Shortfall Triggers A Default
CHICAGO – The trustee on $32 million of bonds supported by a Missouri county’s appropriation pledge withheld the Dec. 1 principal payment while dipping into reserves for interest after a judge refused to order the county to cover a shortfall in pledged revenues.
“As a result of the shortfall in TDD [transportation development district] sales tax revenues, lack of a replacement letter of credit and failure by the county to make payment under the bond documents, the trustee must draw on the reserve fund in order to make any payments of fees and expenses and in order to make the interest payment due to holders,” said the Monday notice posted by UMB Bank NA on the Municipal Securities Rulemaking Board’s EMMA website.
Though bond documents direct the trustee to use the debt service reserve fund in the event of a deficiency, the trustee said it “has been advised by counsel and believes it prudent to pay interest only and not make any principal payments at this time” given the “uncertainty of payments in the future and sources available for payment.”
Interest of $161,000 and $685,000 of principal was owed.
The 2007 bond issue refunded debt sold by Platte County’s industrial development authority to pay for parking facilities to aid in the development of the Zona Rosa retail complex in suburban Kansas City.
The project has struggled with high vacancy rates for several years. The developer has defaulted on its contributions and is in default on its mortgage. Pledged revenues covered debt service until last year.
A discussion among county board members at a summer meeting raised questions over the county’s commitment to make up an anticipated December shortfall absent a long-term solution, triggering downgrades.
S&P Global Ratings cut the rating to D on Tuesday. S&P which rates the bonds but not the county
previously dropped the bonds to the junk level of B-minus from A. They were originally rated AA-minus based on the strength of the county’s support subject to annual appropriation. S&P further cut the rating to CC last month after the county filed a lawsuit seeking a court ruling that it was not legally required to honor the pledge.
“We continue to believe the county has an ability to appropriate and pay debt service, based on its strong budgetary flexibility and liquidity and very strong economy and tax base. The county’s failure to meet its obligations on time and in full represents an immediate unwillingness to support ongoing debt service. We believe the county will not appropriate for future payments,” said S&P analyst Blake Yocom.
Moody’s Investors Service, which rates the county but not the authority’s bonds, has previously slashed the county’s rating to the junk level of Ba1 from Aa2.
The debt service shortfall adds to the events of default under the bond indenture triggered by past and current violations under the financing agreement and guaranty agreement that were included in the bond documents.
UMB drew $160,748 from the reserve Monday, leaving $3 million in remaining reserves, according to the notice.
The county filed the lawsuit in early November in Platte County Circuit Court against UMB and the development authority, a move the county’s attorney said was driven by a demand letter from UMB to cover the shortfall.
UMB last week filed Nov. 28 motion asking the court for a temporary restraining order requiring the county cover the shortfall by freeing up previously appropriated funds.
The county “signed the financing agreement stating that it intended to budget and appropriate moneys sufficient to pay the appropriation amount as that term is defined within the financing agreement on an annual basis,” reads the motion filed by UMB which is represented by Spencer Fane LLP. “The county wants to escape its promise to pay the shortfall by arguing it was unconstitutional.”
Judge James Van Amburg on Friday denied the motion, though he did order the county to set aside the required funds. The case is set for trial in May, although the county expects to file a request for summary judgment before that.
Based on the bond documents “the county has to make a decision whether to make the payment to cover the shortfall and based on the current situation the county has chosen not to make that volunary payment,” said Todd Graves, a partner with Graves Garrett LLC, which represents the county.
The county is asking the court to find that “any legal obligation for Platte County to make payments to cover any shortfalls in the amount of principal and interest due on the Zona Rosa Bonds is unconstitutional under the Missouri Constitution.”
The lawsuit states that as of 2018 the annual revenue shortfall is approximately $1 million and “without a long-term sustainable plan, these revenue shortfalls are likely to continue throughout the duration of the Zona Rosa Bonds. The new owners of the property have asserted that they have no obligation to make up these revenue shortfalls.
The county is willing to participate in a long-term solution that doesn’t require it to “bear the full burden” of repaying the bonds, Graves said. The pre-emptive rating strikes didn’t help. “The county got the punishment before they made the decision so there’s no incentive left to make the payment.”
The Zona Rosa Retail project bonds issued by the authority are special obligations of the authority payable solely from a portion of the Transportation Development District revenues appropriated by the district and amounts appropriated in each fiscal year by Platte County from legally available funds.
Under the financing agreement, the county agreed, subject to annual appropriation, to transfer funds to the trustee in an amount sufficient for the payment of the bonds should pledged sales tax and developer payments fall short, an arrangement viewed in the municipal bond market as a contractual appropriation pledge.
After the lawsuit filing, Municipal Market Analytics questioned the need for such a lawsuit and noted the potential toll on the county’s market access and a wider fallout.
“It seems to be a waste of time. It’s uncontested that the county only has an appropriation obligation,” said Matt Fabian, partner at MMA. “There’s nothing legally requiring the county pay, but if they allow bonds sold in their name to default,” they are acting in a manner hostile to bondholders that should trigger more caution among investors in appropriation debt generally in Missouri.
The bonds most recently traded at around 53 cents on the dollars, down from 66 cents on the dollar last month and 77 cents to 82 cents in September, according to trade data on EMMA.
The S&P downgrade last month “reflects the county’s recently filed petition for declaratory relief that, along with the County Board of Commissioners’ public statements at an August 2018 board meeting expressing unwillingness to continue appropriating for the series 2007 Zona Rosa bonds, increases the likelihood of default on the 2007 bonds, in our view, to near certainty within the next 18 months, and as soon as Dec. 1, 2018,” said analyst Blake Yocom.
The Platte County board had appropriated in its current budget funds to make up for a shortfall in pledged revenues for the bonds of which about $29 million is still outstanding but a final vote was needed to free up the funds.
The 2007 bonds refunded 2003 debt that had financed the construction of an 802-space multilevel parking garage, funded capitalized interest, and funded a debt service reserve.
The bonds mature on Dec. 1, 2032 with an escalating debt service schedule. The developer last year failed to make its $500,000 annual payment so the trustee drew on a letter of credit to cover debt service. The LOC has not been renewed.
Sales tax collection in the development district averages about $1.5 million a year and the county has estimated that by fiscal 2026 it will need to appropriate $1.5 million in legally available funds, up from $634,000 in fiscal 2018, if taxes don’t grow.
The 421-square-mile county in the northwest Kansas city suburbs has an estimated population of 94,970.
“The county’s lack of willingness to honor its intentions under the financing agreement with the Industrial Development Authority represents a lack of willingness to pay on an obligation that supported debt issued in the capital markets,” Moody’s wrote, assigning a negative outlook to reflect the “uncertainty over a potential December 1, 2018 default.”
Indenture defaults include the TDD’s failure to provide a replacement letter of credit, Zona Rosa Development LLC’s failure to comply with its obligations under the Guaranty Agreement to guaranty the TDDs’ obligations regarding the Letter of Credit, and the county’s violation of the financing agreement through its statements and actions including the filing of a lawsuit. ◽
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The Zona Rosa retail complex in suburban Kansas City, Missouri, has struggled with high vacancy rates.