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Sunday, February 29, 2004

Bankruptcy and the billionaire

The corporation that owns the Rose Garden arena, home of the Portland Trail Blazers, has filed for bankruptcy. The company, Oregon Arena Corp., is owned, as is the Trail Blazer team, by Microsoft co-founder Paul Allen, the fifth wealthiest individual in the world.

The move is part of a prolonged attempt by Allen to get Oregon Arena out from under its obligations on the mortgage for the building. That loan, a 25-year bond deal, essentially precludes refinancing, which in turn forces the company to pay interest at nearly 9 percent through 2020. According to "the debtor," as the defaulting borrower is known in bankruptcy, the arena has lost money in all but two of the nine years that it has been open.

The bankruptcy prompts interesting questions from a number of different angles. First, Portland and Multnomah County taxpayers are holding their breaths with their eyes shut tight, waiting for another blow to their wallets. So far, everyone at City Hall and the county building says the Chapter 11 case won't matter to the local governments. I'm not so sure I'd agree. For example, you can bet that Oregon Arena will be looking for a reduction in its property tax assessment, and that its compliance under existing contracts with the city for matters like maintaining the Memorial Coliseum (next door) may deteriorate.

Second, the uncertainty surrounding the Rose Garden should caution the city to sit tight on its proposals for the Coliseum. Plans for a gigantic recreation center in a renovated Coliseum ought to go on hold until it's determined just what the future of its upscale neighbor is. Of course, the city has proved its ineptitude in managing projects like this in recent years, and it may plow ahead with something, only to find out that new management at the Rose Garden -- or some other outcome of the bankruptcy -- could render its best-laid plans unworkable.

Next, the Blazers deny that the bankruptcy has anything to do with their increasingly vocal opposition to bringing a Major League Baseball team to Portland. But without question, the arena bankruptcy will negatively affect that effort. This makes two bad Portland stadium deals in a row for the powerful TIAA-CREF pension fund, based in New York. TIAA-CREF invests retirement money for college and university professors throughout the country, including me and probably several hundred others in Oregon. It's also in the middle of the Portland Civic Stadium/PGE Park fiasco with the City of Portland. You can be sure that it won't be back for a third stinko sports deal in Stumptown, and that its troubles here will not go unnoticed by other potential "financing sources" for a baseball stadium.

Major League Baseball is doubtlessly going to hear about it, too. Although Portland baseball backers will seek to reassure the big leagues that Portland can be a two-professional-team city, the Blazers are obviously trying to show them that the fan base may not even be able to cover one.

The Chapter 11 filing is another consequence of the failed management of former Blazer president Bob Whitsitt, who took a sure thing, the Portland NBA franchise, and wasted it through stupidity and arrogance. In the last six months or so, the new team management has blown up the roster in the hopes of winning back fans turned off by the street-thuggishness to which the Blazers have sunk over the past five years. In the new PR campaign, character is supposed to matter.

Character -- as in not repaying your debts? It would be one thing if the arena were owned by a mere mortal whose prime tenant was an unrelated entity. But here the owner is a certified multi-billionaire, and the tenant is his basketball team, whose outrageous salaries and poor personnel choices are to blame for its financial woe. Allen signed the arena bond deal in '95, back when he held absolutely all the cards. Now he's weaseling out of it.

Taking the building into bankruptcy and flipping the bird to the nation's retired college professors are not the actions to take when you're supposedly showing your commitment to character.

Indeed, word coming out of the negotiations with the bondholders has been that they would gladly release Allen from the onerous mortgage rate if only he would personally guarantee the bonds. And if he were sure that his company was going to repay the bonds, one would think he'd have no trouble with the guarantee. But apparently he's specifically refused to sign it. To him, bankruptcy is a better option.

Maybe Allen is getting ready to pull out of basketball. If that is his desire, then all I ask is that he find a halfway responsible buyer, leave the team here, and not let the door hit him in the backside on the way out.

More ominous is the prospect that he's thinking of taking the franchise out of town. That would be a disaster for many area residents who rely on the team for their livelihood. Although it seems unlikely, the new Allen philosophy, "This is a business, and we're tired of subsidizing it," points to that outcome as a distinct possibility. Moves like this bankruptcy put the Blazers in play to a frightening degree.

It's like an old boyfriend calling from his aging BMW at 3 a.m. to say, "Love me or I might kill myself."

Comments (12)

More like an ugly, but rich boyfriend calling from his new yacht.

I'm glad you wrote about this so I don't have to. We have more in Tiaa-Cref than in our house, so I wasn't too pleased.

And to think I joined his little self-indulgent EMP just so I could go to the opening concerts.

I'll never forget his pear-like shape calling from the stage on a cell phone to the helicopter filming the show for VH-1. Imagine being able to call off attack-helicopters or own a hanger at Boeing.

No one should have that much money, and if anyone does, they shouldn't get out of debts they owe.

What a jerk.

Please, PLEASE take the Blazers away.

Every year those-who-haven't-learned get excited that "They Might Go All The Way This Year(TM)". Since Drexler left, and they fired Drexler's coach (forgot his name) - the team consistently blows the big games at the end of the 4th. Everytime.

Leave the city in peace, Mr. Allen. But take your mess with you.....

The newspaper reports that "PaulCorpOne" (Oregon Arena Corp., which owns the Rose Garden(TM)) has lost $20 million over the last 10 years. That's about $2 million/year.

