Joseph Krist

Publisher

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ISSUE OF THE WEEK

Water Replenishment District of Southern California Financing Authority, CA

Revenue Bonds

S&P: AA+

Fitch: AA+

The Water Replenishment District of Southern California Financing Authority, CA  has been serving for 60 years replenishing groundwater resources not replenished naturally by purchasing recycled or imported water and, to a lesser extent, through the capture of storm water runoff. Water is injected into the aquifers or spread on the surface to percolate down to the basins. There are 43 cities within the district’s boundaries that are groundwater pumpers, including the cities of Los Angeles and Long Beach.

The district derives the majority (95%) of its annual revenues through a replenishment assessment on each of the users based on their annual extraction.  Assessments saw significant increases over the last decade to address the rising cost of imported water and reduced groundwater pumping from the basins during the drought. In the next several years assessments are expected to continue to increase (5%-6%, annually) to provide for increased annual debt service costs.

In a time of drought and other climate changed events making water more scarce and reducing the reliability of water sources, the District’s role takes on greater importance. The recent updates to the Colorado River compact highlight the need to reduce the amount of water that southern California imports from outside and/or out of state sources. The latest bond issue occurs as the District’s Albert Robles Center  comes on line. The Center will purify approximately 10,000 acre feet (3.25 billion gallons) of tertiary treated (recycled) water annually to near-distilled levels through an advanced water treatment facility. Together, with another 11,000 acre feet (3.6 billion gallons) of recycled water, the District will deliver 21,000 acre feet of water to the San Gabriel Coastal Spreading Grounds where it will percolate into the Central Basin.

The bonds are payable from installment payments made by the district from its system net revenues, including replenishment assessments. The district’s obligation to make installment payments is absolute and unconditional as governed by the installment purchase agreement between district and the authority.

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BET THE INVESTORS WISH THIS WAS TRUE

The latest absurdity out of the White House is the existence of multiple reports that President Trump believes that aid from FEMA and other sources is covering Puerto Rico’s debt service requirements. Axios reports that Trump also told senior officials last month that he would like to claw back some of the federal money Congress has already set aside for Puerto Rico’s disaster recovery, claiming mismanagement.

We do not think that such an effort would be The comments are more likely a future indicator of the Administration’s willingness to ask for or authorize additional aid. The news of the President’s sentiments reinforces the views he expressed in a late October tweet. “The people of Puerto Rico are wonderful but the inept politicians are trying to use the massive and ridiculously high amounts of hurricane/disaster funding to pay off other obligations. The U.S. will NOT bail out long outstanding & unpaid obligations with hurricane relief money!”

The President apparently believes that any positive movement in prices in the secondary market for Puerto Rico debt reflects use of disaster funds for debt repayment. One would think that after the President’s extensive experience with defaulted debt and bankruptcy proceedings, he would have a better understanding of the process.

WHAT IS TRUE

The Puerto Rico legislature has approved a proposed COFINA restructuring agreement which has been submitted to the court overseeing Puerto Rico’s bankruptcy. The agreement, the first to be submitted to the court for approval, reduces COFINA debt overall by 32% and gives senior bondholders 93% of the value of the original bonds and junior bondholders 55%. It also saves Puerto Rico about $17.5 billion in debt service.

The approved bill establishes COFINA’s ownership of a portion of the island’s sales and use tax. It also creates a lien to benefit COFINA bondholders, establishes certain agreements in the name of the commonwealth and allows the sale of certain COFINA bonds held by the Puerto Rico Infrastructure Financing Authority.

A decision in the case is expected to be rendered in January.

BRIGHTLINE BECOMES VIRGIN USA

Richard Branson will become a minority investor but that is enough to cause the All Aboard Florida (AAF) high speed rail project to rebrand itself as Virgin USA. The partnership was announced as AAF faces a yearend deadline to secure tax exempt bond financing for its build out across the state. The company hopes to launch rail service along the Interstate 4 corridor from Tampa to Orlando in 2021 and it expects ridership to take two years to ramp up. Construction for the Tampa-to-Orlando service has an estimated cost of $1.7 billion.

Travel time between the two cities is projected to be an hour — Virgin’s trains will have a top speed of 125 mph — compared with 90 minutes by car and 2 hours and 5 minutes for Amtrak’s Silver Star. Travel time between the two cities is projected to be an hour — Virgin’s trains will have a top speed of 125 mph — compared with 90 minutes by car and 2 hours and 5 minutes for Amtrak’s Silver Star.

