Bond Insurer Sues City After Golf Course Deal Goes Awry

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BRADENTON, Fla. – A Virginia city's bond-fueled golf course development dreams have devolved into a court fight with its bond insurer, with its city hall and police headquarters among the stakes.

Buena Vista in southwestern Virginia bet city hall and the police department against Vista Links, a championship-level golf course the city says never proved to be successful.

The municipal facilities, including the 18-hole golf course, serve as collateral for $9.2 million in lease revenue bonds issued in 2005.

The bonds are subject to annual appropriation – a moral obligation - that the city of 6,618 residents said it could not afford amid the recession.

After defaulting on payments in 2010, the city entered a forbearance agreement to have bond insurer ACA Financial Guarantee Corp., make payments for five years.

"The golf course was an economic development project that got caught up in the great recession that we are just beginning to recover from," said city attorney Brian Kearney. "When it became clear that the essential governmental services would have to be drastically slashed, City Council determined that the rent payment could no longer be made."

The city defaulted on the forbearance agreement last year, after the five years were up, when the council voted not to appropriate for debt service payments.

On Monday, ACA filed a lawsuit in Buena Vista Circuit Court seeking a declaratory judgment against Buena Vista.

"The city's economic condition is stabilizing and long-term economic prospects appear quite positive," the suit said. "The city can afford to pay its Series 2005 bonds."

ACA is not particularly interested in foreclosing on Buena Vista's municipal facilities, ACA attorney Steven Higgs said in an interview Tuesday.

Higgs said he has been told that the city's collateral could be valued in the "high $2 million range," while the outstanding debt totals about $9 million.

"Trying to convert a golf course or a city hall into cash is not the easiest thing in the world," he said. "That's still an option."

This is not the first time a local economic development venture has not panned out, only to pit a bond issuer against its insurer.

A three-year legal battle continues to play out in Madison County, Miss., over a failed commercial development for which the county guaranteed to make up a shortfall in payments on $30.7 million of bonds issued in 2008 by the Parkway East Public Improvement District.

When the district could not make debt service payments, Madison County said its interpretation of the backup pledge required the county to make up the shortfall in payments for only two years.

The county stopped making payments, forcing the bond insurer, Radian Asset Assurance Inc. at the time, to pay investors in the failed project.

Radian - now Assured Guaranty Corp. – filed suit in the Southern District of Mississippi in 2013 contending that there was no two-year limit on the county's obligation, and alleging that the county interfered politically with the success of the district.

In April, Federal Judge Carlton Reeves ruled that "the contract requires the county to forever make bond payments…as long as the bonds remain outstanding."

Madison County is appealing.

The unwillingness of some local governments to stand behind promises to make bond and insurance payments is not new, said Matt Fabian, a partner at Municipal Market Analytics.

"This dynamic has been around at least as long as we have been tracking defaults," Fabian said. "Some governments choose to re-characterize apparent pledges to use general fund resources to pay debt service once those resources are actually needed."

Some governments lose the willingness to pay after voters become sensitive to higher taxes, he said, "or maybe they were only pretending to be willing all along."

Several recent, well-known cases have ended up being costly for issuers both in expense and credit rating downgrades, Fabian said.

In Harvey, Ill., the Securities and Exchange Commission found that officials diverted at least $1.7 million of bond proceeds from three offerings to the city's general fund accounts to pay for operations.

Harvey Mayor Eric Kellogg agreed to pay $10,000 and to never participate in a municipal bond offering again in order to settle the SEC's charges without admitting or denying them.

Menasha, Wis., failed to honor its appropriation pledge or to issue refunding notes to pay off $23 million of maturing bond anticipation notes tied to a power plant conversion project.

While Menasha continued to pay its general obligation debt, it defaulted on the notes and bondholders sued the city.

"Although the city did not default on its GO debt, its unwillingness to meet the [BAN] commitment brought into question the city's willingness to meet all of its obligations," Moody's Investors Service said in January while raising Menasha's general obligation ratings three levels to Baa2.

In Missouri, Moberly reneged on its appropriation pledge and lost its investment grade ratings in 2011 for failing to stand behind a $39 million bond issue for an artificial sweetener plant after the developer halted payments and abandoned the project.

S&P Global Ratings upgraded Moberly's rating to BB-minus from B in February.

In Buena Vista, the city attorney says that the council prefers to end its fiscal problems over the golf course bonds by negotiating a settlement with ACA Financial Guarantee.

"By pursuing a negotiated settlement, we are doing what's best for our residents, our employees, and our regional partners who have steadfastly supported the city," Kearney said in a press release issued by an advertising agency on Tuesday.

Kearney also said that ACA's lawsuit has "no legal basis and will do nothing to resolve this issue."

The bonds did not carry long-term ratings.

ACA Financial Guarantee has continued to make payments for debt service since the city's default.

On Jan. 7, a customer bought $15,000 of golf course bonds maturing in 2035 for 93.5 cents on the dollar to yield 6.05%.

"While ACA has been unwilling to negotiate, the city remains committed to a negotiated resolution," Kearney said. "In the meantime, all bondholders have been paid in full because the city purchased payment insurance from ACA at the onset of the bond issuance."

ACA has a different view of circumstances, and wants the court to determine the validity of its agreement with Buena Vista, including the ability to foreclose on city hall, the police department, and the golf course.

"ACA has worked with the city of Buena Vista for many years to accommodate its needs, and more recently has worked to come to a comprehensive resolution that would benefit all parties," Higgs said.

"After 16 months of continued non-payment by the city," he said, "ACA has decided to sue the city to force it to renew payments on the money it borrowed, and to demand it comply with the promises it made under the bond agreements."

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