Joseph Krist

Publisher

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ISSUE OF THE WEEK

THE INDUSTRIAL DEVELOPMENT AUTHORITY OF THE

CITY OF MARYLAND HEIGHTS, MISSOURI

$50,250,000

Revenue Bonds

$5,400,000*

Subordinate Revenue Bonds

(Saint Louis Community Ice Center Project)

Ice skating facilities have a relatively poor credit history in the municipal bond market. Regardless of the involvement of a variety of public and private entities, many bond financed facilities have failed to reach projected levels of demand. This has produced a number of defaults which have troubled municipalities and challenged them to provide financing through either initial funding agreements or restructurings.

In spite of this checkered history for these projects, the City of Maryland Heights, MO is undertaking the financing of a new ice facility in the City through the issuance of bonds. The non-rated bonds are intended to be repaid from operating revenues and a pledge of sales tax dollars generated by economic activity in a Community Improvement District.

A variety of private interests are supporting the project including a hotel casino located within the boundaries of the community improvement district as well as the St. Louis Blues NHL hockey franchise. The Blues are a popular team which has enjoyed strong fan support and the community is considered to be a major source of junior hockey participation and interest. a number of current NHL players were initially developed through local St. Louis youth hockey programs.

This proposed deal will be secured by proceeds of a 1% sales tax collected within the District beginning January 1, 2019. Risks to the transaction include construction risk in addition to operating risk and dependence upon economically sensitive sales tax revenues. A mortgage on the facility will be offered to secure the debt.

Nonetheless, many unsuccessful facilities have offered similar profiles – the support of a local professional team and strong interest in youth hockey. This deal does attempt to address many of these historic hurdles to successful ice projects. It will employ a professional manager which does e have experience in the local market, sponsorship agreements providing revenues, and provisions for events unrelated to hockey including concerts.

In any event, the bonds are planned to be sold only to “qualified investors” but that does not prevent them from being placed into high yield bond funds which means that individuals will wind up having these bonds securing their investments. Caveat emptor!

 

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VIRGIN ISLANDS

The US Virgin Islands will move forward with the reopening of the former Hess/HOVENSA owned oil refinery now that the Legislature has approved an agreement last week with ArcLight Capital Partners’ Limetree Bay to operate the facility. The refinery had historically been an important revenue source for the USVI government as well as the source of some 1200 jobs on the island of St. Croix. In the wake of Hurricane Maria, a way to recreate many of those jobs was an important part of the post-Maria recovery plan.

The plan as approved by the Legislature was not all that had been hoped for by the Governor of the USVI. He had wanted revenue received by the government from the project to be dedicated to the USVI’s significantly underfunded public employee pension plan. The pension plan in the 2017 fiscal year had about $4.7 billion less than it needs to cover all the benefits that have been promised, according to the Government Employees’ Retirement System, and is projected to run out of money as soon as 2023. The Legislature did not include the revenue dedication in its approval.

The appropriation of the funds will be determined through negotiations between the Governor and the Legislature. ArcLight Capital will make a $70 million payment to the Virgin Islands government upon finalization and implementation of the agreement. It will continue to make annual payments ranging from $14 million to $70 million, based on the performance of the refinery.

The deal is positive for the USVI credit in that it will provide increased revenue as well as replacement of an estimated 700 of the jobs lost to the economy when the refinery closed.

AURORA ADVOCATE HEALTH SYSTEM

Whenever two health systems merge, there is always ratings risk associated with the endeavor. In April, Aurora Health merged with Advocate Health to create a new substantial regional health provider serving portions of Illinois and Wisconsin. AAH now provides a continuum of care through its 25 acute care hospitals, an integrated children’s hospital and a psychiatric hospital, which in total have 6,563 licensed beds, primary and specialty physician services, outpatient centers, physician office buildings, pharmacies, behavioral health care, rehabilitation, home health and hospice care in northern and central Illinois, eastern Wisconsin and the upper peninsula of Michigan.

The merger impacted the ratings of the outstanding debt of both entities. For those who own debt from Advocate, the impact was negative. Debt formerly rated Aa2 will now be rated Aa3. Debt from Aurora was upgraded from A2 to Aa3. The rating incorporates challenges including integration risk, especially as it relates to realignment of management and governance, fierce competition in rapidly consolidating markets and noted revenue slowdowns attributable to pricing pressure and unfavorable payer mix shifts, particularly in the Illinois region.

The rating also is based on the size and scale Advocate Aurora will have as a market leader over a large geographic service area, potential to capitalize on synergies related to core infrastructure, purchasing and materials management, a strong liquidity position as measured against expenses and financial leverage, both legacy organization’s demonstrated history of successful operations and absorption of growth, and anticipated savings that will be achieved from the debt refinancing.

