High-yield, tax-free bonds pay for resort 'These bonds are not sold to widows and orphans'

13 years to finance project

March 22, 1998|By Debbie M. Price | Debbie M. Price,SUN STAFF

The risky nature of Rocky Gap hotel and golf resort project near Cumberland has never been a secret in the Maryland investment community.

"Why do you think it took 13 years to finance the project," said Hans F. Mayer, executive director of the Maryland Economic Development Corp. and Rocky Gap's second greatest champion after House Speaker Casper R. Taylor, Jr.

"It was high risk. Still is but it was a risk well worth taking considering all the benefits to the community and the region."

In 1996, MEDCO issued $26.3 million in tax-exempt bonds paying 8 5/8 % and 8 3/8 % (depending upon the maturity) along with $5 million in taxable issues, whose principal was backed by the Maryland Industrial Development Financing Authority, yielding 8% interest. The tax-exempt issues carry interest rates that at the time were two percentage points higher than other tax-exempt, low-rated bonds of roughly the same maturities. The Rocky Gap bonds are called "high-yield bonds" -- known more commonly in the language of Wall Street as junk bonds.

"These bonds are not sold to widows and orphans," Mayer said.

In the world of finance, risk and return go hand-in-hand. The higher the risk, the higher the return -- at least as long as there is a return. And the high-wire act at Rocky Gap is spelled out clearly in the official statement that accompanied the bond offering.

According to projections included in the official statement, the hotel and golf course at Rocky Gap will not be able to make enough money to cover expenses and pay the debt service through at least 2003. During this time, MEDCO plans to supplement income from the hotel by drawing upon several million dollars worth of reserve funds set up as part of the bond offering.

If the resort fails to meet the projected 65 percent occupancy rates or does not draw an anticipated 35,000 golfers a year, all bets are off and the project could go into default. And if that happens, the bondholders could find themselves owning a hotel and golf course in the middle of a state park.

The financing for Rocky Gap did not come easily. Over the years, virtually every major Maryland lender was offered a chance to do the Rocky Gap deal and every one of them said, "No, thank you."

Ultimately, MEDCO, the authority created by the state to issue bonds for difficult economic development projects, not only issued $31.3 million in high-yield unrated revenue bonds, but also decided it would own the hotel and golf course. As part of the deal, MEDCO set aside millions of dollars in reserve funds to cover the debt service and run the hotel in the early lean years of the project.

"The first few years of any project are when you have the greatest risk," says Robert F. Doherty, a vice president with H.C. Wainwright & Co., which received $1.25 million for its role in underwriting the bond issue. "In order to get the bondholders to buy -- and they said don't blow smoke at us -- we had to show them how to get through the first year or two when we're probably not going to be able to cover everything."

Allstate Insurance Co., which has a long history of buying nonrated, high-yield municipal offerings, bought $18 million worth of the Rocky Gap bonds. Waddell & Reed of Shawnee Mission, Kan., and Calvert Asset Management Co. of Bethesda bought the rest.

Charles Mires, an assistant vice president who oversees the municipal bond group for Allstate, said that the company liked the return and was encouraged by the state's participation in the project.

The bond offering specifically says that the state is not liable for the debt, but, as Mires acknowledged, the state's role gave investors confidence.

Pub Date: 3/22/98

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