Trustee wants Missouri's high court to reverse appropriation pledge rulings
The trustee for $32 million of defaulted bonds that carry Platte County, Missouri's appropriation pledge will take a final shot at getting the Missouri courts to hold the county responsible for repayment.
UMB Bank NA has failed to persuade courts of its position that the financing agreement tied to the bonds requires the county to make up pledged revenue shortfalls.
Its latest defeat came last week when the appellate court denied a re-hearing request and refused to transfer the case directly to the Missouri Supreme Court.
Now UMB will make that request itself.
“Pursuant to Missouri rules, the bond trustee can file a request to transfer the appeal directly to the Missouri Supreme Court within fifteen 15 days from the date the request to transfer is denied by the Missouri Court of Appeals. The current deadline to do so is October 14,” UMB said in a statement. “The bond trustee intends to file such a request within the requisite time period.”
The appellate court panel on Aug. 25 upheld a lower court decision from May 30 that the county bears no legal obligation to repay tax revenue shortfalls on the appropriation-backed industrial bond issue.
Platte County leaders decided in 2018 not to cover a $765,000 shortage in tax revenue generated by the Zona Rosa shopping center in Kansas City. The county had pledged to appropriate to make up for any such revenues shortfalls to repay a 2007 Platte County Industrial Development Authority issue. The decision cost the county its investment-grade rating.
“At this point, two courts have found that the trustee’s position is without merit. Both opinions are well founded and are based on the plain language of the Financing Agreement," Dane Martin, an attorney representing the county, said in September when the trustee asked the appellate court to reconsider its decision.
The litigation dates to November 2018. The county’s lawyers said they sued in the face of UMB’s demand that the shortfall be covered amid a threats of a lawsuit.
Though the county won't accept legal responsibility to honor the appropriation pledge, the shopping center district continue to generate some revenue pledged to repayment and so bondholders continue to see some payments. The operators have also announced plans to redevelop pieces of the complex.
A debt service payment of $724,750 in interest was paid in full June 1. No principal was due. The payment was made up of funds received from the district, but also a draw of $171,189.10 from the debt service reserve.
While appropriation pledges are subject to an annual decision by the sponsoring government, the trustee unsuccessfully argued the financing agreement supporting the bond issue represented a legally enforceable promise to pay.
Platte County Circuit Court Judge James Van Amburg issued the first ruling in the cast in a May 2019 opinion agreed with Platte County. About $29 million of the transportation refunding and improvement bonds are outstanding.
S&P Global Ratings stripped the Zona Rosa bonds of their investment-grade rating in September 2018 after county commissioners discussed at a public meeting their opposition to making up future shortfalls absent a long-term solution. Moody’s Investors Service cut the county’s rating — then at Aa2 — to junk in response to the comments. Moody’s rates the county Ba3 with a negative outlook.
The financing agreement that outlined repayment of the bonds issued in 2007 to refund 2003 debt sold to finance parking facilities at the Zona Rosa retail complex required the county to submit in its annual budget a debt service appropriation. The county warned it could not afford the expense, which could reach $40 million when the bonds mature in 2032. The bonds are not secured by a deed or mortgage and remedies.
The shopping center’s struggles underscore the attention that must be paid to a project’s financial prospects and investors need to understand the legal limits of pledges.
“The dispute gives us an opportunity to reinforce our long held belief that investors who rely on legal provisions over and above economic fundamentals are making a serious mistake,” Joseph Krist, publisher of Muni Credit News, wrote in a recent column. “If a project is not economically viable on its own, legal provisions can only help so much. They guaranty a place on line at bankruptcy court and not much else.”
“As always, it is up to the investor to do their due diligence and to understand exactly what the legal provisions are and to understand what they do and what they do not do,” Krist added.
The bonds in September were trading at 37 cents on the dollar.