CHICAGO — The dispute over a Missouri county’s obligation to cover debt service shortfalls on bonds issued for a struggling retail complex may be headed to mediation.
UMB Bank, the trustee for $32 million of bonds supported by Platte County’s appropriation pledge, told investors on a recent call that it “had proposed in writing to the county a mediation with all appropriate constituencies to attempt to resolve the lawsuit,” according to a Dec. 21 notice posted on the Municipal Securities Rulemaking Board’s EMMA website.
The bonds issued by the county’s Industrial Development Authority fell into default after UMB withheld the Dec. 1 principal payment while dipping into reserves for interest after a judge refused to order the county to cover a shortfall in pledged revenues on bonds issued to support construction of the struggling Zona Rosa shopping center.
“If enough of the interested parties are willing to come to the table the county is open to discussions including mediation. We have communicated that to the trustee,” Todd Graves, a partner with Graves Garrett LLC, which represents the county, said Thursday in an email.
The 2007 bond issue refunded debt sold by the authority to pay for parking facilities to aid in the development of the suburban Kansas City complex.
The project has struggled with high vacancy rates for several years. The developer then defaulted on its contributions that go to cover debt service. New owners took over the complex this year.
A discussion among county board members at a summer meeting raised questions about their commitment to make up anticipated shortfalls absent a long-term solution, even though the county had appropriated the funds needed for the December payment in its budget. That discussion triggered a first round of downgrades that stripped the bond issue and then the county of investment-grade ratings.
The county then filed a lawsuit in early November in Platte County Circuit Court against UMB and the development authority asking the court to find that “any legal obligation for Platte County to make payments to cover any shortfalls in the amount of principal and interest due on the Zona Rosa Bonds is unconstitutional under the Missouri Constitution.”
The default earlier this month triggered another round of downgrades from S&P Global Ratings, which rates the authority’s bonds, and Moody’s Investors Service, which rates the county.
S&P cut the rating to D. The bonds were originally rated AA-minus and previously cut to A. As the county’s commitment came into question over the summer, S&P cut the rating to B-minus and then CC after the lawsuit was filed.
After the default, Moody’s cut the county’s issuer rating two notches to Ba3 from Ba1 and dropped its neighborhood improvement district bonds to B2 from B1 and its lease appropriation rating to Caa1 from B1. The outlook remains negative.
Moody’s had stripped the county of its high-grade Aa2 issuer rating after the summer discussion about the county’s legal obligation to honor the appropriation pledge.
The latest downgrade “reflects the county’s failure to transfer funds appropriated to fulfill what Moody’s believes to be a contractual obligation, subject to annual appropriation by the county, to make payments sufficient to pay principal and interest on the” bonds, Moody’s said.
The county’s lack of willingness to pay an obligation in the capital markets calls into question its willingness to pay other obligations, according to Moody’s.
“The negative outlook reflects the uncertainty surrounding future payments and the disposition of litigation filed to absolve the county of its obligation to appropriate and transfer certain moneys to the trustee for application to the payment of the bonds,” the rating agency added.
The trustee’s latest notice summarizing the Dec. 19th investor call that discussed only public information also reminded bondholders that an ad hoc committee could be established if they sought one so that non-public information could be shared but that would limit their trading rights. The next court hearing is set for May 24.
The original 2003 debt financed the construction of an 802-space multilevel parking garage, funded capitalized interest, and funded a debt service reserve. The bonds mature on Dec. 1, 2032 with an escalating debt service schedule.
Sales tax collection in the development district averages about $1.5 million a year and the county has estimated that by fiscal 2026 it will need to appropriate $1.5 million in legally available funds, up from $634,000 in fiscal 2018, if tax collections don’t grow. The 421-square-mile county has an estimated population of 94,970.