead to a technical default on the bonds for the center that opened in 2006. The decision led to a notice that $88.3 million in outstanding bonds are subject to a mandatory repurchase next month. The symphony and the banks could agree before then on more favorable terms.

Kevin Crumbo, a board member and treasurer for the orchestra, says bondholders will be paid.

Valentine says the long-term future of the symphony is uncertain.

Or, as Robert Storm Petersen famously said, “predictions are hard to make – especially about the future” (although he said it in Danish).

The truth about this situation is rather more complicated than the article makes it appear, as the article in The Tennessean makes clearer:

This week, the organization took an unusual step that will trigger a technical default on $102 million in bonds that were used to build Schermerhorn Symphony Center, the state-of-the-art performance hall that opened in downtown Nashville in 2006.

In a letter to patrons issued Wednesday, orchestra officials disclosed they will not renew a letter of credit that backed the 2004 bond issue. That decision already has triggered a notice from the trustee for the bondholders that the remaining $88.3 million in outstanding bonds are subject to a mandatory repurchase on April 1.

That leaves 15 days for the symphony and its banks to broker an agreement that could include more favorable terms for the orchestra. In any case, the decision will not adversely affect bondholders because they would be paid in full, said Kevin Crumbo, a board member and treasurer for the orchestra. Nor would there be any risk to Metro government, he said.

The problem is not repaying the bonds. The problem, as this article in the Wall Street Journal suggests, is the letter of credit:

Before the 2008 financial crisis, banks provided letters of credit as backstops that effectively guaranteed payment on floating-rate debt sold by municipal-debt issuers. They were an easy source of fee income for at least a dozen U.S. and European banks that relied on their high credit ratings to land the business. Meanwhile, variable-rate debt allowed a municipality or other entity to raise money for long periods, but at lower rates typically associated with short-term bonds.

But since the credit crisis, some banks have been downgraded by credit-ratings firms, making their guarantee less appealing to the investors that buy municipal bonds. Also, banks globally have tightened lending standards and are under new requirements to set aside more capital as a buffer against losses.

The result: As letters of credit that banks provided expire this year, fewer banks are willing to provide them, and those that are doing so are demanding more for them. This comes as many issuers are in weaker financial shape than they were three years ago, and investor appetite for municipal bonds lately has been declining.
“The cost for procuring letters of credit is substantially higher than it was before the prices exploded in 2008, and the number of banks that are offering the product has shrunk,” said Tom Dresslar, a spokesman for the California Treasurer’s Office.

To simplify, the Nashville Symphony was paying a pretty nominal fee for the letter of credit required to back the Schermerhorn Hall bonds prior to 2008. According to Nashville staff I talked to a couple of years ago, that fee rocketed into the 7-digit range after the beginning of the Great Recession, putting real strains on their cash flow.

It’s worth noting that the Nashville Symphony got exactly nothing for the hundreds of thousands of dollars they were shelling out, post-2008, to the banks when their endowment was taking the same huge hit as everyone else’s, and when their donors were taking huge hits in their portfolios as well. They didn’t get health care, or a more secure pension benefit, or new seats, or anything else. All they got was the right to keep making payments on their bonds, no doubt along with the nagging doubt that, should they stop making those payments, whatever entity actually issued the letter of credit would do everything in its power to avoid making good on its guarantee.

It appears that the orchestra’s board and management have decided the situation is untenable and are not going to play the banks’ game any more. The downside, of course, is that, as the bonds are no longer covered by the letter of credit, the bondholders can demand immediate repayment. But I suspect that, as the article suggests, the Nashville Symphony and the bondholders will indeed reach “an agreement that could include more favorable terms for the orchestra.” No doubt the management has done its homework and believes that immediate repayment will not be demanded, which would certainly be bad optics for whatever too-large-to-fail banks would be acting like Mr. Potter in It’s A Wonderful Life. And, as interest rates are lower now than when the bonds were first taken out, it seems that the net effect on the Nashville Symphony’s finances could well be positive.

The take-away from this lesson in the intersection of art and high finance is not that the Nashville Symphony is going broke, or that a New Model is needed, or that building a wonderful concert hall will sink an orchestra – although I’m sure someone is going to draw all of those lessons, or even worse ones I haven’t thought of, from this. The real lesson is that the Great Recession has been very hard on orchestras, and sometimes for surprising and obscure reasons.