I purposely wrote a technical piece without offering concerns and interpretations. I hope ELi will be able to obtain a copy of the Bond indenture with numbers filled in, at which point it will be easier to ask questions and offer interpretations.
The balloon payment I alluded to is speculation. We don’t know how Scottsdale Capital, associated with the father or the Harbor Bay principal, came up with $25 million to purchase the bonds. As far as I have ascertained, this is not someone with obvious access to that kind of cash. (DRW, the financier behind Core Campus, would have that kind of money.) So, if Scottsdale borrowed money short term to purchase the bonds, there would be a balloon, presumably around the time the city has promised to redeem the bond. Since this would be a likely scenario, I want to raise it as a concern. It is like all those risks listed on the prospectuses. Might not happen, but worth worrying about.
With the city, we have documents committing the BRA to redeem and refund in 2020. What happens if the BRA cannot refund in order to redeem is unclear. The documents do not have a proviso about what happens if they can’t. I don’t know if no-recourse trumps promise to redeem. Sounds like expensive litigation to me.
This is why the lack of a debt service/revenue coverage spreadsheet is disturbing. The numbers certainly seem to show that refunding on the same terms as the private placement to Scottsdale will lead to significant shortages for years. This is also consistent with other back-loaded TIF plans to pay for bonds—the 2008 brownfield for City Center II was appalling. All the examples I linked, including the one for City Center I, which was put together (pro bono) by Vic Loomis and his banking professional staff, were not back-loaded to the extent of making the total TIF over 30 years equal the total debt service, making up for shortfall in first part with surplus in last part. You can do that with full faith and credit (at cost to general fund until the surplus starts). You can’t do that with a non-recourse bond, because you are basically saying, we plan on defaulting on payments.
Apparently the city (and Scottsdale) have decided they don’t need a debt service/revenue coverage spreadsheet at this time. I would be more than happy for them to produce one and show how they can cover debt service with designated funding sources. With the last iteration of CC II, we managed to force such a spreadsheet for due diligence, which is what led to rejection, because it fell short. These coverage ratio spreadsheets should be required, even with full faith and credit, because the public needs to know about cash flow for the city. (Loomis did that for City Center I, but that was before “getting to yes” so projects would happen became the number one city priority.)
Anyway, unless the city can provide a spreadsheet proving how refunding will work, the data seems to show, refunding is not likely. What happens then, I don’t know. I personally learned long ago not to take on risks without fully knowing what I was doing. Given the history, I seriously doubt city officials understand the risks.
Eliot Singer
