CHICAGO – A Missouri county board’s intention to cancel a budgeted appropriation needed for an upcoming debt service payment triggered a 10-notch downgrade.
The Platte County board had appropriated in its current budget funds to make up for a shortfall in pledged revenues for the 2007 Zona Rosa Retail project bonds. About $29 million is still outstanding from the original $32 million issue.
But during an August 20 public meeting 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 Global Ratings said.
The county also has consulted with its bond counsel on the “legality of non-appropriation,” S&P added.
S&P slashed the rating on the Platte County Industrial Development Authority bonds for Zona Rosa deep into junk Sept. 7, to B-minus from 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.
If the appropriation is canceled Municipal Market Analytics warned of a widespread credit impact for the county and a potential investor chill across the state for appropriation credits.
“S&P reports that the county is in strong financial and economic condition, but MMA assumes catastrophic downgrades for all Platte County securities should the IDA bonds default,” MMA wrote in its weekly commentary. “Further, MO appropriation bonds generally could see weaker price trends, particularly if market wide yields begin to rise.”
S&P does not rate the county or any other county-supported debt, according to analyst Blake Yocom.
Platte County does carry a Aa2 rating from Moody’s Investors Service. Moody’s last issued a report on the county in November. “The financial position of the county is very healthy and is relatively favorable with respect to the assigned rating of Aa2,” its report said.
While S&P said it’s concerned about the status of the December payment, it has more long-term questions as the bonds don’t mature until 2032. “If they are already contemplating failing to appropriate this year what are they going to do every year?” Yocom said. “The board's long-term commitment is highly questionable after the Aug. 20, 2018, meeting.”
In addition to the deep cut, S&P put the rating on CreditWatch pending confirmation of what action the three-member county commission intends to take on the December payment. Without the appropriation, the bonds would default, so if the rating agency confirms a non-appropriation it would lower the rating to CC which warns of looming default.
“If management corrects course, and proactively displays a commitment to annually appropriate for the series 2007 Zona Rosa bonds through 2032 and makes the 2018 payment, the rating could see marginal, and likely incremental, improvement in the future,” S&P said.
The IDA has issued more than $100 million in bonds for various projects. The authority declined to comment on S&P’s action and referred calls to bond trustee UMB Bank.
The bonds had been trading at full value ahead of the late Friday downgrade but showed no recent trade data.
The 2007 Zona Rosa bonds 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.
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 but pledged revenues covered debt service until last year.
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 and the developer's struggles continue; it is now in default on its mortgage.
Sales tax collection in the development district averages about $1.5 million a year and the county has estimated that by fiscal 2026 it need to appropriate $1.5 million in legally available funds, up from $634,000 in fiscal 2018, if taxes don’t grow.
Debt service on the bonds escalates through maturity.
“That factor, along with mostly flat sales-tax performance in recent years, and a developer that is no longer making contributions as initially intended, further weakens our view of the intended payment source,” S&P said, adding it views the bonds as being a weak commitment for the county as the project is not a basic function or purpose.
S&P cut the Missouri city of Moberly, for reneging on its appropriation pledge in 2011 to support bonds issued for a failed artificial sweetener plant. The city would have struggled to meet the obligation that was later the subject of litigation against the developer and finance team. The city won back its investment grade earlier this year.
The affluent Chicago suburb of Lombard, Illinois also sunk to junk for its unwillingness despite a healthy balance sheet to make good on its appropriation pledge for a struggling hotel conference center debt that later became the subject of a Chapter 11 bankruptcy.
