Investment-grade again seven years after failing to honor bond pledge
CHICAGO – The road back to investment grade territory for a Missouri city that reneged in on its appropriation pledge in 2011 ended this week as S&P Global Ratings boosted Moberly’s rating four notches.
S&P upgraded the city’s issuer credit rating to BBB from BB-minus and raised the city’s 2008 certificates of participation to BBB-minus from B-plus. The rating outlook is positive.
The news represents closure – at least rating-wise – for a project debacle that cost the city its investment grade. After the project’s developer skipped a payment needed for debt service on the $39 million 2010 bond issue, the city chose not to make good on its appropriation pledge.
The bonds were issued to finance an artificial sweetener plant and the city put its backing behind the bonds with the expectation that the developer could make debt payments and the project would spur development.
The plant was never finished and the project soon became tainted by state criminal and federal regulatory sanctions and an investor-driven lawsuit. Creditors forced the company into bankruptcy and the plant's assets were sold off for their benefit.
“It’s been a long road but we are finally back,” said Moberly's finance director, Greg Hodge. The city has no imminent borrowing plans, but “this will definitely help us out when we get to that point.”
The rating agency’s action stems from “Moberly's commitment to support conditional debt obligations, as evidenced by its full and timely payment of debt service on the 2008 COPs as well as its adherence to its debt and economic development due diligence policies," said analyst Eric Harper.
“If the city continues these efforts, which have been improving our view of its willingness to support debt obligations, we could raise the rating, likely by multiple notches, within the outlook period,” he said. “Our view of management remains weak due to the city's 2011 non-appropriation.”
While the restoration of an investment grade will help the city’s future market access, the buyside’s memory may extend further with yield penalties because investors frown upon an issuer’s unwillingness to pay on its obligations.
“It takes time to restore trust of investors and it’s based on continued pattern of a borrower’s pattern of paying on all its promises,” said Richard Ciccarone, president of Merritt Research Services LLC. “The stigma of selective non-payment doesn’t just go away” with the restoration of an investment grade rating, he said.
Moberly’s finance director of 16 years said he understands that investors might have concerns but he stressed that the failed project was a “very unique situation” and the City Council had to “make a tough decision” on how to proceed.
“We are financially stable and have put in place policies so that we would go into any future project with our eyes more wide open,” Hodge said Wednesday.
The city of 14,000 reneged on its appropriation pledge on bonds issued through the Moberly Industrial Development Authority. Mamtek US Inc., which billed itself as a subsidiary of a Chinese firm that makes sucralose, defaulted in August 2011 on a payment to Moberly needed for debt service.
The city then informed trustee UMB Bank that it wouldn't honor its pledge to repay the debt. Mamtek then abandoned the half-built factory. Later court filings revealed the company misused bond proceeds and misled city and state officials about the project's prospects as the company sought local and state subsidies.
The debacle led to the company's involuntary bankruptcy, and numerous investor lawsuits against the finance team, notably the former Morgan Keegan & Co. which underwrote the bonds. It also triggered regulatory and legal actions at the local, state and federal level. The state also came under fire for approving tax credit incentives without conducting sufficient due diligence.
Mamtek’s head, Bruce Cole, was sentenced to prison time for theft and securities fraud.
As the legal actions played out, Moberly adopted new debt management and due diligence policies for future projects with the goal of repairing its credit rating. The policies were designed "to provide guidance for the types of debt issued, the issuance process, and the administration of the debt portfolio," city documents say.
The city also created a new economic development commission under an agreement that requires an independent third party to conduct due diligence on any company proposing to do business in the city in return for a financial incentive or other public assistance.
A series of lawsuits brought by investors against the financial firms involved in the project were settled several years ago.
In 2012, Missouri's attorney general at the time, Chris Koster, filed charges alleging securities fraud and theft against Cole, and the Securities and Exchange Commission filed a civil complaint accusing Cole of scheming to defraud potential investors.
As part of a settlement with Koster's office, Cole was given a seven-year prison sentence. He is scheduled to be paroled June 4.
Morgan Keegan later agreed to pay $850,000 to settle securities fraud charges brought by Missouri's secretary of state at the time, Jason Kander, over the firm's role as underwriter. The complaint charged that the firm failed to adequately investigate the feasibility of Mamtek's business plan, misled investors about investigation findings, and failed to inform them of significant risks of the bonds.
The lawsuit alleged that Morgan Keegan misrepresented to investors that their bonds were secured by valid Mamtek patents, when in reality, Mamtek did not have any patents. Morgan Keegan did not admit any wrongdoing.
The bonds originally carried an A rating from S&P based upon the city's pledge.
The sucralose plant bonds were later lowered to D. In February 2016 S&P raised the city's rating two notches to BB-minus from B and the COP rating to B-plus from B-minus.