University of Phoenix Bond Holders Face Default Risk

By Matthew Kochen,   
Money & Investing Writer

The Arizona Cardinals have come out to a hot start this season. An up and coming team the past few seasons, the team seems to have finally turned the corner from a team with a lot of potential, to an elite NFL team.

Behind a stifling defense, perennial All-Star Larry Fitzgerald, and rejuvenated Carson Palmer and Chris Johnson, the Cardinals have established a 5-2 record through Week 7 of the regular season, good for the top of the NFC West, fourth place in the NFC, and the seventh best record overall of the entire NFL.

As the team continues to pursue Super Bowl aspirations and fans rejoice, the investors that funded the money to place the team in their beautiful stadium are at risk of not receiving their bond payments as recent legal action has halted a cash stream needed to make the payments.

The home of the Arizona Cardinals, University of Phoenix Stadium, opened for business back on Aug. 1, 2006. Before the opening, the Cardinals rented out space on the University of Arizona’s Sun Devi Stadium for 18 years.

This placement restricted the Cardinals in that their revenue was stunted as the college stadium lacked the capacity to meet the demand of a typical professional team as well as some forms of revenue were lost to the team as ownership belonged to the university.

This need necessitated the construction of new stadium the Cardinals could call their own.

The overall cost the new stadium totaled around $455 million and is typically the case, the majority of the cost was covered by state and local municipalities through the sale of bonds.

The Arizona Sports & Tourism Authority raised $300.4 million to fund the stadium. The naming rights to the stadium were sold to the for-profit online, University of Phoenix.

The resulting name is a bit of a misnomer as the school does not have a football team, something not lost on the president of the University of Phoenix’s parent company, Brian Mueller, “This is the first time a National Football League venue has been named after an educational institution and the irony of that deal is not lost on us.” For the license to the naming rights, the University agreed to pay $154.5 million over the next 20 years.

The University of Phoenix Stadium is especially lucrative compared to other stadiums.

In addition to a seating capacity of 63,400 permanent seats and the ability to expand to 72,200 seats, the year round fair weather and temperature make it a frequent host for mega events such as the Super Bowl, BCS Championship, the NFL Pro Bowl, and the Fiesta Bowl.

Through all this, the Arizona Sports and Tourism Authority is facing a possibly of defaulting to make payments to the bondholders that provided the funding for the stadium.

The bonds were financed by being linked to tourism taxes, such as transportation and hotels.

From the start, the bonds were risky. If the income from these taxes were to decline, it puts all the debt issued at risk of being downgraded and decrease in price.

The bonds maturing in 2028 traded for an average yield of 3.3 percent, about 1.7 percentage points more than benchmark securities and bonds maturing in 2036 traded at yields around 4 percent, about half a percentage point more than comparable debt according Bloomberg and Thomson Reuters Municipal Market Data. The yield of bonds increases as the price decreases.

The Arizona Sports and Tourism Authority is facing an issue of making payments because of recent litigation against their taxation of rental cars.

Pending appeal, Arizona courts have ruled that Arizona’s constitution requires vehicle taxes to be used for roads, thus making the previous tax that went towards paying off stadium debt illegal.

The tax on rental cars accounts for about one-third of stadium bond payments.

Leading credit rating agencies rate the bonds, like Fitch at A and Moody at A1, still at investment grade. The inability to collect taxes would increase the risk of default and sway credit rating agencies to downgrade the bonds to junk level, sharply decreasing prices. If the appeal is denied, the future for bondholders remains unclear.

A legislative audit last month found tourism revenue was insufficient to fulfill financial obligations, as tourism revenue fluctuated and debt payments scheduled to increase.

In spite of this, Todd Curtis, a portfolio manager for $280 million bond fund, Aquila Group of Funds, who sold the bonds, predicts that, “If they lose, they could probably still make their bond payments, but they couldn’t pay for much else. The sports authority has always run on a very thin line.”

A version of this article appeared in the Tuesday, November 3rd print edition.

Contact Matthew at


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