"PaulCorpTwo" (the Trail Blazers) is reported to have the highest or second-highest player payroll in the NBA, at about $105 million/year. The Puget Sound Business Journal reported (June 30, 2003) that the Blazers were expected to lose $90 million or more last year.

Mr. Allen controls what rent PaulCorpTwo pays PaulCorpOne. So the solution is simple: PaulCorpTwo pays $2 million a year more in rent to PaulCorpOne. PaulCorpTwo cuts its payroll from $105 million to $103 million.

I can see the lawyers for TIAA-CREF asking what rent Mr. Allen pays PaulCorpOne for his apartment in the Rose Garden, what rent he pays for the skybox, and how the PaulCorpTwo rent was fixed, and (if they don't like the answers) arguing to pierce the veil and hold Mr. Allen responsible for PaulCorpTwo's debts. Not a can of worms that I would want to open, if I were Mr. Allen.

I can see Allen's lawyers asking why the hell that's relevant.

If you were Allen's lawyer, would you recommend that he personally guarantee bonds in that amount? Hell no.

How much do you pay on your mortgage? 9 percent? I bet not. I bet you refinanced when rates dropped. I bet you saved a lot of money doing it. And that is exactly what Allen is doing here, in the only way possible. I have money in TIAA-CREF too (it's not just university professors; it's educators of all stripes, including high school teachers), so I'm not particularly happy about the reduced return they'll get on this investment, but it's a drop in the bucket compared to their asset pool.

The suggestion that the Blazers might leave town is bare speculation and nothing more. I'm not a huge Allen fan, I just hate to see the rich pilloried for things the rest of us wouldn't think twice about. Why *should* he keep subsidizing an unprofitable business?

Oh, and Isaac, I hope you're not a lawyer, because if you think this is a proper situation for piercing the corporate veil, you've got another think coming.

Whether it's a proper situation for piercing the corporate veil depends on whether Mr. Allen has been faithfully keeping the books separate. I don't know whether the facts support piercing the veil here, but I'm pretty sure that TIAA-CREF's lawyers will be asking some questions to see if the facts are there.

Hey, Brett, before I signed my mortgage, I checked to see whether it allowed refinancing. If it didn't, I wouldn't have signed it.

Bankruptcy's for people in true financial hardship, not billionaire children who've grown tired of paying for their toys.

What a creep.

Why is it relevant? To the bankruptcy court, every transaction between PaulCorpOne and Mr. Allen and the other entities controlled by Mr. Allen, going back at least a year, is fair game for investigation as a possible preferential transfer.

No kidding. But you can be sure that Allen has had the best lawyers from the beginning, who would have been absolutely sure to keep scrupulous records and to avoid transfers. No allegations of fraud have surfaced, the RG is not Allen's alter ego, and it sure wasn't undercapitalized. So there won't be any veil piercing.

And Professor, I guess I just don't see the moral dimension of a corporate bankruptcy. It's not as if he's leaving people out in the cold by doing this. When TIAA-CREF and the other investors performed their due diligence on this investment, they knew it was relatively risky. Hence the 9% return. They have enjoyed that return, FAR above the typical bondholder return over the past 10 years, only because they accepted that risk. Now, the risk has ripened into bankruptcy. But this isn't a pennies-on-the-dollar situation - it's just an adjustment of risk. In fact, an argument could be made that this is better for TIAA and the other investors - they will come out of this with a lower rate of return, but also lower risk, allowing them to more accurately forecast revenue. No one could predict in 1993 that interest rates would go as low as they are right now. If you told the principals that rates would go to virtually zero in 10 years, I bet they could have predicted this.

In fact, if bankruptcy is the best fiscal option, the company's directors have a fiduciary obligation to its shareholders (Allen) to put it in bankruptcy. They have to do what's best, financially, for the corporation.

> For more than a year, Allen's representatives and Oregon Arena have sought to negotiate changes to their obligations to no avail.

They tried to negotiate - the bondholders wouldn't respond. This is a perfectly normal step. It would be gross negligence on the part of Allen's and the RG's lawyers *not* to go Chapter 11.

On another note, I love the blog. Wish my professors had had any idea what a blog was. I think their response would have been something like your fictional Mayor's: "I hardly have a chance to blob."

Brett: You may not see a moral aspect to bankruptcy, but some folks do.

Up until recently, the whole Allen Persona with the Blazers, Experience Music, and many other ventures has been as a lovable "player" -- an eccentric guy who's so wealthy he could burn money in pursuit of his passions. His word was good because he loved these things, and he invited the public to share his enthusiasm. Now, suddenly, they're all just hard, cold businesses, from which he is cutting and running. His promises are voidable.

Many other people lost their shirts in the tech bust, and some of them are still nobly struggling to make good on the promises they made in their fat days. Allen's not one of them.

He can exercise his rights to the max, as you suggest, but the public can also exercise its rights to stay home and change the channel rather than spend any more money on his wares.

Don't conclude that this Chapter 11 is such a great idea for him until after it's over.

You're right - an entertainment business does depend on the goodwill of its patrons, and if people start staying home because of Allen's perceived greed, that could kill the business. It might have been a good time to do it, though, in the spirit of cleaning house. Got rid of the bad players and the bad debt in the same week. Nowhere to go but up.

Wouldn't it be delightful if Larry Ellison topped Mr. Allen's bid and then renamed it the Oracle Arena?


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