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Patriots' affiliate sues bond insurer to block fees

Securities trouble boosted costs of financing stadium

NPS, a Patriots' affiliate, issued bonds to finance the new stadium, but market woes drove up the costs. NPS, a Patriots' affiliate, issued bonds to finance the new stadium, but market woes drove up the costs.
Email|Print|Single Page| Text size + By Ross Kerber
Globe Staff / July 16, 2008

An affiliate of the New England Patriots football team is playing defense on a new field: the market for auction-rate securities.

The Foxborough team affiliate has sued Ambac Assurance Corp., the big bond insurer, in a dispute similar to a raft of others in which institutional borrowers found that policies they took out didn't guarantee low interest rates after auction-rate markets froze up this spring.

Ultimately the Patriots' owner, the Kraft family, faced a situation in which, in the worst case, it could have owed an extra $44 million a year in interest on money borrowed to build a new stadium, according to the suit. That's about three times what the team will pay star quarterback Tom Brady this season.

The Patriots' affiliate, NPS LLC, reported it lost almost $6 million during the upheaval over rate increases.

Though NPS has since refinanced its way out of that risk, it still faces $2.8 million in fees to Ambac that it hopes to block with the suit. The situation is similar to that facing various schools, hospitals, and public agencies that also have faced millions in extra costs this year, ranging from Tufts University to the parent of Beth Israel Deaconess Medical Center and public television giant WGBH.

The Patriots "appear to be one of many victims of the seizure of the auction-rate marketplace," said Robert MacIntosh, codirector of municipal investments for Eaton Vance Management in Boston. He said the suit is unusual in targeting Ambac and could put additional pressure on the insurer if it has merit and if other borrowers file similar claims.

A Patriots spokesman declined to comment yes terday.

A spokeswoman for New York-based Ambac declined to comment except to note the company's past statements that it is trying to work out disputes with borrowers.

In the spring, NFL Commissioner Roger Goodell said that teams including the Patriots faced problems with auction-rate securities, but the team previously wouldn't give more details about exactly what troubles it faced.

Now the lawsuit spells them out. The claims were filed by NPS LLC on July 8 in Norfolk Superior Court. A filing with Massachusetts Secretary of State William F. Galvin shows that NPS was previously known as "New Patriots Stadium" and that it is controlled by Patriots owner Robert Kraft.

The suit centers around a $252 million bond issue that NPS sold to investors in 2006. The proceeds went to pay off $282 million worth of bonds that the team sold in 2000 to fund the construction of what is now Gillette Stadium, the 68,756-seat facility in Foxborough where the Patriots played their first game in 2002.

On their own, the 2000 bonds were rated at BBB- by Standard & Poor's, a relatively low score indicating the issuer's credit would be considered risky, and forcing NPS to pay a higher interest rate. NPS has paid Ambac about $19 million since 2000, allowing the stadium securities to use Ambac's own AAA rating.

As with other borrowers, the high rating was important because the interest rates on the Patriots bonds were set during weekly or monthly auctions in which buyers, such as high net-worth investors or institutions, bid certain interest rates to hold the securities for short periods. Traditionally when no bidders were available Wall Street banks stepped in. But as credit markets tightened this year, many stopped rolling the auctions along in order to preserve their own capital, and many auctions failed.

Under the terms of their contracts, that development sent interest rates soaring for many borrowers at least until the next auction - in the worst cases as high as 20 percent.

That's what happened to the Patriots affiliate, according to their suit. The problem began when rating agencies, under pressure for their own past lack of scrutiny, began lowering their outlooks on Ambac and business rivals. The first auction failure for the 2006 bonds came on Feb. 20, forcing NPS to pay 20 percent interest that week. Five days later the interest rate was set at 19 percent, and troubled auctions kept it high throughout the spring, as much as 11 percent above the baseline interest rate. NPS lost almost $6 million as a result, the suit states.

NPS finally found its way out of the dilemma in May by refinancing its debt, as other institutions did. The suit states NPS offered a "private placement" of two groups of notes with interest rates around 7 percent.

According to the suit, Ambac had demanded that NPS pay an extra $2.8 million in "accelerated premium payments" under the terms of the previous agreements, a claim NPS disputes.

In the suit, NPS states that Ambac's decisions to start insuring riskier obligations such as mortgage-backed securities are to blame for its credit woes. NPS seeks a declaration "that Ambac has no right to premium payments that would have come due if NPS had not refinanced the bonds in order to escape the ludicrously high interest rates caused by Ambac's concealed imprudent actions."

Ross Kerber can be reached at kerber@globe.com.

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