Graceland project woes continue as borrowers miss another debt payment

Borrowers for a revitalization project for Graceland Mansion, the fabled former home and resting place of Elvis Presley, missed another debt service payment at the beginning of the month.

Long a tourism magnet for Memphis, Tennessee, Graceland has failed to see visitors return to pre-pandemic levels, and borrowers of bonds issued in 2017 to finance its redevelopment missed another scheduled debt payment, the latest in a string of missed obligations marking worsening financial straights for the attraction.

After “transferring all available funds” to cover scheduled July 1 interest and principle payments on Series 2017A sold on behalf of the project, US Bank, trustee for the deal, said the borrowers were still short for the $1.77 million payment, according to a filing with the Municipal Securities Rulemaking Board’s EMMA website.

Four series of bonds connected to the development totaling $89.3 million were issued by the Economic Development Growth Engine Industrial Development Board (EDGE) of the City of Memphis and County of Shelby in 2017; $40.49 million of Series 2017A tax-exempt senior tax increment revenue bonds, $24.43 million of Series 2017B taxable senior tax increment revenue bonds, $24.375 million of Series 2017C taxable subordinate tax increment revenue bonds and $5.005 million Series 2017D taxable bonds.

While it is the first missed payment on Series 2017A, the borrowers have failed in meeting a number of biannual obligations over the last several years.

US Bank said borrowers also missed payments on the Series C on July 1, 2021, January 2, 2022, July 1, 2022, and again on January 1, 2023, triggering an event of a default. US Bank said it was able to make this July’s payment by transferring funds from a tax-related surcharge account.

Since July 2021, they’ve also missed every debt service payments on Series D and Series E, including the most recent. However, under existing contracts that did not constitute a default.

To make the most recent payment on Series B, US Bank was forced to tap reserves, it said.

Neither EDGE nor the city or county has any responsibility for the debt service or other payments associated with the bonds.

The mansion and surrounding grounds are managed by Elvis Presley Enterprises and are the centerpiece of a $137 million redevelopment project that includes new lodging and exhibition centers that officials had hoped would help revitalize the Whitehaven neighborhood of Memphis where its located.

Debt woes began “pretty quickly” for it after lockdown measures sent tourism into a spiral nationwide, said Lisa Washburn, managing director at Municipal Market Analytics, with borrowers failing to make their first debt payment in January of 2021, a trend that continued through to the most recent miss.

Financing for the different series of debt is “intertwined and draws on different and related revenue streams in a senior or sub basis,” Washburn said. “In general, when there’s different layers of debt there’s just more risk.”

Under state guidance, Memphis set up a tourism development zone with sales tax revenue and an additional 5% surcharge on all purchases at Graceland going toward supporting its redevelopment. Tax increment financing (TIF), which increases property taxes on the property, was also used.

Similar to payment-in-lieu of taxes financing, TIF bonds are backed by future revenues, generally a percentage of taxes collected on a property within the designated economic zone that’s expected to increase as the value of the property does over the course of the investment.

The method provides municipalities with a tool “that exploits the rise in economic value and associated increase in tax receipts that accompanies successful urban redevelopment,” the World Bank said in a report. “The use of a TIF requires robust real estate and economic conditions. A TIF is most appropriately used when land uses are up-zoned and when there is strong market demand. “

The arrangement for Graceland, Washburn said, is “very dependent” on the economic activity surrounding the attraction. Officials blame the insufficient cash flow on lagging tourism numbers and, while major tourist hubs have seen numbers rebound, Graceland hasn’t, possibly because it has a much “narrower interest base.”

“It being kind of a niche may contribute to a weaker recovery, versus a more generalized area that’s got a lot more activity,” she said. “It hasn’t been improving and now all of the bonds seemed to be impaired, either by drawing on reserves, or by being in default.”

Risks associated with TIF bonds are often higher than average, Washburn said. MMA records a 1.81% aggregate default rate for the bonds, which is above MMA’s risky sector default average of 1.39% and nearly identical to the 10-year default for Ba-rated general government junk bonds as recorded by Moody’s Investors Service.

In its most recent move on the bonds, S&P Global Ratings in December revised the outlook on the Series B issued for the Graceland project to stable from negative and affirmed its BB long-term rating.

The outlook reflected improved debt service coverage following an uptick in visitor activity and “potential variability in improved visitor counts given pent-up demand following pandemic-related shutdowns,” S&P Global Ratings credit analyst Randy Layman said.

Graceland’s sales tax surcharge collections for the 2021 bond year were down around 70% after lockdown began, resulting in declining debt service coverage on the bonds.

A strong rebound across 2022 saw revenue from the tourism surcharge up by 135% year-over-year, which allowed for the replenishment of the bonds debt service fund. The annual debt coverage ratio improved to 1.7x in 2022 from 0.7x in 2021, S&P said.

While it “highlighted the pace of recovery, S&P collections were still down 18.4% below pre-pandemic peaks in levels at Graceland.

The addition of the 2017A default to ongoing defaults associated with the C, D, and E series “introduce uncertainties should the 2017B be pulled into any potential litigious bondholder action given the master indenture,” the report said.