New York Liberty Development Corporation Second Priority Liberty Revenue Refunding Bonds, Series 2010 (Bank of America Tower at One Bryant Park Project)

$206,200,000 5.125% Series 2010, Class 1, due January 15, 2044 Price 98.036% CUSIP 649519AD7

$145,400,000 5.625% Series 2010, Class 1, due January 15, 2046 Price 102.780% CUSIP 649519AC9

$ 87,100,000 5.625% Series 2010, Class 2, due July 15, 2047 Price 100% CUSIP 649519AE5

$211,300,000 6.375% Series 2010, Class 3, due July 15, 2049 Price 100% CUSIP 649519AF

I am recommending municipal bonds (effectively 2nd mortgage bonds) that were issued to refinance a portion of the site acquisition costs and the costs of developing and constructing a Class A 51-story, approximately 2,354,345 rentable square foot office building now known as "The Bank of America Tower at One Bryant Park. 

The building is located on an approximate two-acre site at the northwest corner of the Avenue of the Americas and West 42nd Street in the New York City.  The building also contains ground level retail stores, a theater and a theater restaurant. 

The total cost of the Project was approximately $1.8 billion.

B of A is the principal tenant of the Facility with a lease for approximately 1,798,373 rentable square feet of office, retail and storage space within the Facility. The lease to B of A expires on September 30, 2028, if not renewed or earlier terminated.

The bonds were issued in 2010 and can be purchased in the marketplace at approximately the same price they were issued (see above).  For this writeup, I recommended the Class 1 bonds maturing in 2044 but in reality I recommend purchase of all of the Classes. 

I believe the bonds are trading at effectively issuance price because of the general sell off and anxiety around municipal risk.  Consider that since issuance corporate bonds are up enormously and cap rates on NYC office properties have tightened signficantly.  Absent the general inefficiency in the muni marketplace and anxiety around munis more generally I believe these bonds would be up enormously.  As such I believe these bonds are mispriced.

The bonds trade relatively infrequently and as such are probably most appropriate as a personal account ("PA") investment and because the tax benefit probably can be best utilized by individuals.  To NYC residents the bonds should be triple tax exempt and as such the Class A bonds would yield ~10.5% on a tax equivalent basis (and the other classes correspondingly higher).  Put differently, on a spread basis, the bonds yield ~600 bps over the interpolated comparable treasury.

I believe the bonds are enormously attractive for investors.  To be sure you have to be comfortable with the bonds illiquidity and duration although there are ways to hedge the duration would one desire to do so.

Why do I believe the bonds are extremely attractive?

I believe the 10% yield is extremely attractive relative to the risk. 

Effectively, you own mortgage bonds (that sit behind a $650 mm CMBS issuance) on newly constructed and well located Class A office building in New York City.  You have B of A in the building at least through 2028.  My base case is that BofA stays in the building but if not I am confident that given the extremely desirable location of the building that the property could easily be released to other prospective tenants.

You are getting a 10%+ return at a Loan to Value (LTV) of <50% and effectively own the asset (although on a second mortgage basis) at $425 a foot.  The LTV is based on an Appraised value of $2.2 bn or $934 a square foot.  The debt yield is 13%. 

The appraisal was completed in April 2010 by CB Richard Ellis and seems conservative to me as it was completed over a year ago when New York City cap rates were lower than they are now.  The appraisal and by extension implied values per square foot seem with information from other sources such as CoStar and owners of NYC real estate like SL Green.

The following is information on the Collateral from the Official Statement:

Property:  Bank of America Tower at One Bryant Park

Balance of CMBS Loan:  $650,000,000

Balance of Liberty Bonds Loan:  $650,000,000

Aggregate Balance of Loans:  $1,300,000,000

Location:  New York, New York

Property Type:  Office

Net Rentable Square Feet:  2,354,345

Appraised Value:  $2,200,000,000

Appraised Value PSF:  $934

Aggregate Loan PSF:  $552

Loan to Value Ratio:  59.1%

Underwritten Net Cash Flow:  $131,252,784

Underwritten Aggregate Debt Yield:  10.1%

Underwritten Aggregate DSCR:  1.95x

Here are some collateral metrics on  the Class 1 Liberty Bonds: 

Loan to Value Ratio (LTV) --  45.5%

Debt Yield -- 13.1%

Debt Service Coverage Ratio (DSCR) -- 2.68x

Loan Per Square Foot -- $425.

The Issuer is New York Liberty Development Corporation, an instrumentality of the State of New York, separate and apart from the State itself, constituting a local development corporation created under the New York Not-for-Profit Corporation Law.

The Borrower is One Bryant Park LLC, a Delaware limited liability company having two members: (y) One Bryant Park Development Partners LLC, a New Yorklimited liability company affiliated with The Durst Organization Inc., and (z) Bank of America, National Association ("B of A").  The Borrower will not have any significant assets other than the Mortgaged Property while the Series 2010 Liberty Bonds are Outstanding.

The Borrower is a limited liability company organized and existing under the laws of the State of Delaware and has two members - One Bryant Park Development Partners LLC, a limited liability company organized and existing under the laws of the State of New York (the "Durst Member"), and B of A. The Durst Member has a 50.01% interest in the Borrower and is affiliated with the Durst Organization, and B of A has a 49.99% interest in the Borrower.  The Borrower is a single purpose entity, all of the assets of which are pledged or mortgaged to the Collateral Agent as referred to below.

Concurrently with the issuance by the Issuer of the Series 2010 Liberty Bonds pursuant to the Indenture, the Issuer made a loan of the proceeds of the Series 2010 Liberty Bonds in the principal amount of $650,000,000 to the Borrower pursuant to the Liberty Bonds Loan Agreement.  Recourse against the Borrower under the Liberty Bonds Loan Agreement and under the Liberty Bonds Note is  limited to the Mortgaged Property and the related collateral held under the Collateral Agreements. 

The Liberty Bonds Loan and the CMBS Loan will be secured by a Consolidated, Amended and Restated Leasehold Mortgage, Assignment of Leases and Rents, Fixture Filing and Security Agreementfrom the Borrower as mortgagor, to the Collateral Agent as mortgagee, pursuant to which the Borrower will grant to the Collateral Agent as security for the Obligations, the CMBS Note, the CMBS Loan Agreement, the Series 2010 Liberty Bonds, the Liberty Bonds Note, the Liberty Bonds Loan Agreement, the Collateral Agency Agreement and any and all other Loan Documents, to secure a principal indebtedness of $1,300,000,000, among other collateral, (i) a mortgage Lien on, and a security interest in, all of the Borrower's right, title and interest in and to the ESDC Ground Lease and the Facility, the Brandt New Net Lease, the Improvements, all Personal Property, all Accounts, Insurance Proceeds and Condemnation Proceeds, and (ii) a pledge and assignment of all Leases and Mortgaged Rents from the Facility.

Here is a link the Official Statement ("OS") for more information:  http://emma.msrb.org/SecurityView/SecurityDetails.aspx?cusip=649519AD7

 

No catalysts other than a repricing of broader municipal risk.  Meredith Whitney has been fear-mongering in my opinion. You are getting paid very attractively to wait (if the market does not re-rate the risk in these bonds or the broader muni marketplace).