Short­fall Trig­gers A De­fault

The Bond Buyer - - Front Page - BY YVETTE SHIELDS

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. ◽

For more con­tent about this re­gion, visit the Re­gional News tab on

The Zona Rosa re­tail com­plex in sub­ur­ban Kansas City, Mis­souri, has strug­gled with high va­cancy rates.

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