Litigation over a Missouri county’s obligation to make up shortfalls in pledged revenues on $32 million of defaulted industrial development authority bonds will continue to play out in 2020.
A state judge in a May 30 ruling agreed with Platte County that it’s not on the hook to cover shortfalls in project revenues to repay the remaining $29 million of debt sold through the county’s industrial development authority for the Zona Rosa Shopping Center project.
The county argued that the pledge provided on the bonds was not a promise to pay, despite the trustee’s assertions that the obligation was part of financing agreements, but a pledge that the auditor could request coverage of a shortfall with the decision resting with the county on an annual basis.
Platte County sued the bond trustee UMB Bank NA in November 2018 to secure a legal determination that it was not legally on the hook to make the appropriation.
The move struck some market participants as unnecessary because such pledges represent a contractual pledge but lack a legal guarantee with the market instead responsible for imposing a penalty through higher cost to access the market and a loss of investment grade status. The county said it took the action, however, because it believed the trustee was preparing a complaint.
UMB filed a notice of appeal in October.
“The trustee expects that the Missouri Court of Appeals for the Western District will conduct an oral argument in the second or third quarter of 2020,” the trustee wrote in a disclosure filing dated Dec. 3.
Indenture defaults are ongoing and the trustee reported that it drew $132,579 from reserves to cover the December interest payment and will not make near-term principal payments.
“At this time, given the continuing uncertainty of payments in the future and sources available for payment including but not limited to TDD [transportation development district] sales tax revenues, letter of credit obligations and appropriations from the county, the Trustee has been advised by counsel and believes it prudent to pay interest only and not make any principal payments,” the December notice said.
After drawing on the reserve fund for the December interest payment, the trustee reported holding a remaining $2.4 million. Spencer Fane LLP’s Scott Goldstein and Kersten Holzhueter represent the trustee.
The county is represented by Todd Graves and Jenifer Donnelli at Graves Garrett LLC.
Recent secondary market trades on the bonds have landed at 47 cents to 48 cents on the dollar.
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 in suburban Kansas City required the county to submit in its annual budget a debt service appropriation.
“There is no promise or requirement in the financing agreement that the county commission must accept the auditor’s proposed budget and appropriate for a potential payment,” Platte County Circuit Court Judge James Van Amburg ruled on the county’s request for a summary judgment. “Under the terms of financing agreement, Platte County is not liable on the bonds issued by the Development Authority.”
The county sued UMB after receiving a demand to make up a $765,000 2018 shortfall in pledged tax revenues, saying it believed the trustee appeared to be moving to take legal action. The county warned it could not afford the expense that could reach $40 million to make good on the bonds that mature in 2032 and to put a legal requirement behind repayment would violate the state constitution.
The decision cast a pall over Missouri appropriation pledges, a popular structure in a state that imposes strict voter approval rules on general obligation borrowing.
The Zona Rosa bonds are repaid with a dedicated 1% sales tax in Zona Rosa, but the revenue doesn’t fully cover debt service. The annual appropriation will continue to be submitted in the budget but in the near-term the county is not expected to cover shortfalls. The first default on the bonds occurred in December 2018.
UMB attorneys had argued that any judgment should fall in its favor based on the contractual language in the financing agreement.
S&P Global Ratings stripped the Zona Rosa bonds of their investment grade rating in September 2018r 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 September 2018 after learning of the commissioners’ comments and after the May ruling Moody’s warned in a special report that lease appropriation ratings could be at risk if the market saw a contagion effect. Moody’s rates the county Ba3 with a negative outlook.
Moody’s rates the county but not the industrial development bonds in question while S&P rates the bonds but not the county.
While the ruling doesn’t remove all the value of an appropriation pledge in Missouri, it does hurt the value because Platte County was the ninth local Missouri appropriation bond to become impaired or default in the last decade, Municipal Market Analytics said after the May ruling.