February 9, 2014
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Fiscal Stress & Sustainability. Moody’s has downgraded the general obligation limited tax (GOLT) debt of Wayne County, Michigan, which includes the formerly bankrupt city of Detroit, by three notches to junk, citing a “very stressed financial position,” citing the county’s steady loss of revenue, from Ba3 from Baa3, noting: “We expect the county’s current liquidity position will remain sufficient to meet all obligations in the coming year, but will continue to degrade absent significant operating adjustments, the implementation of which could be challenging,” The rating agency’s negative outlook on the country’s GOLT debt reflects its expectation that the county now confronts significant fiscal challenges—with a crisis point coming as early as August. Wayne County has been running a general fund deficit of about $50 million annually during its last three years—a deficit driven, according to the agency, by a combination of declining property tax revenue, an unsustainable defined-benefit pension plan, healthcare inflation, and budget overruns in the sheriff and prosecutors’ offices.
Won’t You Be My Neighbor? U.S. District Judge Sean Cox will oversee the talks about the Great Lakes Water Authority, which was created during Detroit’s historic municipal bankruptcy. In a judicial order last Friday, U.S. Bankruptcy Judge Steven Rhodes indicated the discussions will focus on lease negotiations and other agreements: “Judge Cox has apprised this court that, in connection with his mediation efforts, he will be conducting one or more mediation sessions with members of a working group tasked with negotiating a lease and related agreements between the Great Lakes Water Authority and the city of Detroit.” The federal mediation appears to be in the wake of complaints from county executives that Detroit’s financial information did not appear to be real. Oakland County Executive L. Brooks Patterson complained there were no guarantees that Detroit could afford to operate the regional water authority. The Great Lakes Water Authority has the Detroit Water and Sewerage Department providing maintenance and service in the city and the authority handling responsibilities for about 3 million suburban customers. Under the agreement, Detroit will retain ownership of the area’s water and sewage system, but the suburbs agreed to a 40-year, $50 million annual lease that gives them a greater stake in operations.
Betting on a City’s Future. When the Atlantic City Council last week voted to repay its outstanding notes by issuing some $12 million in bond anticipation notes, Moody’s warned the city’s ability to refinance its maturing $12.8 million bond anticipation notes through an expensive short-term loan demonstrated the city’s “limited market access.” The repayment came, as we have previously noted, at an interest rate of 5%―and $800,000 in cash, following in the turbulent wake of a cancelled $140 million bond sale in December and Chris Christie’s appointment of an emergency manager in late January to oversee the city’s troubled finances—an action which has not just disrupted the city’s governance—leaving fundamentally unclear just who is in charge, but also created a contagion of rising interest rates for cities across the state—in addition to triggering a six-notch downgrade by Moody’s due to the possibility of debt adjustments. In their report last week, Moody analysts Josellyn Yousef, David Strungis, Julie Beglin and Naomi Richman wrote: “The refinancing was the city’s first test of market access after the appointment of an emergency manager in late January, and its first attempt to enter the capital markets after canceling a December 2014 bond sale of $140 million.” But when that $140 million bond sale was cancelled, Atlantic City instead received a $40 million loan from the state—a loan which is due at the end of the month, and carries a 0.75% interest rate. The dynamic Moody’s trio also noted that the city settled on a $31.5 million delinquent property tax payment from the shuttered Revel casino with its primary lender Wells Fargo & Co. Had the city been unable to successfully refinance the maturing notes, it would have stressed Atlantic City’s liquidity—even as the city’s fiscal stability is under pressure from eroding property tax revenues and the risk of additional property tax delinquencies. And the city leaders, caught in their own Jekyll and Hyde uncertainty whether the state or its own elected officials are in charge, now has until Sunday to meet its next debt service payment of roughly $3.35 million—with then another deadline, March 31st, for repayment of its $40 million state loan. The Moody trio notes: “By that date, we will have more clarity on the emergency manager’s plan and whether it includes a recommendation for a bankruptcy filing and/or adjustment of the city’s debts.”
