Missouri county wants court blessing to shirk bond obligation

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CHICAGO – Platte County, Missouri’s decision to mount a legal challenge to its annual appropriation obligation to repay $32 million of bonds issued for a struggling retail complex triggered a downgrade to CC from S&P Global Ratings as analysts now believe a default is all but certain.

The county filed the lawsuit in Platte County Circuit Court against bond trustee UMB Bank NA and the county’s Industrial Development Authority, the issuer of the 2007 refunding bonds.

“The lawsuit is a petition for declaratory relief, in which the county asserts, among other things, that the terms of the financing agreement under which the county obligated itself to make payments to the bond trustee for shortfalls due on the bonds is contrary to the Missouri Constitution,” says a UMB disclosure notice dated Nov. 9.

The county alleges the terms run counter to the constitution “insofar as it demands Platte County to undertake indebtedness with respect to the Zona Rosa Bonds without voter approval,” it continued.

The Zona Rosa Retail project bonds issued by the authority are special obligations of the authority payable solely from a portion of the Transportation Development District revenues appropriated by the district and amounts appropriated in each fiscal year by Platte County from legally available funds.

Under a financing agreement, the county agreed, subject to annual appropriation, to transfer funds to the trustee in an amount sufficient for the payment of the bonds should pledged sales tax and developer payments fall short, an arrangement viewed in the municipal bond market as a contractual appropriation pledge.

Municipal Market Analytics questioned the need for such a lawsuit.

"It seems to be a waste of time. It's uncontested that the county only has an appropriation obligation," said Matt Fabian, partner at MMA. "There's nothing legally requiring the county pay, but if they allow bonds sold in their name to default," they are acting in a manner hostile to bondholders that should trigger more caution among investors in appropriation debt generally in Missouri.

S&P on Wednesday cut the rating multiple notches to CC from B-minus and assigned a negative outlook. The bonds most recently traded on Nov. 7 at 66 cents on the dollar, down from 77 cents to 82 cents in September.

"The downgrade reflects the county's recently filed petition for declaratory relief that, along with the County Board of Commissioners' public statements at an August 2018 board meeting expressing unwillingness to continue appropriating for the series 2007 Zona Rosa bonds, increases the likelihood of default on the 2007 bonds, in our view, to near certainty within the next 18 months, and as soon as Dec. 1, 2018," said analyst Blake Yocom.

Developer payments and sales tax collected in the shopping center in the Kansas City suburbs go to repay debt. The project has struggled with high vacancy rates for several years and the developer has defaulted on its contributions and is in default on its mortgage. Pledged revenues covered debt service until last year.

The Platte County board had appropriated in its current budget funds to make up for a shortfall in pledged revenues for the bonds of which about $29 million is still outstanding.

But the county began backing away from its commitment at an August 20 public meeting during which board commissioners “actively discussed and verbally conveyed that the county board would stop appropriating” for the bonds “unless they found a long-term sustainable solution that did not involve the county annually budgeting for debt service,” S&P said in a Sept. 7 report.

The rating agency responded then by slashing the rating deep into junk at B-minus level. They were previously rated A. The bonds were originally rated AA-minus based on the strength of the county’s guaranty subject to annual appropriation.

“We view this as a willingness issue rather than the ability to pay,” S&P wrote, given the county’s healthy balance sheet and taxing flexibility.

The 2007 bonds refunded 2003 debt that had financed the construction of an 802-space multilevel parking garage, funded capitalized interest, and funded a debt service reserve.

The bonds mature on Dec. 1, 2032 with an escalating debt service schedule. The developer last year failed to make its $500,000 annual payment so the trustee drew on a letter of credit to cover debt service. The trustee has not renewed the letter of credit.

Sales tax collection in the development district averages about $1.5 million a year and the county has estimated that by fiscal 2026 it will need to appropriate $1.5 million in legally available funds, up from $634,000 in fiscal 2018, if taxes don’t grow.

S&P does not rate the county but Moody’s Investors Service does and the county’s comments in August led the rating agency to strip Platte County’s general obligation rating of its investment grade status by dropping it to Ba1 from Aa2. It assigned a negative outlook.

The 421-square-mile county in the northwest Kansas city suburbs has an estimated population of was 94,970.

“The county's lack of willingness to honor its intentions under the financing agreement with the Industrial Development Authority represents a lack of willingness to pay on an obligation that supported debt issued in the capital markets,” Moody’s wrote, assigning a negative outlook to reflect the “uncertainty over a potential December 1, 2018 default.”

The county, in a statement after the Moody's downgrade, defended its steps aimed at “protecting taxpayers” and its legal position that appropriation is not guaranteed because it’s subject to annual approval. It also accused Moody’s of unfairly actively preemptively as the appropriation remained in the budget. Moody’s does not rate the Zona Rosa bonds.

Moody’s has not acted since the lawsuit’s filing this month.

Trustee UMB reported that it had not yet been served with a summons so no response date was available. “The trustee is currently reviewing the suit with counsel and will provide an update to holders when it has obtained more information,” the notice said.

The authority did not immediately respond to a request for comment on the lawsuit or downgrade. A county official said: "We are not commenting on pending litigation or the impact of the litigation at this time."

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