Interactive Data last reported on the Florida "dirt bond" sector in a series of webcasts held in October 2009 and in February 2010. Here is an update on the sector on several fronts: restructuring trends, material event notice filings, new issuance, and trading activity.
Dirt bonds in Florida are issued by Community Development Districts (CDDs), which are typically formed by a real estate developer to help finance infrastructure supporting housing developments. The bonds are expected to be paid back by special assessments charged to homeowners and/or from proceeds of property sales. Original debt issued between 2000 and 2007 was structured under conditions of strong real estate demand and pricing. Generally, the bond structure anticipated these residential districts would be completely built and sold to end users within 5 to 10 years. In many cases, this build-out did not happen. Subsequently, failure to complete projects led to a number of bond payment defaults, followed in some instances by restructurings of the original debt. The extent of bond payment defaults is much greater than the number of restructurings. An estimated 40% to 45% of the Florida dirt bonds we follow have missed debt payments or drawn on reserves, and only an estimated 10% of these bonds have been restructured.
Debt restructuring occurs when the parties, the district, bondholders, landowners, and other participants to a transaction, agree to replace or reorganize the original debt under new terms in an attempt to improve the prospects of completing the project and being able to service the debt. The most common form of restructuring for dirt bond deals, bifurcation, resembles the "good bank/bad bank" model discussed during the financial crisis. In a bifurcation, the original bond issue is split into two new pieces - one representing the performing assets and the other the non-performing assets.
Conditions that favor a restructuring do not occur often; less than 5% of the districts we follow have had their debt restructured. Important factors in most restructurings include a good location, a large amount of completed infrastructure, the amount of property that has been platted, and the status of environmental and zoning permits. Most attractive locations have good transportation access and amenities. Also, the amount of debt outstanding relative to the size of the development is one of the major determinates in restructuring. While Florida is behind the nation in real estate recovery, strong locations around population centers like Miami and Orlando are seeing a building revival.
Interactive Data estimates there have been roughly 20 restructurings of Florida CDD bonds since 2010. The volume of material event notices filed in May and November has been declining as more defaulted projects get restructured. The table below shows the number of material event notices Interactive Data reviewed over the last two years.
New issuance in Florida has picked up somewhat in 2012. Interactive Data estimates 11 Florida CDD bond issues were sold during 2011. So far this year, 20 have been sold (excluding private placements).
In an analysis of trading activity since May 1, 2012, Interactive Data observed roughly 167 trades of $1 million or greater in this sector. By credit characteristics, we observed 65 trades for Tier I deals (defined below); 40 for Tier II; and 62 for Tier III.
Tier I: Completed projects supported by homeowners, no longer reliant on developer support.
Tier II: Partially completed projects that stalled due to lack of funding, builder/developer defaults, and bankruptcies. Debt service payments made with help of reserve funds (technical defaults).
Tier III: No build out. Payment defaults; bankruptcies.
Jon Barasch is Director, Municipal Evaluations, and Edward Krauss is Senior Credit Analyst, Municipal Credit Group, for Interactive Data Corp. Pricing, evaluations and reference data are provided in the US through Interactive Data Pricing and Reference Data LLC and internationally through Interactive Data (Europe) Ltd. and Interactive Data (Australia) Pty Ltd.