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Originally Posted by TwistedChief
So, I come at this as someone who has traded bonds for the last two decades of my life at Goldman Sachs and now at a hedge fund, and while I’ve never heard of these bonds (nothing wrong with that btw), I did some cursory digging.
The fact that this is marketed as this risk-free-too-good-to-be-true financing mechanism should raise some major red flags. STAR bonds have in aggregate never been issued in the size required to fund these stadiums, so this is seriously untested from a market’s perspective. And this notion that the risk is on the bondholders so everything is great?! These bondholders aren’t stupid. They understand the risk and the limited buyer base. The interest rate they’ll require will be prohibitive and that will increase the risk the project fails.
But it doesn’t matter, right? Because the bondholders only have recourse to the sales tax generated in the economic zone and would not have any claim on the state/municipality? Well, yes, in theory. But theory is not practice and one article cites a wink and a nod relationship between investors in these bonds and the state that they’d step in in the event of a default. You can imagine that a high profile project like this failing would have reputational impact for the state of Kansas more broadly (see:contagion) and there’s a reasonable chance they would bail them out if push came to shove. Think the government and the implicitly guaranteed Fannie Mae and Freddie Mac. Essentially, the Chiefs and Royals would be benefiting from the backstop of the state of Kansas.
I also wonder if some of these districts aren’t sized up a little larger than they would otherwise be which would carve out some sales tax that would otherwise go to the state. Wouldn’t shock me.
I’m a bit skeptical of Kansas politicians peddling snake oil without fully understanding the economics.
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The water park where the kid got his head decapitated was built with STAR bonds. There's a lot of examples of where those things failed big time. I'm glad this will be Kansas problem and not Kansas City's problem soon