LOS ANGELES — Two northern Nevada shopping centers that were developed using sales tax anticipation revenue bonds have been forced to draw down reserves to meet bond obligations.
Officials said the longer-than-anticipated slowdown in consumer spending has affected sales tax collections in Washoe County. The county collected $55 million in consolidated tax in 2007, but only $39 million in 2011, said Robert Chisel, finance director for the city of Reno.
The use of reserves does not trigger covenant defaults on the bonds. But Moody's Investors Service anticipated in a Dec. 16 report that RED Development, the well-known midwestern developer of Outlets at Legends in Sparks, will default on its $82 million of outstanding bonds on June 15, 2020, with approximately 95% recovery to bondholders through the final maturity in 2028.
The Moody's projections don't take into account the Lowe's home improvement store slated to open in February, however, or other expected Phase 2 additions, including an IMAX theater, a casino and a TJMaxx clothing store.
Jeff Cronk, Sparks' finance director, said the stores expected to open in the next few months should make using reserve funds a thing of the past and the predicted default is unlikely barring some unforeseen event like major store closures.
"We have new development that will make the outstanding bonds whole," Cronk said. "Just the Lowe's alone should do it. We are slightly under one-times coverage now.
Cabela's, a 129,000-square-foot hunting and fishing store adjacent to Boomtown Casino & Hotel Reno, and the $400 million Outlets at Legends, a 1.9 million-square-foot regional shopping center, are the two retail development projects for which Reno and Sparks officials created separate tourism improvement districts.
Nevada lawmakers passed legislation in 2005 that allows cities to create districts in which 75% of the sales tax generated goes to pay off the sales tax anticipation revenue bonds that are used for construction costs.
Bond payments are solely the responsibility of the developers.
Reno sold $35 million of private-issue STAR bonds for Cabela's, which opened in 2007. The company withdrew $500,000 in December and $64,000 in July to make twice-yearly payments of $1.3 million, drawing its $1.2 million reserve account down to $635,000, according to Reno finance officials. Cabela's privately issued bonds aren't rated.
Issued as junk bonds, the Legends bonds have dropped several notches since their May 2008 origin date when they carried a Ba2. In its December 2010 report, Moody's downgraded the debt to B2 from Ba3, citing its use of $600,000 in reserves to make its bond payment. Moody's affirmed its highly speculative B2 rating in the report it issued on Dec. 16. The bonds are not rated by other agencies.
The Legends development again used reserve funds, drawing on $121,129 from its $7.96 million reserve fund to cover its Dec. 15, 2011, bond payment of $3.3 million.
A draw on the reserve fund does not constitute a technical default under the senior STAR bond indenture, according to documents posted on the Municipal Securities Rulemaking Board's EMMA website. No bond insurer was named in the filing.
Moody's assessment on the default potential on the Legends project, looking ahead a decade, is rosier than when it originally predicted the default in December 2010. In that report, Moody's analysts forecast default on the bonds by 2018 with an 84% recovery. In its recent report, it pushed forward a potential default by two years and ratcheted up the recovery potential to 95%, but also gave the bonds a negative spin.
"The negative outlook reflects Moody's expectation that an uncertain economic recovery will be a drag on an otherwise improving project performance over the near term," said Matthew Jones, a Moody's analyst. "Debt service coverage is projected at only 0.97 times in 2012 while scheduled debt service escalates by approximately 2.5% annually through final maturity."
The $83 million of STAR bonds, the largest of which was used to build the Legends development, are held by nine large banking and investment firms. The three largest investors, Nuveen Asset Management, Lord Abbett & Co. and Allstate Insurance Co., own 82% of the bonds.
David Claflin, a spokesman for RED, said the developer does not expect to default on its bonds in 10 years.
"In the long run, we expect that we will be able to make the project profitable and meet all of the projections," Claflin said.
Cronk said he thinks Moody's analysts are waiting to see how the Lowe's will perform when it opens."I think they will increase the ratings then, or at least remove the negative outlook, hopefully," he said.
