Lease appropriation ratings could be at risk if the market sees a contagion effect
“While we expect the vast majority of issuers in Missouri and nationwide to continue appropriating funds for lease payments, a growing trend of non-appropriation, which is tantamount to selective repudiation of debt, would be highly credit negative for all governments that use lease appropriation structures,” wrote Moody’s, which rates the county Ba3with a negative outlook.
The report is the first commentary from the only rating agency that rates Platte County, just north of Kansas City.
Moody’s stripped the once double-A rated county of its investment grade rating last year in response to commissioner discussions that indicated they did not intend to approve the appropriation needed to cover a shortfall in tax revenues generated by the Zona Rosa shopping district to fully cover a Dec. 1 debt service payment.
UMB Bank NA submitted a demand as required under the bond financing agreement to cover a $1 million shortfall in tax revenues and the county then filed a lawsuit in Platte County Circuit Court asking the court to validate its position that it was under legal obligation on the debt.
With the decision pending, the bonds
The court last week granted the county’s request agreeing that its obligations are limited. “There is no promise or requirement in the financing agreement that the county commission must accept the auditor’s proposed budget and appropriate for a potential payment,” Platte County Circuit Court Judge James Van Amburg
While most market participants had questioned the need for such a lawsuit given the legal interpretation that an annual appropriation structure lacks any formal guaranty of repayment, it still sparked debate among investors and analysts over the potential damage it posed to the value of lease or moral obligation bonds that require an annual appropriation.
“The ruling confirms the inherent credit risk of lease appropriation debt. Compared with general obligation or other debt with an explicit contractual pledge, we have long recognized the credit weakness of an issuer's lease obligations, which are subject to annual appropriation,” Moody’s noted.
Moody’s issued a reminder that backs up market sentiment: the most severe consequence for non-appropriation is a rating hit and higher cost of market access.
“Exercising the right of non-appropriation calls into question an issuer's willingness to pay its other debt issued in the capital markets and hurts the credit quality of all of its debt obligations,” Moody’s wrote. “The risk of losing access to the capital markets generally creates a strong incentive for issuers to appropriate and pay debt service even though technically they are not legally obligated to do so.”
Not all lease risk is the same and the Platte County support for a non-essential project like parking attached to the Zona Rosa shopping complex underscores the need to build into any risk assessment a project’s value to a local government and the strength of pledged revenues.
“In the few instances of nonpayment of lease debt by rated issuers, a common theme has been less-than- adequate revenue generation by projects not core to government functions, where the issuer expected the project to be self-supporting,” Moody’s said.
Platte County's non-appropriation was a sudden reversal.
“Notably, the county annually budgeted for the Zona Rosa debt service shortfall appropriation for the entire decade following issuance and listed the debt in its December 31, 2017 financial statements” with the parking garages at the Zona Rosa Retail Project deeded in the county's name to secure the debt, Moody’s said.
Moody’s rates $6.1 billion of local government Missouri debt, nearly 52% of it being backed by an appropriation. Cities and counties — which must have voter approval for GO borrowing — issue the bulk of appropriation structures. The most common structures are traditional lease appropriation structures or special obligation debt.
“The annualized structure of lease appropriation debt opens the door to changing political winds that can make non-appropriation an attractive option for issuers regarding private-purpose projects which suddenly demand the parent government's funding” and “even a long history of appropriations” such as was the case in Platte County “does not mitigate the risk of non-payment,” Moody’s noted.
The bonds most recently traded at 48 cents on the dollar, down from 55 cents on the dollar before the ruling, according to data on the Municipal Securities Rulemaking Board’s EMMA site.
