Moberly Sets Debt Policy After Sucralose Bond Fiasco

CHICAGO - Moberly, Missouri has adopted new debt management policies as it seeks to repair a credit rating sent to junk after it failed to honor a pledge to back bonds sold for an artificial sweetener plant.

The city council this week approved a debt management policy "to provide guidance for the types of debt issued, the issuance process, and the administration of the debt portfolio," the document says.

City officials said the city has long followed the policies but the council's action formalizes the city's adherence to them.

The city of 14,000 lost its investment-grade rating when it reneged on its appropriation pledge on $39 million of bonds issued through the Moberly Industrial Development Authority to help finance the artificial sweetener plant in 2010.

Mamtek US Inc., which billed itself as a subsidiary of a Chinese firm that makes sucralose, defaulted in August 2011 on a payment to Moberly needed for debt service. The city then informed trustee UMB Bank that it wouldn't honor its pledge to repay the debt. Mamtek then abandoned the half-built factory.

Standard & Poor's lowered the city's issuer credit rating to junk bond status at B from investment-grade A.

"The policy is intended to guide decisions, identify policy goals, and demonstrate a commitment to financial planning," new policy document says. "Stakeholders in the debt issuance process including bond buyers, rating agencies, and citizens recognize the importance of having a structured framework in which to issue debt and meet those obligations."

While the city took the new action to gain traction with Standard & Poor's and future investors, several market participants said the credit would remain tainted for some time even if its investment grade is eventually restored. Only a lengthy period during which the city meets all its financial obligations is likely to ease concerns.

The policy bans the issuance of debt to fund operations, requires a bond-financed project to have a useful life that lends itself to debt financing over cash funding, requires a review of other financing options, and says a viable financing stream must be identified to repay new debt.

The policy calls for the city "generally" to steer clear of derivatives and outlines a preference for a traditional fixed-rate structure. The policy also outlines goals for fund balances and operating reserves, debt service reserve levels, and sale methods. The policy was crafted with the advice of Piper Jaffray. The council also adopted an investment management policy.

The city has not sought to borrow through the tax-exempt market since the Mamtek default, but has raised financing through banks to fund some projects, according to published reports.

In its 2011 letter informing the trustee of its decision, the city said it "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."

Moberly defends its 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.

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.

Standard & Poor's did not give much weight to the city's legal argument and penalized the city for its unwillingness to meet its obligations.

The city has largely escaped any other repercussions as investors and local, state, and federal regulators have focused their attacks on Mamtek's former head, Bruce Cole, and the financial firms on the deal.

A federal judge this week granted class action status to an investor lawsuit accusing the former Morgan Keegan of securities fraud for its role as underwriter.

Cole recently pleaded guilty to two criminal counts of securities fraud and one criminal count of theft under a plea deal with Missouri Attorney General Chris Koster.

Cole is also the subject of Securities and Exchange Commission civil fraud charges accusing him of scheming to defraud potential investors.

The Missouri Secretary of State last year filed a civil enforcement action against Morgan Keegan accusing the firm of securities fraud. It accuses the firm of defrauding clients by misrepresenting material facts about the offering.

Financial firms are accused of misrepresenting the bonds' value to potential investors and the city's ability to repay the bonds and failing to do adequate due diligence on Mamtek's viability claims.

For reprint and licensing requests for this article, click here.
Missouri
MORE FROM BOND BUYER