The project’s outlook remains cloudy as unaudited financial statements reveal Brightline struggled in the first half of the year, losing $28.2 million in the first quarter of this year and $28.3 million in the second quarter. It is reported that reported in October that Brightline’s passenger volume increased to 106,090 in April, May and June, up from 74,780 during the first three months of the year, but far below projections.

The partnership comes as Brightline’s major investors announced plans to buy the rights to build a high-speed railroad between Southern California and Las Vegas. Service there is to launch in 2022, and eventually could expand into the Los Angeles area, according to Brightline. Brightline says that “Virgin has built a respected and trusted brand in travel and hospitality.”

In Britain, there is no shortage of those who would beg to differ with that characterization. Virgin is one of the entities which took over rail lines when British Rail was privatized. That has produced at best mixed results in spite of promises to invest in equipment and improve operating performance. Virgin Group’s existing high-speed railroad in the United Kingdom, also called Virgin Trains, has had its own financial struggles and faced criticism earlier this year for accepting a government bailout.

Those issues have not received the same level of attention here on this side of the Atlantic. The hope seems to be that the Brightline’s below projection operating results will be boosted by “access to millions of customers with the potential for increased ridership from other Virgin branded travel and hospitality businesses, including Virgin Atlantic, Virgin Hotels and Virgin Voyages.”

LOOKING TO THE COURTS TO LOWER OBLIGATIONS

Platte County, Missouri sold $32 million in bonds in 2007 to provide up-front financing for two public parking garages. The bonds would be paid back over time by sales taxes generated at Zona Rosa. Zona Rosa is an approximately 500,000 square feet, mixed-use development located in Kansas City, Platte County, Missouri. The project opened in 2004 and was expanded by an additional 500,000 square feet in early 2009.

Now in the face of a changing environment in the retail sector, Zona Rosa has not generated enough in sales tax revenue to pay annual debt payments. The County is being looked to as a source of funds to cover the debt service shortfalls. The shortfall on the annual debt payment to bondholders, which is due on Dec. 1, exceeds $1 million.

Now Platte County is taking a fairly aggressive stance in court. The lawsuit asks a judge to declare that Platte County is not legally responsible for shoring up Zona Rosa’s debt, and that it would be unconstitutional for the county to do so. Explicitly, the suit states that “The decision of whether to pay will be made by the Platte County Commission based on the law and the best interests of Platte County taxpayers, not the demands of a Trustee representing investors that accepted the risks of their investments.”

The County has already felt the ratings impact of its position losing its investment grade status in the face of its initial opposition to making payments. Moody’s said in association with its action that “the downgrade of the county’s GOLT rating to Ba1 from Aa2 reflects the county’s lack of willingness to fulfill a contractual obligation to make payments sufficient to pay principal and interest on the Industrial Development Authority of the County of Platte County, Missouri Transportation Refunding and Improvement Revenue Bonds (Zona Rosa Retail Project), Series 2007 (NR), and the amount of any deficiency in the bond reserve fund, if the Trustee has not otherwise received sufficient funds. The county’s lack of willingness to honor its intentions under the financing agreement with the Industrial Development Authority (IDA) represents a lack of willingness to pay on an obligation that supported debt issued in the capital markets.

WHY PEOPLE IN NY ARE UPSET ABOUT THE AMAZON DEAL

Where do we begin? Questions about whether or not Amazon even needs the subsidies to want to be in the center of finance and the center of political power for a start. The same week that the $1.7 billion package of inducements was announced, the MTA announced that it would increase bus and subway fares 4%. Why? A funding shortfall of some $1 billion annually. So let’s see – the Amazon deal increases the mass transit burden facing the city and state. The amount of subsidies would actually cover about 1.7 years of revenue shortfall. So why wouldn’t current residents wonder if the fares could have been maintained?

In theory, Amazon’s 25,000 incoming employees might wonder about things like schools for their children. Well Amazon has pledged to donate space at its new Astoria campus for a school. Not funding for its construction or operation – just space. Likely space to be obtained through eminent domain. Housing? The recent experience in Seattle is instructive regarding its effort to generate funding from the tech industry.

So if you live by the Amazon site say in the nation’s largest public housing project, you might ask: Will this deal generate resources to improve my home or will it continue to be without heat but with lead for the winter? Will my child have a chance to go to a modern school equipped in order to enable my child to get a job across the street at this employment behemoth? Lacking that will my neighborhood have better transportation so that my child and I can get to better educational and employment opportunities?

These are reasonable questions to be asked not a cover for NIMBYism. Especially in light of the really mixed results from many other subsidy schemes. They are questions which should be asked by the neighborhood but also by objective analysts of the plan (muni analysts).

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