Rolling the Dice. The complex uncertainties for Atlantic City’s elected leaders were, if anything, further shaken and stirred late Friday in the wake a federal appeals panel ruling in favor of a major tenant at Revel Casino-Hotel—a decision which further muddied the Atlantic waters of the shuttered megaresort just days before it is supposed to be sold—and, potentially, but pack on the city’s tax rolls. However, the U.S. Third Circuit Court of Appeals overturned a lower-court decision which had stripped the tenant of its rights and cleared Revel’s sale to Florida real estate developer Glenn Straub for $95.4 million—with Mr. Straub scheduled to close the deal today. The decision permits the deal to go forward, but appears to mandate that Mr. Straub must deal with the owner of the HQ nightclub which once operated inside the casino hotel, according to the casino’s attorney, who noted: “Whether the nightclub operator can remain in possession will have to be decided later if [Mr.] Straub purchases the property.” Under the challenged decision by a federal bankruptcy judge, the owner had been given the right to force out the nightclub as well as other tenants, so he could complete Revel’s purchase “free and clear” of any leases. Now, however, the appeals ruling preserves the tenant’s rights as a tenant and puts it in position to negotiate with Mr. Straub over its demands. What the appeals decision will mean to Mr. Straub’s plans to add a $108 million water park that would be the largest of its kind in the world and to start high-speed ferry service between Atlantic City and Manhattan would now seem to be a roll of the die—as, in its arguments last Friday, his attorney had urged the appeals panel not to delay the sale, warning of the possibility that the entire deal could collapse if it does not go through by today—a refusal he warned could “end up with a disastrous situation.” Revel’s lawyers had previously warned the casino could be forced to liquidate if the sale is not finalized by today, but the decision now sends the dispute back to U.S. District Court. During oral arguments, the appeals panel suggested Revel’s sale is part of a broader “public policy issue” to help revitalize the Atlantic City economy. Facing intense competition from casinos in neighboring states, Atlantic City’s gambling industry has seen its annual revenue cut nearly in half from its 2006 peak of $5.2 billion.
Could Harrisburg’s Recovery Go Up in Smoke? A key step in Harrisburg’s escape from filing for municipal bankruptcy was the capitol city’s sale of its former incinerator; but now, it seems, another city-owned piece of infrastructure—here a 12-story downtown office building—which the city purchased with debt 17 years’ ago has become a new symbol of a deal gone sour. Therefore, even though, according to Mayor Eric Papenfuse, Harrisburg’s short-term financial situation is relatively strong (The city had a cash balance of nearly $5 million as of December.) the city’s twin, long-term debt financing arrangements are threatening its fiscal future. The combination of the two infrastructure deals is creating a grave, potential risk: as The Harrisburg Strong recovery plan, which the Commonwealth Court approved in 2013, included the leasing of 200,000 square feet at the tower in addition to the headline components – the sale of the incinerator and a long-term parking lease. The settlement will provide a state tenant to replace Verizon and is expected to reduce the city’s total debt service to about $18 million, with the first payment of $500,000 due in 2017. However, it also saddles Harrisburg with $7.4 million of payments due in 2033. Moody’s noted the discordant fiscal problem: “[It] leaves unclear how the city will meet two large balloon maturities in the final year of the bonds, raising the possibility of a re-default and a potential loss to creditors in 2033.” City Council approved a deal late last month intended to bring 900 state Department of Health and Welfare employees into the Verizon Tower at Strawberry Square and help the city avoid being stuck with tens of millions of dollars in new debt. The deal was struck as the building has been all but vacant—meaning the city was confronting mounting debts on it with the prospect of not only no rent coming in—but, obviously not only no property taxes, but also the risk of reducing neighboring assessed property values. Absent the agreement, Harrisburg would have been facing a $2 million a year bill. The Verizon building, which had been the subject of a $6.9 million borrowing in 1998, a borrowing that put the city’s debt service at some $42 million, was, at least according to Mark Schwartz, a Bryn Mawr, Pa., attorney who represented the Harrisburg City Council in its 2011 attempt to put the city in bankruptcy, an “ass backwards,” because it