A debt default by Graceland, the Elvis Presley mansion turned tourist attraction, shows why investors in other municipally financed venues may one day be singing the blues.

For years, I’ve used attendance at Graceland as the standard by which museums and other projects hoping to tap the bond market must be judged.

Though the King of Rock and Roll died Aug. 16, 1977, he has active fan clubs and buyers of his music worldwide and a new biopic in theaters. That’s why his Memphis home still draws around 500,000 visitors a year, down about a third from the crowds that came 25 years ago.

And yet officials across the country propose attractions that somehow are going to attract 800,000 or a million or more? The Graceland standard has worked for me in ferreting out overly optimistic deals, and was even endorsed once by a speaker at a National Federation of Municipal Analysts meeting.

Now it’s broken, as evidenced by the notice sent out by trustee U.S. Bank to holders of the $88 million in 2017 Economic Development Growth Engine Industrial Board of the City of Memphis and County of Shelby, Tennessee Graceland project bonds. The trustee tapped reserves — something it’s been doing since July, 2020 — to pay two series of bonds, and defaulted on another three series of bonds used to pay for renovating and expanding the site.

Among the risk factors listed in the offering documents to the bonds was “the continued interest from tourists who visit Memphis to experience the life, legacy and music of Elvis.” This presumably hasn’t flagged, but where is everybody?

Blame COVID-19. Graceland in 2019 said attendance was 534,488. It fell to 158,182 during the first year of the pandemic, and rebounded to 272,708 in 2021, according to Randy Layman, primary credit analyst on the issuer at S&P Global Ratings. S&P only rates the $24.4 million taxable series B Graceland bonds, which remain current on debt payments because they’re secured by a senior lien on a 5% tourism surcharge on stuff bought within the Graceland Development Project.

“The latest disclosure highlights Q1 2022 attendance of 56,703,” Layman said in an email on Monday. “This is 37% below Q1 2019, the most recent pre-pandemic first quarter. While quarterly attendance continues to highlight a material recovery over levels experienced during the height of the pandemic’s first several waves, recent figures indicate that a structural return to pre-pandemic figures will continue to take some time.”

S&P rates the series B bonds BB with a negative outlook, which is, yes, below investment grade. Elvis is junk. I never thought I’d see the day.

Asked whether the new film by Baz Luhrmann, “Elvis” (which had its premiere at Graceland on June 11) might have a positive influence on attendance, Layman said he didn’t have information to comment directly.

“We have indicated in prior reports that attendance does fluctuate around events such as the anniversary of Elvis’ passing and the release of documentaries about Elvis and Graceland,” the S&P analyst said. “With that in mind, it’s plausible that the film will have a positive impact on attendance.”

Perhaps more concerning, though, is the decline in the incremental sales tax revenue in the tourism development zone, which is responsible for the defaults and reserve fund draws. As Layman explains it, while taxable activity at Graceland declined, base year values (which are used to calculate how much incremental sales tax revenue is available for debt service) continued to grow due to strong performance in county-wide sales tax collections.

“This divergence between taxable activity at Graceland and the county as a whole led to the complete erosion of the increment upon which TDZ revenue is calculated,” wrote Layman. In other words, Graceland’s sales tax activity declined in such a manner compared to the county that no incremental sales tax revenue was available for recent debt service payments. “In order for any TDZ revenue to be generated going forward, taxable activity at Graceland will have to grow exponentially and consistently outpace activity for Shelby County as a whole.”

Which suggests that Graceland, once the gold standard for tourist attractions, has had its stay on the default list extended. Elvis Presley Enterprises, which runs Graceland, didn’t respond to a request for comment.

Maybe the big question before municipal analysts assessing any credits dependent upon visitors has to be: If Elvis can’t draw fans, who can?

Joe Mysak is a municipal market columnist who writes for Bloomberg. His observations are not intended as investment advice.

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