Missouri county's debt repayment dispute in a judge's hands
Platte County, Missouri, and the trustee for $32 million of defaulted industrial development bonds are awaiting a court decision about the county’s obligation to repay the debt after squaring off in oral arguments in response to the county’s request for a quick resolution to the case.
Platte County, which lost its investment grade rating over the mess, put its appropriation pledge behind the bonds to support infrastructure at the Zona Rosa shopping complex in suburban Kansas City. Project revenues have fallen short of what’s needed to cover debt service and the debt would be a drain on county coffers if the county honors the pledge.
Facing a demand from UMB to pay up, the county sued trustee UMB Bank NA last year asking the court to rule it’s not under any legal obligation to repay the bonds.
Late last year, UMB countered, asking the court to order the county to make good on the revenue shortfall based on the financing agreements that include an guaranty pledge but Platte County Circuit Court Judge James Van Amburg refused. He did require that the county set aside the funds.
A default occurred on Dec. 1 and Platte County moved to seek a quick resolution by requesting a summary judgment. Amburg heard arguments Friday on the request. A decision was not expected before the end of the month.
The county argues that its pledge is not a promise to pay, despite assertions that the obligation was part of financing agreements, but a pledge that the auditor could request coverage of a shortfall with the decision resting with the county.
“There is no promise in the financing agreement that Platte County ‘shall’ or ‘will’ pay any funds that are appropriated,” Platte County attorneys from Graves Garrett LLC told the court in a presentation. The “trustee seeks to rewrite the financing agreement to require Platte County to appropriate and pay any shortfall each year.”
The county argues that UMB’s demand for $765,000 to cover the 2018 debt service shortfall and future payments could total up to $40 million is “contrary to Missouri law” and would violate the state constitution by conveying a general obligation pledge to the bonds.
The county is asking the court to find that the financing agreement language does not require it to appropriate the needed funds and said such a declaration “that Platte County never promised to pay is the first step to restoring its credit rating.”
Some market participants took issue with the latter statement, given that the market has a long standing view that is the threat of rating downgrades and market access that gives a moral obligation pledge it’s credibility.
Some market participants have questioned the need for a lawsuit given that a moral obligation pledge is not viewed as a contractual obligation to make good on bond payments, but rather an incentive to pay given the market and rating fallout.
Platte County had said it filed because it feared legal action on the part of UMB. Market participants are watching closely because court rulings could damage the value and repayment strengths of similar credits in the state.
UMB attorneys from Spencer Fane LLP argued that any judgment should fall in its favor based on the contractual language in the financing agreement.
“Platte County attempts to run from its prior admissions as to the requirements of the financing agreement,” citing county financial documents that acknowledge it “has agreed to appropriate the annual debt service payment.”
“These are Platte County’s own admissions. County officials were representing to the world via their annual budgets and reports that Platte County understood it had an obligation to appropriate and pay the Zona Rosa Bonds,” UMB writes. “They made these representations for a decade….now that the county has been asked to pay for the first time, it is trying to escape those admissions and modify the language in the financing agreement. This is improper.”
UMB also noted that the county has reaped financial benefits from the project with over $22 million in sales tax revenue related to sales within Zona Rosa. “Yet, Platte County has never made a payment towards the debt service on the Zona Rosa Bonds,” says the filing.
The Transportation Refunding and Improvement Revenue Bonds were issued in 2007 by the county’s Industrial Development Authority to refinance 2003 debt sold to finance parking at the shopping center development. Under the financing agreement, the Zona Rosa bonds are payable from the 1% sales tax in Zona Rosa.
Under the 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.
The summary judgment proceeding is the latest development in the troubled facility’s history that caught the market’s attention for the preemptive rating strikes taken by S&P Global Ratings and Moody’s Investors Service. The bonds have traded this month at about 54 to 55 cents on the dollar, according to trade data on the Municipal Securities Rulemaking Board’s EMMA website.
S&P stripped the Zona Rosa bonds of their investment grade rating last summer after county commissioners discussed at a public meeting their opposition to making up future shortfalls absent a long-term solution. Moody’s Investors Service quickly followed by cutting the county’s rating to junk. Moody’s rates the county's bonds, but not the authority’s, while S&P rates the authority's bonds, but not the county's.
The bonds mature on Dec. 1, 2032 with an escalating debt service schedule.