CHICAGO — Moberly, Mo., lost its investment-grade rating last week after it declined to make good on its appropriation pledge on $39 million of revenue bonds issued for a Chinese company’s troubled artificial sweetener factory.
The city’s refusal to appropriate led the trustee to dip into reserves for a Sept. 1 debt payment.
The saga over the stalled project prompted Missouri Attorney General Chris Koster to announce Friday that his office had launched a probe of the project — which also relied on $17.6 million in state aid through tax credits, borrowing, and grants — along with Randolph County prosecutor Mike Fusselman.
“Substantial concerns have arisen regarding the entity known as Mamtek International Ltd. and its proposed construction and operation of a manufacturing facility in Moberly,” Koster said.
The Moberly Industrial Development Authority last year sold three series of Project Sugar bonds, including $8.4 million of taxable capital project bonds, $3 million of tax-exempt capital project bonds, and $27.5 million of tax-exempt recovery zone facility bonds.
The latter was issued under a federal stimulus program that allowed for qualified private projects to use tax-exempt financing. Morgan Keegan & Co. was the underwriter.
Proceeds were to finance the acquisition, construction, and equipping of a sucralose manufacturing and processing plant owned by Mamtek US Inc. Officials believed the project would spur economic development in the struggling central Missouri community and create hundreds of jobs. But the plant remains only half-built, and construction has halted.
The company failed in August to make required payments to Moberly needed for debt service.
Bond trustee UMB Bank NA published a notice this month reporting the city’s failure to forward back in August the payment required to cover a Sept. 1 debt service payment.
That failure triggered a default in the city’s financing agreement tied to the bonds and as a result the trustee dipped into reserves to cover the September payment. If the city and company don’t get caught up within 60 days, an event of default of the bond indenture is triggered.
UMB said it has hired Spencer, Fane, Britt & Browne LLP attorneys Norman Fretwell and Adam LaBoda. An investor call was held Friday to provide an update on the latest developments. Details of the call were not immediately available.
The bonds are secured by revenues expected under a financing agreement between the city and authority. The city backed the debt with an annual appropriation pledge to make basic payments to the trustee.
The bonds were rated A-minus at the time by Standard & Poor’s, one notch lower than the city’s issuer credit rating.
The rater Thursday lowered the bonds’ ratings to CC from A-minus and placed the rating on CreditWatch with negative implications. The agency also downgraded the city’s 2008 certificates of participation to B-minus from A-minus and its issuer credit rating to B from A. The latter two were assigned a stable outlook.
“The rating actions are based on our view of the city’s limited ability to meet its financing agreement obligations without receipts from third-party Mamtek,” said Standard & Poor’s analyst John Sauter.
Mamtek could not be reached to comment last week and the city manager, Andy Morris, was out of town. His office referred calls to the development authority, but the authority did not comment.
The $64 million project received great fanfare when it was approved. In July 2010, Gov. Jay Nixon held a press event in Moberly to announce the Mamtek facility.
Some lawmakers say the revelations from Moberly have created new opposition to Nixon’s proposed revamp of tax credits and economic development policies, which are the subject of an ongoing special session.
Moberly recently made clear it would use only funds from Mamtek to cover debt service.
The city did not initially include in its 2011 budget any appropriation for payment of the bonds.
On Sept. 6, the council passed an ordinance amending its budget to include an appropriation of payments under the financing agreement. It said, however, that the payments would be made “solely from amounts” the city receives from the company under its 2010 financing agreement and “from no other source whatsoever.”
The trustee reported that sufficient funds remain in reserves to cover the next debt service payment owed March 1. After the draws to cover the Sept. 1 payment, about $180,000 remains in the A reserve, $217,000 in the B reserve, and $2 million in the C reserve. The trustee is also holding $2 million in unused project funds.
The notice underscores the precarious state of the project and grim prospects for bond repayment. The company has made statements to UMB representatives that it “is severely financially distressed and has very little cash.” Company officials told the trustee it would cost an additional $20 million to $44.5 million to complete the project.
“The trustee is both independently and in cooperation with the city actively working to evaluate the collateral and possible resolutions and remedies,” the UMB notice read.
The Missouri Department of Economic Development marketed the project to local communities asking for proposals in early 2010.
The city pursued it and offered to issue bonds to support it while some other communities in Missouri and outside rejected it in part over concerns of the company’s viability, according to published reports.
The state agreed to a $17.6 million aid package aimed at helping create at least 600 jobs.