The Southern California Logistics Airport Authority has defaulted on more bonds after discovering it can’t use reserves to make principal payments for some of its debt.
The SCLAA’s trustee, Bank of New York Mellon, said in a disclosure filing Wednesday that the authority missed principal payments on capital appreciation tax-allocation bonds issued in 2007 and 2008 that were due Dec. 1 because of the restrictions set by the bond indentures.
The agency initially thought it could make the combined $535,000 principal payment.
The authority issued $173.8 million of bonds in 2007 and 2008 to refurbish a former Air Force base in Victorville and refinance debt sold earlier to fund development.
The bank said in a disclosure statement, dated Dec. 16 but filed Dec. 21, that the only way the SCLAA would be able to use the reserve would be with consent from bondholders to amend the indenture agreement.
“It is unusual that a debt-service reserve fund would be available for interest but not principal,” said Roger Davis, head of Orrick, Herrington & Sutcliffe’s public finance practice. “However, that arrangement is sometimes used in connection with subordinate bonds or capital appreciation bonds, which you have here, or bullet maturity bonds.”
On Dec. 1, the authority defaulted on another batch of its bonds because it could not make a $10 million debt-service payment.
Officials said the legal uncertainty surrounding California’s redevelopment agencies prevented them from using short-term loans from Victorville’s RDA to make the payments.
The authority issued seven series of tax allocation bonds from 2005 to 2008 totaling about $300 million to fund airport development.
Before the initial default, the authority said it gave $3 million to the trustee to pay what it could toward the $6 million due on the senior tax-allocation revenue bonds.
That left the SCLAA $7.4 million short of the $10.5 million of debt service payments.
Securing the bonds are tax increment revenues from the airport, the city and surrounding areas, which have been hard hit by the housing downturn.
City documents say the airport authority had $21 million in reserve accounts for the bonds with the trustee as of Dec. 31, 2010.
Victorville’s City Council runs the SCLAA, which was created to build the new airport and redevelop the surrounding area in the high desert area around 80 miles northeast of Los Angeles.
City officials could not be reached for comment.
The California Supreme Court is weighing a challenge by redevelopment agencies across the state to two laws passed this year. One eliminates the state’s RDAs, which number around 400, while the second gives them the option of coming back to life if they pay $1.7 billion this year to fill a gap in the current budget. A decision by the court is expected by Jan. 15.
Victorville city manager Doug Robertson has said if the court decides in favor of redevelopment agencies without forcing them to make a state payment, the authority would borrow funds from the city’s economic development authority to refill the reserve.
If the court rules against RDAs, Robertson said debt service payments would have to come from whatever entity takes over for the airport authority, as provided for in the legislation.
In April, Moody’s Investors Service downgraded $51 million of the SCLAA’s subordinate non-housing tax allocation bonds to B1 from Ba3 and kept a negative outlook on the non-investment-grade debt due to a rapid deterioration of property values and weak debt-service coverage.
According to Victorville’s fiscal 2010 comprehensive annual financial report, the authority’s debt service for fiscal 2011 was $21.6 million.
Most of the that debt was issued to fund redevelopment of the decommissioned George Air Force Base into a transportation hub.
The authority’s potential default is part of a string of financial problems the city has faced in recent years, some of which have grabbed attention from other government agencies.
Victorville’s bond sales have recently been scrutinized by the Securities and Exchange Commission, and a local grand jury is still conducting a multi-year investigation into the city’s finances. No reports have been released.
The airport is also part of and gets revenues from the Victor Valley Economic Development Authority, whose members include surrounding cities and San Bernardino County.
The secondary market has seen active trading in the airport authority’s bonds.
SCLAA bonds with a 5.90% coupon maturing in 2043 sold Dec. 22 in a block of 50,000 at 49.50 with a 12.2% yield. Another authority bond with a 4.30% coupon maturing in 2019 and insured by Syncora Guarantee Inc. sold on Dec. 20 in a block of 30,000 at 80.50 with a 7.67% yield, according to MSRB data compiled by Interactive Data.