CHICAGO — A retail development in a wealthy Cleveland suburb has lost its investment-grade rating after Fitch Ratings cut it to BB from BBB-plus, citing weak cash flow.
The seven-year-old development, Crocker Park, is nearly 95% occupied with several major retailers and located in the affluent and triple-A rated city of Westlake outside of Cleveland.
But, Fitch says, the mortgage loan financing the property is now much higher than the property’s value, and cash flow has recently been insufficient to cover mortgage payments.
On the plus side for bondholders, the mortgage payments are subordinate to the special assessments that service the $69 million of debt that financed the project. But Fitch is “concerned about the current or any future owner’s incentive to continue to make special assessment payments, given the very high loan-to-value ratio,” analyst Arlene Bohner wrote in the downgrade report.
In addition to weak cash flow, the junk-bond rating reflects what Fitch calls the single-payor risk, when special assessments are payable only from a single payor, in this case developer Crocker Park LLC, an affiliate of Robert L. Stark Enterprisesh.
It’s the second time this summer that Fitch has downgraded a troubled development financed through the Toledo-Lucas County Port Authority.
In late June, Fitch dropped to D its rating on $9.3 million of troubled special-assessment debt issued in 2007 through the authority for a Toledo-area development called the Town Square at Levis Common. The default rating came after the developer failed to pay sufficient special assessments to cover two recent debt-service payments.
At the Crocker Park development, cash flow in 2011 covered only about 50% of the mortgage payment, Fitch said. The mortgage loan is now higher than the property’s value by a ratio of 1.5 to one, according to analysts. The developer has remained current on the payments by tapping other resources.
There is a debt-service reserve fund that totals maximum annual debt service through a guaranteed investment contract.
“Some comfort is derived from the superiority of the lien to those of larger obligations; however, the very weak coverage of the mortgage obligation introduces risk of payment disruption should the loan go into foreclosure,” Bohner wrote.
If the reserve fund falls short, the city of Westlake agreed to appropriate sufficient money to restore the reserve fund and make debt payments, according to original bond documents.
Using the Port Authority as a conduit, Crocker Park LLC issued $76.2 million of special assessment revenue bonds in late 2003. Robert W. Baird & Co. was the underwriter and Calfee, Halter & Griswold LLP was bond counsel. The serial bonds totaled $10 million with maturities from 2006 through 2013. Two series of term bonds totaling roughly $66 million mature in 2023 and 2035.
The 2035 bonds with a 5.375% coupon yielded 4.38% in recent trading, according to the Municipal Securities Rulemaking Board’s EMMA data site. Bonds maturing in 2023 with a 5.25% coupon were yielding 5.2% in March trading.
Fitch is the only credit agency to rate the Crocker Park project.