Memphis and Cardinals Partner in Deal to Revitalize Ballpark

The City of Memphis is inheriting a once troubled minor league baseball stadium in an unusual deal orchestrated by a New York private equity firm.

The deal, which was announced Friday, culminates a more than three-year bet by the firm, Fundamental Advisors, that it could turn around AutoZone Park in downtown Memphis.

In 2010, when Fundamental bought the municipal bonds used to build the stadium, attendance had declined and the stadium’s owner at the time was in default on its debts.

With a focus on investments in distressed municipal debt, Fundamental bought the bonds at steep discount and began investing in upgrading the park to increase ticket sales. As the stadium’s largest creditor, Fundamental was looking for ways to stabilize the stadium’s business and earn a return on its investment.

The minor league team that plays at the stadium, the Redbirds - and their major league affiliate the St. Louis Cardinals â€" are beloved in Memphis, while the ballpark is considered vital to the city’s downtown rebuilding efforts.

Fundamental’s ultimate strategy involved finding buyers for both the ballpark and the Redbirds.

As part of the deal signed on Friday, the St. Louis Cardinals agreed to pay Fundamental about $15 million to buy the Redbirds, one of their farm teams.

The city borrowed new money in the municipal bond market to purchase the stadium for about $19 million. The city used proceeds from the recently issued bonds to pay off the debt owned by Fundamental.

“This isn’t your typical private equity play of levering up an asset and letting the public markets take it out,’’ said Laurence Gottlieb, a former Citigroup municipal debt trader who co-founded Fundamental in 2007. “This asset touches the community in a very meaningful way.”

Until it hit a rocky patch, the park had come to symbolize the city’s efforts to reverse generations of “white flight”â€"predominately white residents fleeing Memphis for the suburbs, said the city’s mayor,  A C Wharton Jr.

“There are white families who claimed they would never go down into downtown Memphis,’’ Mr. Wharton. “But the one thing they don’t have in the suburbs is a minor league baseball stadium.”

Alternative investment firms like Fundamental are relatively new to the municipal bond market, but they have shown up more frequently as municipal issuers face default. Fundamental also runs a hedge fund strategy and the firm has invested in Puerto Rico debt as that island faces deep financial troubles.

The involvement of a distressed debt investor raised concerns among some in Memphis that the firm would look for ways to take advantage of the city. So city officials hired a financial advisers to assess Fundamental’s expected return on the deal. The analysis concluded there was “nothing extraordinary” about the return, the mayor said.

Fundamental expects an internal annual rate of return on its Memphis investment of about 6 percent, though for some of its investors, the return could prove higher because of the tax advantages of the municipal bonds.

“This is America,’’  Mr. Wharton said. “It is the willingness to take a risk and put your money out there that makes this country turn.’’

The deal didn’t exactly sale through, though. Some officials worried that taxpayer would be responsible for the ballpark debt.

“Like many big cities, we have pension problems and increasing healthcare costs,’’ said the City Council’s chairman, Jim Strickland. “I didn’t want to take money away from public safety and put it into baseball.”

The debt will be paid partly through tax rebates generated by food, beverage and other sales at the park. The Cardinals will make lease payments to the city for use of the ball park. The Cardinals chairman, William DeWitt Jr., said buying the farm team and leasing the stadium in Memphis was part of the Cardinals strategy to develop talent. Many major league clubs don’t own their farm team affiliates.

“We want to make sure that when our players are being developed in the minor league, they are in good cities and in first-rate ball parks,’’ Mr. DeWitt said.

The deal also added some other protections for the city, Mr. Strickland said.

If that revenue should fall short, the Cardinals have agreed to chip in $100,000 to backstop the debt payments. Memphis-based AutoZone, the car part retailer, is also providing a backstop if needed.