BRADENTON, Fla. - Port St. Lucie, Fla., notified bondholders who invested in bonds issued for the failed Digital Domain special effects studio that it plans to call their bonds on Sept. 30.
The 20-year lease revenue bonds issued for the studio, and backed by the city, have pressured the city's budget since the firm's September 2012 bankruptcy.
The bonds will be taken out with 30-year new money bonds expected to price by negotiation Tuesday.
A majority of bondholders consented to a change in the indenture, allowing Port St. Lucie to pay off the debt without first selling the 115,703-square-foot building and property that was vacated by the failed firm, according to Edwin Fry, the city's finance director and treasurer.
About $37 million of the $39.9 million in recovery zone facility bonds sold in 2010 are outstanding, and next week's offering will provide the city budget relief while officials continue to seek a buyer for the vacant building.
The deal, being sold by RBC Capital Markets, is structured as $13.6 million of taxable bonds with an extraordinary call provision, and $19.44 million of tax exempt bonds with the traditional municipal bond structure with 10-year call protection for investors.
First Southwest Co. is the city's financial advisor. Greenberg Traurig PA is bond counsel. GrayRobinson PA is disclosure council.
The new bonds will be backed by the city's public service tax.
Bond proceeds, along with about $3.9 million from a cash-funded debt service reserve, will be used to pay off the 2010 debt.
The taxable component of the deal is being sold with an extraordinary redemption feature so that the bonds can be called when the city sells the building, said Fry.
The city is going without an extraordinary call provision on the tax-exempt portion of the deal because the sale of the building is not expected to provide sufficient funds to call all the bonds, Fry said.
The bonds should therefore appeal to traditional muni investors.
"We decided it was best to pledge our 10% electric utility tax revenue to get rid of the lease-revenue bonds, and reduce our annual payments," said Fry.
A preliminary official statement is expected soon, as are ratings from Moody's Investors Service and Standard & Poor's.
Compared to the original bonds that are being called, the savings are expected to be roughly $5,000 a day over at least the next year due, in part, to the fact that payments are interest-only, Fry said.
The city hopes to reduce payments further when the building is sold, allowing a portion of the bonds to be called.
The city will pay interest only on the bonds for the first four years, with principal payments after that.
Port St. Lucie has paid debt service on the bonds since Digital Domain went bankrupt.
It has tried to sell the building for well over a year, with at least one purchase offer falling through.
In December 2012, the U.S. Bankruptcy Court for the District of Delaware terminated the lease payments that were the primary security for the debt, leaving Port St. Lucie to make good on its moral obligation pledge.
The city lured the company with the sale of bonds, paying for the studio and furnishings.
In return, the California-based company promised it would bring hundreds of high-paying jobs to Port St. Lucie with an average annual salary of $63,000.
"If we sell the building, we'll still have legacy costs," Fry said. "It didn't work out as we hoped, obviously, and there will be an ongoing cost for the city even if we sell the building."
The city is actively marketing the project, and has hired brokers to work on the sale as well.
Information about the building and grounds is posted on the city's website.
Tuesday's offering will give the city "breathing room" to be more deliberate in choosing a buyer, Fry said.
The new bonds being issued to take out the Digital Domain debt are expected to close before the Sept. 30 year end, bringing relief for the fiscal 2015 budget.
However, the city still is supporting payments on two other soured economic development projects for which bonds were issued in 2008.
A downtown development project has required city intervention since a developer stopped paying special assessments supporting bonds. While the property has changed hands, the new owner has not paid the assessments, leaving them up to the city's general fund.
City budget support is also still needed on a biomedical project for which bonds secured by impact fees were sold. When the real estate market was hit by the recession, and new building virtually stopped, so did impact fee collections.
Collectively, the three projects have been identified by city manager Jeff Bremer as "financial threats" impacting the city's fiscal 2015 general fund budget.
"If it weren't for these major financial issues, we'd be in good shape," said city spokesman Ed Cunningham. "Growth is coming back, we have a pretty efficiently run government, and pretty reasonable tax rates."
The city will pay debt service on the economic development bonds it promised to support, and will cut back on expenses or increase the tax rate in order to make good on its promises, he said.
City officials are holding budget hearings this month but preliminarily agreed to increase property taxes to pay for needs, including debt service on the troubled bonds.
Port St. Lucie, one of the fastest-growing cities in the country during the boom years, has an estimated population of 171,016 people now.
Fry said he prefers to call the troubled projects "financial challenges."
"Digital Domain did not work out the way we intended it to," he said. The other troubled projects got under way as the "economy was turning south on us," he said.
The experience means the city most likely would shy away from adding its covenant to budget and appropriate from economic development projects "at this point and time," said Fry.
"Digital Domain didn't work out but somebody else will come into that building," he said. "It's going to be a job engine and it will benefit the city as a whole."
In July, the state of Florida filed a lawsuit charging Digital Domain's former executives and board members, auditors, lenders and underwriters with fraud, conspiracy, negligence, and tortious interference with a grant fund agreement.
Florida hopes to recover state and local investments that were made to lure the digital animation studio to the East Coast. Port St. Lucie is not named in the complaint, but it does mention the city's investment.
According to the suit, Digital Domain was a "de facto Ponzi scheme" - a serial borrower which constantly replaced old debt with new debt to keep the enterprise going until it collapsed.
The complaint says the scheme was perpetuated when Digital Domain obtained a $20 million grant from Florida, and more than $60 million from Port St. Lucie and Palm Beach counties.
The state is seeking a jury trial, damages, attorney's fees and costs.