Muni Credit News Week of September 5, 2017

Joseph Krist





$595,720,000 Motor Vehicle Surcharges Subordinate Revenue Bonds

Moody’s: Baa2

This is the first rating from Moody’s on the subordinate lien for this credit. The bonds are secured by a subordinate lien on motor vehicle surcharges and unsafe driver surcharges, subject to legislative appropriation. After appropriation, the pledged revenues will be transferred monthly to the EDA by the state Treasurer pursuant to state statute and a contract between the two parties.

If you have ever paid a speeding ticket in New Jersey, you have supported this credit. It is, as revenue bonds go, a fairly narrow stream of revenues and as driving decreases is vulnerable to decline. The use of proceeds is not the best. Originally, the program financed loans and grants to governmental, not-for-profit, and private developers to provide permanent housing and community residences for individuals with special needs and mental illness.

Now the program supports state General Fund operations and capital improvements to the Motor Vehicle Administrative Office of the Courts. So capital funds are used for operating expenses. This issue in particular will refund a portion of the Motor Vehicle Surcharge bonds (senior lien) into a new subordinate lien resolution, for estimated net present value savings that the state will take upfront in the first year for budgetary relief.

So the fiscal gimmickry continues under the Christie administration. The credit remains tied to that of the State. So of the risk is mitigated by the structure of the issue which includes a turbo feature on the last five maturities that will likely decrease future debt service and reduce revenue risk, as well as an Advance Account that provides liquidity against a timing mismatch between revenue collection and debt service payments.



Whenever there is a large scale natural disaster, one of the ways that Congress addresses the resulting capital needs of a recovering area is to authorize special municipal bond issuance authority. The issuance is authorized for projects in designated areas and the bonds must usually be issued within designated time limits. We expect that this will be one of the mechanisms employed in the program of relief in the aftermath of Hurricane Harvey, just as was the case with hurricane Katrina and the Liberty Bond program for New York after 9/11. One of the characteristics of these programs is that they often result in some dubious financings.

That factor was revisited recently when it was announced that  the Internal Revenue Service has preliminarily determined that $1.26 billion of economic development revenue bonds as well as refunding bonds issued for Indiana-based Midwest Fertilizer Company are taxable.

Midwest Fertilizer is sponsored by one of the largest conglomerates in Pakistan. The company disclosed on July 27 that the IRS had issued a “Notice of Proposed Issue” stating that the revenue and refunding bonds violate federal tax laws and are therefore not tax-exempt.

One of the first cautionary signs was the fact that the Indiana Finance Authority issued the $1.3 billion of bonds for the project in the latter half of December 2012 to take advantage of the Midwestern Disaster Area Bond program, which expired at the end of 2012. My experience has led me to call the post Thanksgiving period “the silly season” in the high yield market. Deals like this one are one of the reasons.

Away from the size of the deal and the type of project, the deal was plagued by a number of other questionable characteristics. The bonds were issued in late 2012 to build a state-of-the-art, nitrogen fertilizer production plant on 220 acres in the county, which is located in the Southwestern corner of the state. The cost of the plant is now expected to be almost $3 billion, according to a Midwest Fertilizer press release dated July 27 of this year.

While it was offered under a program of disaster relief, it was a new project. As for immediate relief, groundbreaking of the project is now expected in 2018 and the plant is not expected to begin operating until 2022 – some twelve years after the disaster. It is designed to produce about 2 million tons annually of ammonia, urea ammonium nitrate solution and diesel exhaust fluid, a diesel additive that reduces diesel exhaust emissions.

In order to land the project, the Indiana Economic Development Corp. (IEDC) had offered an incentive package accepted by the company on Nov. 30, 2012, that included access to tax-exempt financing through the allocation of a portion of the state’s volume cap under the disaster bond program.

The package included up to $2.9 million of conditional tax credits and up $400,000 training grants based on the company’s job creation estimates. It also offered the company up to $300,000 in conditional incentives from the Hoosier Business Investment tax credit. But the IEDC made clear that the company would have to create jobs and invest in Indiana to receive the incentives. Additionally, Posey County agreed to provide a tax incentive package under which certain tax increment revenues and special assessments would be applied over a 25-year period to repay tax increment and special assessment bonds.

The company told the state it would create more than 2,500 construction jobs and as many as 200 ongoing regulator and contract employment opportunities. It also said U.S. farmers in the state would benefit from its fertilizer product.

While Midwest Fertilizer is a U.S. company it is actually owned by multinational investors, the principal one being Fatima Group, one of the largest conglomerates in Pakistan. The U.S. Defense Department’s Joint-Improvised-Threat Defeat Agency (JIDA) determined that the Fatima Group had been “less than cooperative” in implementing security for its fertilizer products to prevent them from being used in explosive devices deployed against American soldiers in Afghanistan and Pakistan.

