Bank of America Tower at One Bryant Park Municipal Bonds 649519AD7
May 21, 2011 - 7:10pm EST by
creditguy
2011 2012
Price: 0.98 EPS $0.00 $0.00
Shares Out. (in M): 206 P/E 0.0x 0.0x
Market Cap (in $M): 206 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0.0x 0.0x

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Description

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

 

Catalyst

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).
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    Description

    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

     

    Catalyst

    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).

    Messages


    SubjectRE: some initial questions
    Entry05/21/2011 08:58 PM
    Membercreditguy
    1.  The debt yield is defined as net cash flow/aggregate balance of loans.  Underwritten cash flow is defined as NOI less capex less TI less leasing commissions.  Through Classes 1 - 3 the debt yield is $131.2 mm/$1,300 mm or 10.1%.  Through the Class 1 bonds the debt yield is $131.2/$1,002 or 13.1%.  The cap rate based on the appraised value is 6% ($131.2/$2,200).  This seems conservative as Class A midtown NYC office buildings have recently changed hands at cap rates as low as 4%.  4-5% seems like the right range for current cap rates.  Effectively if you think 5% is the right cap rate the value of the building would be 20x (the reciprocal of 5%) underwritten cash flow of $131.2 or $2,624 mm and you'd be in the property at a LTV of 38% ($1,001 mm/$2,624 mm).
    2.  In terms of getting "taken advantage of" in terms of the structure I'm can't answer your question definitively.  I don't have any experience in investing in any muni securities that defaulted.  Your ability to "control the process" as you could in a corporate bankruptcy is limited and similar to the rights and remedies that CMBS holders have.

    The Servicing Agreement establishes that the CMBS Loan will have a priority in payment over the Liberty Bonds Loan. The Servicing Agreement also establishes the relative voting rights of the Holders of the CMBS Loan and of the Liberty Bonds Loan, and provides for the assignment by the Indenture Trustee and the CMBS Trustee to the Master Servicer and the Special Servicer of the sole and exclusive right to take enforcement actions (except with respect to the Issuer and the Issuer's Reserved Rights), to grant or withhold any approvals and to exercise rights and remedies under the Liberty Bonds Loan and Collateral Documents and the Liberty Bonds Financing Documents (with respect to the Liberty Bonds Loan), and under the CMBS Loan Documents (with respect to the CMBS Loan).

    3.  I believe the answer to your question is "Yes."  Here is the security clause from the OS.

    The Liberty Bonds Loan (together with the CMBS Loan) will be secured by (i) the mortgage lien granted by the Borrower to the Collateral Agent on the Borrower's leasehold interest under the ESDC Ground Lease in the Facility, including the purchase option, (ii) the pledge and assignment by the Borrower to the Collateral Agent of all tenant leases and rents from the Facility including the tenant lease with B of A, (iii) a lien and security interest in favor of the Collateral Agent in all Personal Property of the Borrower, (iv) a pledge and assignment of contracts relating to the Facility including the property management agreement with Royal Realty Corp., a New York corporation affiliated with the Borrower and the PropertyManager for the Facility, and a contract for the operation of the cogeneration plant located within the Facility, and (v) funds or assets from time to time on deposit in the Collection Account established under the Collateral Agency Agreement and reserve accounts held pursuant to the Loans. Neither the Liberty Bonds Loan nor the Series 2010 Liberty Bonds are secured by any debt service reserve fund or other liquidity facility. However, the Master Servicer (or the Collateral Agent, upon the failure of the Master Servicer as set forth in the Servicing Agreement) will be obligated to make P&I Advances (as referred to below) with respect to the Liberty Bonds Loan (and the CMBS Loan) upon the circumstances described in this Official Statement.

    I hope this is helpful and answers your questions.  I welcome additional feedback from you and other VIC members.