Security will be a general, unsecured obligation of the obligated group. There is no additional indebtedness tests. The members of the obligated group under the Master Indenture will be: Advocate Aurora Health, Inc., Advocate Health Care Network,  North Side Health Network, Advocate Condell Medical Center, Aurora Health Care, Inc., Aurora Health Care Metro, Inc., Aurora Health Care Southern Lakes, Inc., Aurora Health Care Central, Inc. d/b/a Aurora Sheboygan Memorial Medical Center, Aurora Medical Center of Washington County, Inc., Aurora Health Care North, Inc. d/b/a Aurora Medical Center Manitowoc County, Aurora Medical Center of Oshkosh, Inc., Aurora Medical Group, Inc., Aurora Medical Center Grafton LLC.

LOW INCOME TOLL RELIEF IN VIRGINIA

The area around the cities of Norfolk and Portsmouth are best known as the locations for major US Navy facilities. While these facilities provide a significant economic base, not all of the region’s residents benefit. The two cities have poverty rates that hover around 20 percent, above the national rate and well above the average in Virginia. Nearly half of the residents in both cities spend at least 30 percent of their income on housing costs. So an agreement to have a private operator run two tunnels between the two cities – an agreement that allows the private operator to levy tolls for use of the tunnels has been viewed as an economic hardship for some who travel  between the two cities.

Some 115,000 cars that cross the river between the two cities each day through the either the Downtown or Midtown tunnel. Tolls were put into place in early 2014 under an agreement between Elizabeth River Crossings and the Virginia Department of Transportation that also involves repairs and additions to the tunnels. Each car that passes through either tunnel pays at least $1.73 – up to $5.53 during peak hours without E-Z Pass – each way.

A recent study found that tolls accounted for a 13% decline in annual traffic volume through the two tunnels between 2013, the last year before the tolls were implemented, and 2016. It estimates that the tolls deterred $8.8 million of taxable sales from Portsmouth in 2017, which amounts to nearly $500,000 in lost tax revenue for the city.

Recently, former Governor Terry McAuliffe  brokered an agreement between state government and Elizabeth River Crossings, the private company that manages the tunnels. Through the Virginia Toll Relief Program developed by the Virginia Department of Transportation, Elizabeth River Crossings pledged $5 million in toll rebates to low-income individuals over a span of 10 years.

Eligible individuals must reside in Norfolk or Portsmouth, earn no more than $30,000 each year and cross through the Elizabeth River tunnels at least eight times per month. Using an EZ Pass, a 75-cent credit per trip – between a 13.6 and 43.4 percent discount that adds up to about $30 per month – is refunded to the accounts of enrolled participants after each eighth trip.

2,100 people enrolled in the program in its inaugural year. That increased to just over 3,000 in year two, with two-thirds of enrollees residing in Portsmouth and one-third in Norfolk. For P3 projects to gain acceptance where they involve formerly free facilities, innovative programs to address the concerns of less well off users will likely grow in importance. They are emerging at the same time that discount programs for low income users of public transport systems are growing in major municipalities across the country.

CHICAGOLAND RATING UPGRADE

S&P Global Ratings raised its rating to ‘B+’ from ‘B’ on the Chicago Board of Education’s outstanding unlimited-tax general obligation (GO) bonds. The outlook is stable. S&P cited “the board adopting a balanced budget for fiscal 2019 when accounting for management’s articulated plan to close a small $59 million initial gap and the state adopting a fiscal 2019 budget that includes the promised higher state aid revenue as a result of Illinois’ new evidence-based funding formula (EBF), along with estimates for fiscal 2018 indicating an operating surplus and a resulting positive fund balance.”

Other positive factors include Continued evidence that the board has improved its cash and fund balance position (by an estimated $575 million), reduced reliance on lines of credit (by $455 million), and  notable wins for the board in 2017 from the state now picking up more of the employer pension contribution and the board’s authority to extend a higher property tax levy to support that contribution.

The outlook was raised to positive in April of this year. At that time, S&P said the rating could be raised by one notch after further evidence of increased state funding for fiscal 2018, fiscal 2018 estimates showing a surplus result and a positive fund balance, the board adopting a balanced fiscal 2019 budget, the state adopting a fiscal 2019 budget that included full EBF funding, and the cash flow continuing to show improvement in line with or better than projections—all of which have occurred.  a higher rating is precluded at this time given increased operational costs (over 9% increase from fiscal 2018 projections, a 5% increase from the fiscal 2018 amended budget) spending and the affordability of capital spending in fiscal 2019 and beyond, special education spending pressures, and unresolved sexual harassment scandals and lawsuits.

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