CHICAGO — Moberly, Mo., on Tuesday informed the trustee of $39 million of annual appropriation-backed revenue bonds that it won’t honor its pledge to repay the debt issued to help finance construction of a half-built artificial sweetener plant abandoned by a Chinese company.
The city also handed over control of the project site to trustee UMB Bank NA even as it continues negotiations with two potential investors. The city and the Moberly Industrial Development Authority distributed a joint statement announcing the city’s position and UMB posted a notice informing bondholders of the action.
“The city is not legally obligated to appropriate city funds and the City Council has determined that such use of taxpayer funds would not be in the best interest of the citizens of Moberly,” the city’s statement read. “The council believes the city’s taxpayers under these circumstances should not bear the burden of Mamtek’s failures or be asked to 'bail out’ their shareholders or investors.”
UMB in its notice reported that it is actively working with its counsel, Spencer, Fane, Britt & Browne LLP, “to evaluate and pursue possible resolutions and remedies.” The bonds are secured by the city’s financing agreement with the company, a security agreement and first deed of trust. The city pledged to annually appropriate payments to the trustee.
Moberly lost its investment-grade rating in September after it declined to make good on its appropriation pledge supporting the revenue bonds issued for the plant being built by Mamtek US Inc. The city’s refusal to appropriate led the trustee to dip into reserves for a Sept. 1 debt payment. The city’s decision followed the company’s default in August on a payment to the city needed for debt service.
The project received city help from the bonds issued through the IDA and $17.6 million in state assistance. Proceeds were to cover the cost of acquisition, construction, and equipping of a sucralose manufacturing and processing plant owned by Mamtek. Officials believed the project would spur economic development in the struggling central Missouri community and create hundreds of jobs, but construction halted with the plant half-built.
Missouri Attorney General Chris Koster is jointly investigating the project with local prosecutors, at least two state legislative committees are examining the state’s role in the project, and the trustee has reported that the Securities and Exchange Commission has issued subpoenas in connection with the financing.
Moberly defends its latest action as permissible under the bond indenture, which includes language explaining that the bonds do not constitute a general obligation of the city, that the city is not liable for repayment, and that nothing in the city’s financing agreement should be construed to require the city to appropriate its own funds for repayment.
Though reserves hold sufficient funds to cover the next debt service payment, the city’s failure to replenish funds used to cover the September debt-service payment within 60 days triggers an event of default. The city contends in its statement that it’s not legally obligated to appropriate the funds.
The language is standard in most appropriation-backed bond indentures and it is the appropriation pledge — not the revenue source used to repay bonds — that investors value when reviewing offering statements, market participants said. It is also a key factor used by rating agencies in assigning ratings.
“I am disappointed,” said Mike Ross, a managing director and analyst at Morgan Keegan & Co. “This is a pledge that the market generally assumes will be honored. It raises a question over how the market will respond, and will it have implications for future appropriation debt in Missouri?”
Missouri borrowers issued a total of $3.2 billion of appropriation-backed bonds in 22 issues since 2006, according to data compiled by Morgan Keegan. It’s a popular method of financing in a state where general obligation borrowing faces voter approval.
The city reported in its statement that it is exploring two proposals from potential investors. One calls for completion of the project on a larger scale and the other would assist the city in finding an alternative use for the site. The city said any agreement would require the investors to cure the bond default and bring reserves up to date. “Discussions with these investor groups are ongoing,” the statement reads.
The statement also revisits the plant’s history, noting the company’s hiring of 14 employees, payments made on the bonds in March, and its completion of most structural work on the site before the September default.
The city recounts how on Sept. 2 it sent notices of default to Mamtek as guarantor of the payments owed to the city. The company asked for a 75-day forbearance and the city and trustee responded by requesting preliminary payments and other assurances of future payment. The company told the city on Sept. 16 it could not satisfy those demands and the city should secure the project.
The city then worked to find a new occupant and American Sucralose Manufacturing Inc., formed by principals of Mamtek, on Sept. 24 said it would take over the project. The company failed to produce the payments required by the city and on Oct. 7 withdrew its written commitment to take over the project.
The IDA last year sold three series of Project Sugar bonds, including $8.4 million of taxable capital project bonds, $3 million of tax-exempt capital project bonds, and $27.5 million of tax-exempt recovery zone facility bonds. The latter was issued under a federal stimulus program that allowed qualified private projects to use tax-exempt financing. Morgan Keegan was the underwriter.
The following reserves remain after the September draw: $180,000 for the Series A, $217,000 for Series B, and $2 million for Series C. Another $46,000 is held in project funds on the A bonds, $2 million on the B bonds, and just $19 on the C bonds. The bonds were rated A-minus at the time by Standard & Poor’s, one notch lower than the city’s issuer credit rating at the time. S&P has since lowered the bonds’ rating to CC from A-minus and placed it on negative watch. It also downgraded the city’s issuer credit rating to B from A with a stable outlook.
The latest UMB investor notice is available at emma.msrb.org/ER523201-ER404544-ER806121.pdf.
