Platte County rating changes show paradox of appropriation debt - Analyst Snapshot

30 October 2018
 
 
Platte County, Missouri was in the news last month after Moody’s Investors Service imposed multiple-notch rating downgrades on various bond issues of the county and the Platte County Industrial Development Authority (IDA).

The downgrades occurred on 14 September after county officials indicated that they might choose to not appropriate monies needed for an IDA debt service payment due 1 December. Moody’s does not rate the bonds in question, which are payable from annual county appropriations. But the downgrades informed the market of how seriously it considers a borrower’s unwillingness to pay debt service on publicly issued bonds. Moody’s rating actions are summarized in the table below.

S&P Global Ratings rated the IDA bonds AA- when they were sold in September 2007. Earlier this year S&P lowered the bonds to A before its own superdowngrade to B- on 7 September. S&P’s rating actions are also indicated below.

Regardless of what one thinks of the rating agencies’ actions, Platte County presiding commissioner Ron Schieber was spot-on in his own analysis when he told Debtwire Municipals “We believe this is a message to the market, it’s not just about us”. The commissioner, who has a background in finance, also said “Moody’s and S&P and any other ratings agencies have taken these appropriation pledges for granted for many years”, another statement which is difficult to disagree with.

In the last 10 years, the municipal market has seen several of its previously held assumptions invalidated. One such assumption was how general obligation bonds would be treated during bankruptcy, and another is the ruling in Puerto Rico’s Title III court that challenged investor protections related to special revenues.

Analyst takeaway

Sentiments such as those expressed by Platte County’s presiding commissioner raise again the question of whether annual appropriation bonds will continue to be paid by borrowers. To date, most failures to appropriate for these types of bonds have been due to unsuccessful economic development projects.

This is the case with Platte County. Sales taxes from a retail and residential development, Zona Rosa, are the intended source of bond payment. Zona Rosa was built in two phases of roughly the same size, and as of January 2018 only 59% of available space in the newer phase of the project was leased.

The paradox of annual appropriation bonds is that they are rated as if they were second lien general obligation (GO) bonds, but they aren’t. Anyone who has read official statements for both GO and annual appropriation bond issues can tell you that security features for each type of bond are not comparable. With the latter, it’s always clear in the offering statement that the borrower is not legally required to annually appropriate monies for debt service.

Yet when a borrower threatens to not provide monies for an annual appropriation bond, the rating agencies spring into action as if a default on GO bonds was imminent. This strategy has helped preserve the market for annual appropriation bonds, but at some point, one or more issuers may decide that their interests outweigh those of the market. A tipping point could be when rating agency condemnations won’t deter borrowers from acting in concert with their legal right to not appropriate.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
By Greg Clark