Gov. Mike Pence, a day after taking office in January 2013, halted state support of the project and then formally dropped all state involvement in mid-May of that year. Posey County stepped in and offered the company tax increment incentives valued at $144 million and up to $480,000 in employment incentives. In spite of all of the questions about the company’s background, Gov. Pence sought to revive Indiana’s support for the project.

In the meantime, Posey County became the project’s main supporter and refunded or remarketed the bonds six times between July 2013 and November 2015. Over that period, Posey County and the company agreed to a revised tax incentives package. Midwest Fertilizer since executed a purchase of all of the bonds through a mandatory tender.

Unanswered is the question of how anyone thought it was a good idea to use scarce private activity bond capacity and create a revenue loss to the US Treasury to support an entity that could not prove that its products were not used to kill and maim US servicemen. A clear example that the road to hell is paved with good intentions.


Shortly after the Allen brothers chose to establish Houston at the confluence of Buffalo and White Oak Bayous, virtually every structure in the new settlement flooded. After the tremendously destructive floods of 1929 and 1935, on April 23, 1937, after local leaders petitioned the State of Texas, the 45th Texas Legislature unanimously passed the bill that created the Harris County Flood Control District and established the Harris County Commissioners Court as the District’s governing body. The Harris County Flood Control District originally served as the local partner for the U.S. Army Corps of Engineers for flood control projects.

Costly floods were almost an annual event. More homes and businesses were built in improvident locations, prior to establishing the standard of the 1% (100-year) flood. Throughout Harris County, close to 30 damaging floods have occurred in the area, resulting in hundreds of millions of dollars in damages in just under 70 years. Flooding problems continued, with 21 damaging storms from 1950-1980. Since 1986, there have been six “100 year” floods in Harris County. A major flood still occurs somewhere in Harris County about every two years. No area of the country has received more federal disaster aid over the years as the result of floods than the greater Houston metropolitan area. More flood insurance funds have been paid here than in any other National Flood Insurance Program-participating community.

Many have said that going forward the topic of Houston’s lack of zoning regulations is effectively off limits for debate. It is fair to say that four and a half feet of water was going to be catastrophic in any event. At the same time, it is not wrong to say as Governor Greg Abbott did that “it would be insane for us to rebuild on property that has been flooded multiple times. I think everyone is probably in agreement that there are better strategies that need to be employed.” Unfortunately, we have heard such talk before but the sentiment usually fades with time.


Initially, there is no expectation that ratings will be impacted. Damage needs to be assessed, resources identified, and a timetable for repair and relief established. Experience tells us that the rating agencies will let all of this unfold before taking any action. The potential exists for short-term defaults due to administrative issues but these are usually resolved quickly as banking and municipal facilities are reopened and records recovered. This is more likely to be true for smaller municipalities where records are less likely to be electronically compiled and maintained and where staffing is minimal even during normal operations.

For the larger entities, any impact will be longer term. The State has indicated that it will rely on its estimated $10 billion rainy day fund until outside resources are delivered. The State Legislature is not scheduled to convene again until January, 2019 but the Governor is able to call it back into a 30 day special session if necessary.


The Cleveland Cavaliers will reconsider the decision to pull out of a $140 million deal to renovate Quicken Loans Arena now that referendum petitions have been withdrawn. A faith based coalition has announced that it was withdrawing petitions for a voter referendum on financial support for the renovation of the 22 year old facility. The group was holding the deal hostage for more County investment in mental health facilities. Like many areas, cuts in such funding have made prisons the primary place for the severely mentally ill to be housed.


The Cavaliers’ owner, Dan Gilbert, had announced that he would not go ahead with the project (the same Dan Gilbert who has invested so heavily in downtown Detroit) if a referendum was required. A delay in the renovation was connected to the potential loss of an NBA All Star game and the project was seen as a source of jobs. It was claimed that no new tax revenues would have been needed for the project.


The initial plan for the makeover of the 22-year-old arena was to be financed jointly by the Cavs, the city of Cleveland and the county. The deal included a lease extension that would ensure the Cavaliers will remain at the arena through 2034, a seven-year extension of the existing lease. Interest on two, $70 million bond issues would bring the cost over 17 years to $282 million. The Cavaliers would pay $122 million of that in increased rent, while the city and county would cover the remaining $160 million.

The arena is publicly owned, by the city and county through the Gateway Economic Development Corp. The county would issue bonds that would be repaid by available funds from existing local admissions and hotel taxes, and from increased rent payments from the Cavs. The city is involved because part of the financing for the renovation will come from a city admissions tax.

As we go to press, Puerto Rico and the Virgin Islands are being impacted by Hurricane Irma. experience tells us that damage will be significant and that both entities will be even more reliant on federal aid given their very weak financial positions. The storm will add to the already high burden of negative credit factors facing them. The potential exists for the storm to be a final crippling blow to efforts to keep the Virgin Islands effectively solvent. It highlights the lack of viable alternatives for investors looking for the benefit of triple tax exempt income in the face of Puerto Rico’s ongoing fiscal crisis. We expect to have much clearer information in next week’s edition.


Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.


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