Think Before You Tee Off With Default-prone Golf Course Debt

If golf course debt has you teed off, you’re not alone.

Three market observers interviewed by The Bond Buyer recommended avoiding golf course certificates of participation, citing the prevalence of defaults.

They also questioned whether supporting a sports facility is a valid use of tax-exempt financing.
Criticism of the ongoing issuance of municipal debt to finance stadiums may eventually spread to golf course bonds as well, market players said. In fact, they said, such criticism could even advance the argument that all municipal interest income should not be tax-exempt.

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Supporters of Golf Course Debt

By contrast, supporters of golf course debt contend that while the sector has its pitfalls, investors can manage to avoid them and reap handsome yields.

Still, the list of golf course debt’s defaults is lengthy, including $8.14 million of Wasco, Calif., Regional Municipal Golf Course bonds and $7.89 million of Arvin, Calif., Regional Municipal Golf Course paper. The June 1995 default of $7.2 million of Lewisburg, Tenn., COPs illustrates some of the problems with golf course issues, observers pointed out.

When the Lewisburg COPs defaulted because the course failed to generate sufficient revenue and city officials refused to bail it out, several bondholders sued the city and the underwriter, First Tennessee Bank.

A settlement was reached in April under which the Lewisburg Industrial Redevelopment Board sold bonds to redeem the outstanding Cops.

Zane Mann, editor, and publisher of the California Municipal Bond Adviser questioned the purpose of golf course bonds and said the recurring trouble with them is just another reason not to buy the debt. “It is clearly not the purpose of municipal finance to build private-purpose (facilities),” said Mann.

“This abuse gives (Congress) that much more ammunition. By picking away at municipal bonds by saying, ‘No stadiums, no aquariums, no golf courses,’ it’s going to lead to the day when Congress passes a law saying municipal bonds aren’t tax-exempt anymore,” he added.

Mann said that bond underwriters and their lawyers often visit small towns in California and persuade city councils to build golf courses without incurring any cost or responsibility.

“City councils are not going to appropriate any taxes to help out a nonessential enterprise like a golf course,” Mann said.

Mann cited the golf course COP default in Arvin – population 12,000 -as an example.

“The Arvin Cops were for like the 12th golf course or so in the Central Valley area. They didn’t have a prayer,” he said.

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Terry Trim of Flagship Financial

Golf course debt comes with problems, but investors and municipalities can still benefit from the bonds, according to Terry Trim, director of credit research at Flagship Financial Inc.

“There are situations across the country where you have golf course demand that’s under-met – courses that can be well located and have a real benefit to the whole municipality,” Trim said.
Those issues may be rare, but they do exist, he said.

Trim said features like practice facilities and pro shops make an issue more attractive.

He said at least three municipal golf courses in the Westminster area of Denver have produced excess collateral and good coverage for many years. Golf courses can also offset a municipality’s tax liabilities, make money and serve land planning purposes by preserving open space, Trim said. He noted, however, that “nine out of 10 investors are opposed to golf course financing and will tell you they’re not the genuine public purpose.” Trim said that while detractors claim that golf courses are an economic risk for municipalities, a course in a good location can be quite profitable.

Peter Andersen of Colonial Management

Golf course debt is more trouble than it’s worth, according to Peter Andersen, portfolio manager of Colonial Management Associates, Inc.’s $172.8 million High-Yield Municipal Bond Fund.

“Golf courses are mostly high-yield deals that are nonrated and small, so there’s a number of things that work against them,” Andersen said. Smaller deals, in general, are unappealing from a credit perspective because there are not many co-bondholders, Andersen explained.

“We look at these things first on a credit basis, and if it doesn’t pass on a credit analysis we don’t buy it no matter how cheap it is,” Andersen said.

Another weakness in golf course debt stems from the fact that the success of a golf course depends on to some degree upon entirely unpredictable weather conditions, he said.

Leisure-related investments are also sensitive to economic swings, which are “very difficult to qualify,” Andersen said.

Golf course debt is also difficult to trade in the secondary market, he added.

Andersen said the Lewisburg, Tenn., golf course certificate of participation debacle illustrates that even after a credit analysis, investors are vulnerable to the sector’s downside.

“If Lewisburg guaranteed payment and they walked away, there’s nothing a credit analyst could have done except to try to gauge what that probability was, which in most cases is very low,” Andersen said.

Michael Maher of Greenwich Street Advisors

Tax-exempt golf course debt should be avoided on principle, according to Michael Maher, director of research for tax-exempt mutual funds at Greenwich Street Advisors Inc.

“I don’t want to trash generically an entire sector of the market, but that’s basically it – I don’t like the purpose,” Maher said.

“I guess there are some communities that feel it’s essential to have a golf course, but I just find that concept a little bit unpalatable,” he added.

Maher said that although he does not analyze golf course debt, he continues to review other sectors which are also typically nonrated.

He explained that the volatility of construction debt is another deterrent to buying golf course issues even though they frequently offer high yields.

“I’m sure that someone can pick one out and say, ‘Here’s the deal, Mike, you really blew this one,’ but generally speaking, they’re as speculative as any other construction, and we just don’t play around with them,” Maher said.

Recent golf course financing problems and defaults did not surprise Maher, who said those difficulties only bolster his position.

David Belton of Federated Investors Inc.

The risk involved in golf course debt – as well as its nonessential purpose – make it repellent to David Belton, the senior analyst at Federated Investors Inc.

“The Lewisburg case highlights exactly what the problem is with having the community backing of the golf course – it’s not an essential purpose,” said Belton, referring to the June 1995 default of $7.2 million of Lewisburg, Tenn., certificates of participation.

“For something with a more clearly established purpose like a city hall or police headquarters, COPs are okay, but in many cases, it’s too easy for an issuer to walk away,” Belton continued.

“It’s very unlikely for me to recommend the purchase of an issue backed by a certificate of participation where there would be some discretion involved that’s part of the local government.”
He recommends that investors still interested in the sector stick to bonds issued by major communities that regularly access the capital markets.

The usual warning signs that become apparent when looking at a hospital’s operating statements are less obvious with golf course issues, Belton said.

He said that investors should study the local real-estate market and find out whether other golf courses are being planned, how competitive greens fees are, and how the course compares to what’s already there.

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