CHICAGO – Following a payment default, Standard & Poor’s dropped its rating Tuesday to D on $25 million of lease-backed revenue debt issued in 2010 by Vadnais Heights, Minn. to finance a sports complex for which it later cut financial support.
Trustee U.S. Bank NA reported earlier this month that it made the full interest payment due Feb. 1 of $581,826 on three parity series of bonds totaling $25 million from funds on deposit. The project failed to generate sufficient revenues to cover the full principal payment owed on the bonds or to cover interest due on $2 million of unrated subordinated D bonds.
Previously, events of default had been triggered but the Feb. 1 principal default marked the first payment default.
The city of Vadnais Heights last year decided to cancel its lease and halt financial support for the struggling Vadnais Sports Complex. The lease supported repayment of the debt. The city has argued that it’s simply exercising its legal rights under the lease agreement and it couldn’t afford to continue subsidizing the facility.
Moody’s Investors Service and Standard & Poor’s punished the city by cutting its rating -- once in the double-A category -- to junk.
Standard & Poor’s on Tuesday responded to the payment default by lowering the rating on the A, B, and C revenue bonds issued by the Vadnais Heights Economic Development Authority to D from CC. The city of 12,000 is located outside St. Paul.
“The lowered rating reflects the city’s principal payment default of $455,000 on Feb. 1, 2013,” said analyst Caroline West. “The city of Vadnais Heights decided to not appropriate funds for its lease revenue bonds beginning in fiscal 2013, and we do not believe the city has any intention to appropriate funds in the future to pay debt service on the bonds.”
The facility has struggled to generate sufficient revenues needed to cover debt service since its opening. In 2011, the facility generated $300,000 towards $1.6 million of annual debt service.
The bonds mature in 2041.
The trustee notice also reported that the city has hired a new management company, Rink Management Services Corp., to run the facility. It’s the largest operator of skating facilities in the country.
The city provided $500,000 to fully cover an August debt service payment. Under its master lease agreement, Vadnais Heights is able to decide annually whether to cancel the lease, but rating agencies quickly punished it for acting on that option in a vote last summer.
S&P late lowered the city’s GO rating to B and it lowered the revenue bonds to CC with a negative outlook. Moody’s knocked its rating on $1.8 million of the city’s $10.6 million of GOs down to Ba1 with a stable outlook. The agency does not rate the lease bonds.
The complex transaction in April 2010 differed from most lease-backed deals in the state, according to a bond lawyer familiar with state lease financing laws. The city agreed in 2010 to a conduit-like financing in which the Vadnais Heights EDA issued the taxable and tax-exempt bonds on behalf of a nonprofit, CFP Vadnais Heights LLC.
The proceeds were used to acquire 10 acres of land and build the center, a 100,000-square-foot domed multi-sport facility with a two-rink ice arena. The city served as the tenant, leasing the facility for a rental payment equal to the its annual operating budget, which includes debt-service costs. The project also included three commercial lots that were eventually to be sold.
City officials were promised at the time by the developer that the facility would generate enough revenues to repay the bonds. Loan payments by the company to the EDA secure the bonds. The trustee also holds a first-mortgage lien on the project and has a claim to the three commercial lots. Bondholders could eventually foreclose on the facility, try to lease it, or pursue litigation challenging the city’s decision, lawyers said previously.
The trustee and CFP Vadnais Heights LLC are “meeting with interested parties to consider alternative arrangements for the project,” the trustee’s February notice read.