offered the Commonwealth of Pennsylvania use of the building for its employees, but left the city was on the hook for the bonds. Then, on January 30th, notwithstanding his own apprehensions, Mayor Eric Papenfuse, signed off on an elaborate restructuring settlement involving the state and bond insurer Assured Guaranty Municipal Corp. for debt related to the building. There will be a temporary fiscal lull: payment on the back-loaded bonds is not due to commence until next year. Nevertheless, the Mayor’s apprehensions are the mismatch between the state lease payments and the interest payments due to pay off the 1998 bonds—leaving an angry and apprehensive Mayor who notes: “Harrisburg is still trying to come to terms with the reckless and in my opinion criminal actions of the Reed administration,” referring to his predecessor, former Mayor Stephen Reed, who served as Harrisburg’s Mayor from 1982 to 2010, and was in command at city hall for both the Verizon Tower bonds and the incinerator fiscal fiascos. Now Mayor Papenfuse has requested Pennsylvania State Attorney General Kathleen Kane to investigate the 1998 Verizon deal—which would be in addition to her current investigation of the city’s former incinerator financings. Nevertheless, the capital deals are aggravating the city’s fiscal condition, or, as the Mayor puts it: “It a very bitter pill to have to pay back what we owe for what originally was $6 million to plug a budget hole…We will pay the Verizon debt. The problem is, I can’t give the police force as much as I would like or finance infrastructure needs as much as I would like.” Moody’s describes it slightly differently: “The structure of the ill-fated bonds was risky,” meaning, according to the rating agency, the bonds were not structured to withstand a Verizon pullout. Thus, when the state stepped in a year ago with a partial solution, the lease of office space at the building, that had promised help; however, the rent was insufficient to cover the municipality’s entire debt service obligation. Mayor Papenfuse has added that the city was in a box: state officials threatened the city with the loss of $5 million per year in funding had he not signed the agreement.
Puerto Rico: Between Municipal Bankruptcy & a Hard Place. U.S. District Judge Francisco A. Besosa has determined that U.S. bankruptcy law and the U.S. Constitution trump Puerto Rico legislation enacted to provide for corporate restructuring, in effect agreeing with municipal bond investors’ arguments that the territory’s new law would take away protections provided under the federal bankruptcy code, and that it is in “irreconcilable conflict” with the federal law, with Judge Besosa writing: “The court has no reason to doubt that the commonwealth enacted the recovery act to address Puerto Rico’s current state of fiscal emergency…But even when acting to serve an important government purpose, the commonwealth can impair contractual relationships only through reasonable and necessary measures.” The law would have allowed public utilities such as the power authority, or Prepa, to negotiate with bondholders to reduce debt loads, potentially forcing investors to accept unfavorable terms, according to the complaint. The now federally preempted law would have forced investors in some public corporations to accept unfavorable restructuring terms: it would have allowed public utilities such as the island’s public power authority, or Prepa, to negotiate with bondholders to reduce their debt loads, potentially forcing investors to accept unfavorable terms, according to the funds’ complaint. Indeed, opponents of the law had claimed that the territory had sought to create a process similar to federal bankruptcy protection, but that doing so was beyond its legal and constitutional authority. Without, however, authority to file for municipal bankruptcy protection—because the territory is neither a municipality authorized to do so by a state, nor a state; Puerto Rico had fallen into a legal and constitutional twilight zone. Municipal bondholder celebrations might be short-lived—as the question of how the island’s public power authority, which used its capital budget to buy fuel within the past year, but which has some $8.6 billion of municipal bonds outstanding, of which about 70 percent are not covered by bond insurance, will be met. Puerto Rico Resident Commissioner Pedro Pierluisi, the territory’s representative in Congress, said in a statement that “[I]it is more clear than ever” that Puerto Rico should be included in the bankruptcy code. He said he intends to reintroduce a bill to that effect, noting: “This would empower the Puerto Rico government to authorize an insolvent government-owned corporation to adjust its debts in federally supervised proceedings, just as every U.S. state is empowered to do.”