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Districts in Distress

BRADENTON, Fla. — Stressed community development districts in Florida this month have told bondholders that they continue to rely on reserves to make debt ­payments. Some have filed notices of default and analysts expect their number to increase.

The state currently has 571 active CDDs, according to state records. Since the early 1980s, the districts issued more than $11 billion of debt. Most are structured with payments due the first of May and November, and using reserves is not considered a “default” in their bond covenants.

However, because of Florida’s prolonged real estate crisis some CDDs have used reserves for as long as 18 months and a growing number of experts who follow the so-called dirt bonds consider them to be in default.

Compared with most other states there have been a disproportionate number of muni payment defaults and filings related to using reserves in Florida because of CDDs, according to Matt Fabian, ­managing director of Municipal Market Advisors, whose weekly column distinguishes between defaults and other credit impairments.

On Monday, Fabian’s Weekly Outlook column reported that there were 33 ­defaults and credit impairment filings for the Nov. 2-6 period.

Nearly half of those filings were ­Florida CDDs, which included two ­defaults, 12 districts using reserves to make payments, and one reporting delinquent debt service and assessment payments.

“Over the next few weeks we’ll get all the Nov. 1 filings so Florida’s [CDD filings] will greatly increase,” Fabian said. “Any municipal defaults hurt the marketing of all municipal bonds … no matter what the sector is.”

Although the riskier real estate sector would be expected to suffer distress, particularly in the current economy, CDD problems will focus attention on Florida, Fabian said.

Since the early 1980s home developers across Florida have used the power to issue tax-exempt bonds granted by the state Legislature to finance infrastructure improvements, such as streets, sewers, and utilities.

The developer then sells lots, and individual property owners pay off most of the bond debt through assessments.

But the prolonged real estate crisis in Florida has taken its toll, particularly on CDDs created in recent years, Interactive Data Corp. analyst Edward Krauss told investors in a recent presentation on Florida land-secured bonds.

Interactive Data provides ongoing surveillance of more than 500 issuers. Krauss said about 70% of that was sold between 2004 and 2007, during Florida’s real estate boom.

CDD bonds sold in recent years tend to be the most acutely affected by the real estate downturn. Many districts that commenced construction after 2005 may have infrastructure such as roads, but they remain vacant of homes or they are sparsely built out.

Since CDDs rely largely on the sale of lots and assessments on homes to repay the debt, those that are vacant or only slightly built out are expected to have the most difficulty paying bondholders.

“We estimate about 60% of the issues we follow are stressed or severely stressed,” Krauss said.

Adding to the complexities of ­Florida’s CDDs is that many districts used a unique financing structure selling Series A and B bonds that rely on separate ­revenue sources for payment.

Series A bonds are expected to be paid by homeowners over the long term, while Series B bonds have shorter maturities to be paid from the proceeds of the sale of individual housing units.

“The B bonds are also closely tied to the timely construction and sale of planned housing units, and with over $1 billion maturing in the next four years could be most affected by the housing downturn in Florida,” Krauss said.

Interactive Data has seen a large increase in the number of draws on debt service.

On May 1, the first payment date this year, 80 districts “had reserve draws or did not pay debt service,” Krauss said. Preliminary information on November payments indicates a similar pace of debt service reserve draws.

“In fact, we are seeing several districts doing draws for the first time, which indicates we could see increased draw activity this time,” he said.

Richard Lehmann, publisher of Debt Securities Newsletter in Miami Lakes, said he has received a “flood” of CDD event filings since the Nov. 1 payment date. In an interview Tuesday, he said he had not compiled the results but ­anticipates more “troubled” filings.

Lehmann considers it a default when a CDD draws on reserves to pay debt service because that “gives us good insight” about whether assessments are being paid, he said, adding: “We have to alert buyers in due course who may be buying into a potential cash default.”

As a result of his focus on Florida CDD problems, which includes the launch of a specialized Web site at www.floridacddreport.com.

Lehmann said he has been contacted by attorneys who believe he has improperly characterized some CDD defaults and that has hurt prospective sales.

“Keeping it secret hurts bondholders,” Lehmann said, adding that he believes as many as 200 CDDs in Florida are “in trouble.”

“There is something inherently wrong with the CDD process in the state of Florida that needs to be addressed,” he said, adding that the districts may need more oversight to ensure proper due ­diligence.

The Florida Department of ­Community Affairs maintains a list of all of the state’s CDDs and special districts, active and inactive at www.floridaspecialdistricts.org. But the agency provides no oversight of CDDs or the bonds they issue.

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