Maryland Heights, Missouri, forwarded the funds needed to cover a delinquent debt service payment for revenue bonds issued for its community ice arena, but not before triggering a two-notch downgrade that sent its certificates of participation to junk.
The Centene Community Ice Center, which serves as the practice facility for the National Hockey League's St. Louis Blues as well as a community hockey, skating and entertainment venue, burdened the city's balance sheet after the COVID-19 pandemic put a major dent in revenues needed to pay off unrated 2018 bonds supported by the city.
The latest troubles surfaced in September when the trustee for the unrated revenue bonds notified holders that funds on hand 40 days before the Sept. 15th due date fell short of fully covering all interest due on the Series A and B bonds and a required deposit of one-half of principal due next March on the A bonds.
The city's Industrial Development Authority sold a $50.2 million A series and $5.5 million subordinate B series in 2018.
The city forwarded funds on Sept. 14 needed to cover the obligations but based on the flow of funds the trustee fell $140,000 short of what was needed to cover the B series interest payment, triggering an event of default. That's because the indenture does not expressly authorize a subsequent transfer to interest coming due on the B series.
The city and authority requested that the trustee use money on deposit — $849,000 in a general reserve and $3 million in a series A reserve — to make the $140,000 interest payment on the B bonds.
The trustee advised the city and authority that it would consider applying the available moneys as proposed, according to a Sept. 15
The delinquency prompted S&P to cut the city's issuer credit rating to BBB-minus from BBB-plus Sept. 22 and assign a negative outlook. The city's 2015 certificates of participation dropped to junk level BB-plus from BBB.
"The two-notch downgrade reflects our view of elevated governance risk given the city's unwillingness to support its 2018B Industrial Development Authority revenue bonds, resulting in a technical default," S&P analyst Coral Schoonejans said in the report.
The rating agency cut the city's issuer rating to four notches to BBB-plus from AA-minus in March 2021, citing structural imbalance in the city's enterprise fund and the city's entanglement in the ice arena project.
The city forwarded the funds neededto pay the arena bonds "with the understanding that those funds were intended to be applied to the past-due interest installment on the Series 2018B Bonds, and that such funds would not be delivered" unless the trustee agreed to the stipulation, UMB reported in an Oct. 11 notice.
UMB agreed to the terms and said it plans to make a special interest payment covering the delinquency Oct. 27.
The "event of default remains outstanding and is uncured," the notice notes. Events of default allow for an acceleration of the maturity of principal or the trustee may take possession of certain property.
The authority and city believe by next year the facility can overcome the fiscal strains. Activity at the facility, concerts at an outdoor rink, and events at the neighboring casino and amphitheater that is in the St. Louis Ice Center Community Improvement District have all resumed and are picking up. Also this year, Lindenwood University, which leases the facility for hockey practices and games, reclassified its hockey program to NCAA Division I status, which will result in greater use.
"The issuer and the city expect sufficient funds to be on deposit in the revenue fund 40 days prior to the March 15, 2023" to cover all payments due, the trustee reported in the September notice.
S&P noted that timing issues played a role in what it calls a technical default but also holds the city to account for not acting sooner.
"Officials report that enterprise revenue were not submitted prior to the 40-day window because of lack of funds within the enterprise account, pending additional entertainment revenue in August. In our opinion, the city lacked proper oversight to remedy the foreseeable shortfall," S&P said.
"We note that the city had the ability to appropriate governmental funds in the event of a foreseeable shortfall prior to the 40-day window and is able to appropriate funds to remedy the uncured default, but has chosen not to do so," S&P said in its report issued before the city's Oct. 11 transfer.
The city's payment this month could help stabilize the rating. "We could revise the outlook to stable if the default is cured, enterprise revenue rebounds on a sustained basis, and the city demonstrates support for the project," S&P said in the September downgrade report.
The bonds issued for the facility are secured by net operating revenue of the ice arena and an attached amphitheater; revenue from a 1% sales tax levied on the community improvement district which includes the center, a casino, hotel, and two amphitheaters; and two $500,000 donations from the local port authority during construction.
The A series also enjoys an appropriation pledge from the city of $175,000 and an additional city appropriation ceiling of $625,000 a year to replenish the debt service reserve.
The facility opened in 2019 but pandemic-related social distancing requirements led to arena and amphitheater events being cancelled, cutting deeply in the narrow revenue projections needed to support the bonds. The city made the 2019 and 2020 debt service payments, largely with capitalized interest and some use of various the debt service and other reserve accounts for the 2020, 2021 and March 2022 payments.
"We note that the series 2018B DSR was fully depleted following the Sept. 15, 2021, payment and that elected officials held a special meeting agreeing to remedy the shortfall from its own funds for the March 15, 2022, payment. In this instance, the city showed support for the series 2018B bonds," S&P said. "However, the recent default reflects management's unwillingness to continue to support the obligations."
While the bonds lack a direct general obligation pledge and are not rated by S&P, "they are considered "liabilities of the city," S&P said. "The city's unwillingness to support the bonds, which we view as a risk management, culture, and oversight weakness under governance risk in our environmental, social, and governance framework" caps the rating at BBB-minus.
"The rating further reflects our opinion of management's involvement in an economic development ice arena project without thorough consideration of affordability in the event of unforeseen circumstances," S&P said.
The construction contractor filed a mechanics lien action against Legacy Ice Foundation, which is the nonprofit operator, last year, adding to the fiscal strains. It was settled in March. The financial terms are confidential but could impact funds available for debt service.
City officials could not immediately be reached for comment.
