SAN FRANCISCO - Pacific Genesis Group Inc., an underwriter for dirt bonds, is warning that a bill likely to be signed today by Gov. Pete Wilson will cause millions of dollars of bonds to default.
The bill, which would curtail the use of certain kinds of land-secured financings, is another chapter in the California's ongoing battle with Pacific Genesis over what the state says are abuses of its laws covering these deals.
Pacific Genesis contends that because many of these deals have been funded with short-term debt that issuers had expected to convert into long- term obligations, cutting off further financing would push them into default.
California law allows local agencies to form joint powers authorities, or JPAs, to obtain low-cost debt financing by joining with other agencies to benefit from economy of scale.
Three years ago, Pacific Genesis began underwriting debt from JPAs whereby the projects financed from the sale of bonds are not even located within the boundaries of the JPA. These deals are commonly known as roving JPAs.
The individual agencies are paid a fee to have their name associated with the unrated bond deal, but gain no other benefit from the issuance. Most of the bonds Pacific Genesis underwrote were used to build the public infrastructure - such as roads and sewers - for development projects that included casinos, golf courses, hotels, and strip malls.
Lawmakers sent Wilson SB 147, which immediately will curtail the use of roving JPAs, without any grandfather clause for existing JPAs. That, says Pacific Genesis president David Fitzgerald, spells trouble for a number of his deals.
"They were underwritten at the time with the expectation that future financings would occur, and now they are taking that ability away," Fitzgerald said. "It's like you are playing football and it's half time, and they say, 'you know what, we are now going to use a baseball in lieu of a football.' "
Often the deals were originally financed with a short-term borrowing such as bond anticipation notes to help jump-start the project, with the intention of rolling over the debt at a later date into long-term financing.
But if most roving JPAs are immediately banned, those deals that are still waiting for long-term financing would not be eligible for refinancing. The bill was presented by Sen. Quentin Kopp, vice chairman of the powerful Revenue and Taxation Committee.
"There has been no courtesy given to grandfathering certain deals," Fitzgerald said. "It shows how bitter, how ugly this whole dialogue has become, and the one who is going to lose is not me; it's not the state Senator, it's the investor. Why should they take it on the chin?"
The bill was sponsored by the California Debt and Investment Advisory Commission, a clearing house for local debt information run out of the state Treasurer Matt Fong's office.
CDIAC has fought a prolonged battle to rid California of roving JPAs. On Monday, An official said that defaults are possible, but more because of the precarious nature of the bond structure.
"To the extent that happens, it's because of the inherent riskiness of this type of transaction," said CDIAC executive director Peter Shaafsma. "They've been selling these bonds before they even had the entitlements to develop."
In fact, two deals underwritten by Pacific Genesis totalling nearly $10 million have already gone belly-up. Malibu Canyon Public Finance Authority's $6.15 million of notes went into default in January but has since been refinanced. The other transaction, $3.05 million of notes from the California Commerce Public Finance Authority, defaulted in March.
Wilson has until the end of the day today to sign the bill. Sources said that while they cannot say for certain Wilson will sign the bill into law, he most likely will - given its support from Fong, a fellow Republican, and from the Howard Jarvis Tax Payers Association.
Last year, CDIAC encouraged the State Department of Corporations to sue Pacific Genesis for alleged violations of the state's securities laws. That lawsuit is in the discovery phase.
The state tried twice unsuccessfully to convince a judge to block Pacific Genesis from selling additional roving JPA debt.
In essence, the new law would forbid an agency from issuing roving JPAs unless the project to be financed is located within the boundaries of at least one of the pool members.
The bill would exempt certain types of development projects, such as schools or utility construction, from the new ban.
Also, any agency that wants to sell pooled land-secured bonds in California would have to prove there is significant public benefit to residents in the district in order for the bonds to be issued.