    SubjectRE: some initial questions
    Entry05/21/2011 09:19 PM
    Membercreditguy
    4.  As to question 4 that's hard to answer. 
    The average AAA-rated 10-year municipal bond now yields 94% of the comparable 10-year Treasury yield. The higher the ratio, the more attractive municipal bonds are relative to Treasuries and vice versa.
    On a longer-term basis, municipal bonds remain attractive as the 10-year Municipal-Treasury ratio has averaged 86% over the past 20 years.
    If the bonds traded merely at parity with the comparable interpolated treasury -- that is at 4.32% (or ~8.64% on an aftertax basis for NYC residents) the bonds implied price would be 114.
    If the bonds traded at 86% of the comparable treasury that would imply a bond price of 126 (vs. ~98 today for the Class 1 bonds due in 2044).  The yield would be ~3.74% or about 7.48% on an aftertax basis for NYC residents which would be about 320 bps over the comparable interpolated treasury (4.32%).  300 bps over relative to the credit risk seems fair if not overly generous relative to the risk you're taking (in other words I think you could make a strong case for a tighter credit spread).

    SubjectRE: some initial questions
    Entry05/21/2011 10:24 PM
    Membercreditguy
    Sounds like I should have quoted where on average the average 30 year bond is trading.
    (The BofA bonds are actually 33 year bonds but close enough.  Also, the BofA Class 1 bonds are actually rated AA -- close to AAA).
    A 30-year AAA-rated bond, for instance, currently trades with a yield 100% of an equivalent Treasury, up from a historical average of 97.9%.
    The Class 1 2044 bonds at ~98 are yielding 121% of the comparable treasury.
    Were the bonds to trade at parity with the equivalent treasury the implied price would be 114 or 4.32% or an a tax adjusted basis for NYC residents ~8.64%.

    In short, I believe that the bonds should trade at a substantially higher price than they do today.


    SubjectRE: RE: some initial questions
    Entry05/22/2011 11:27 AM
    Membernha855
    I agree with your analysis and also like this credit. The JPM muni desk regularly trades this issue.

    SubjectRE: response to nha855
    Entry05/22/2011 12:38 PM
    Membercreditguy
    Do you have an opinion on why this is priced (or mispriced) where it is?  Do you think it's just the general inefficiency of the  muni marketplace?  Where do you think this can trade?
    If you like my idea I would greatly appreciate it if you would rate this idea so my membership can be reactivated.  I have a couple other special situation and/or credit related ideas I will share with you and the larger VIC membership base.

    SubjectRE: response to opco
    Entry05/22/2011 12:39 PM
    Membercreditguy
    If you like my idea I would greatly appreciate it if you would rate this idea and vote to reactivate my membership.  I have a couple other special situation and/or credit related ideas I will share with you and the larger VIC membership base.

    SubjectRE: RE: RE: response to opco
    Entry05/22/2011 02:25 PM
    Membercreditguy
    Thanks for the rating opco.  I welcome any further feedback you have on the idea and why you think it trades where it does and if you think there are any catalysts towards a re-rating of the current price.  Thanks.

    SubjectRE: RE: response to nha855
    Entry05/22/2011 09:53 PM
    Membernha855
    I think the muni market is generally mispriced these days. I posted something here a while back on a phoenix hotel. Not as good of a credit as this but much cheaper.

    SubjectRE: RE: RE: response to nha855
    Entry05/22/2011 10:33 PM
    Membercreditguy
    You talking about the Denver convention center hotel idea (you said Phoenix in your reply to me)?  Where do you think those bonds can trade to in the next 12 months?

    SubjectRE: RE: RE: RE: response to nha855
    Entry05/23/2011 09:23 AM
    Membernha855
    Right - Denver - I own some Phoenix as well! - I see no reason they can't be par bonds.

    SubjectRE: RE: RE: RE: RE: response to nha855
    Entry05/23/2011 09:37 AM
    Membercreditguy
    What is the cusip for the Phoenix hotel bonds?  Thanks.  I will take a look.

    SubjectRE: RE: RE: RE: RE: RE: response to nha855
    Entry05/23/2011 11:44 AM
    Membernha855
    26116PAS9

    SubjectRE: RE: RE: RE: RE: RE: RE: response to nha855
    Entry05/23/2011 12:18 PM
    Membercreditguy
    Where do you think the Sheraton Phoenix bonds should trade on a dollar price and yield basis?  How are you looking at loan/value here or how much you're "covered."  Thanks.
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