Transcription:
Chip Barnett: (
Hi, and welcome to another Bond Buyer podcast. I'm Chip Barnett. My guest today is Michael Rinaldi and he's head of U.S. Local Government Ratings at Fitch Ratings. And we're gonna be looking at what's happening in Florida, specifically the battle between the governor and this Disney company over recent legislation on sex education in public schools. Welcome to The Bond Buyer, Michael,
Michael Rinaldi: (
Thank you, Chip.
Chip Barnett: (
Okay. Let's take a look at the issue first and it's kind of complicated and it's been a bit messy. Governor Ron DeSantis, and the state legislature recently moved to dissolve special tax districts like the Reedy Creek Improvement District after Disney said they plan to fight to repeal another recently passed law that bans teachers from talking about gender and sex in the classroom, dubbed the 'don't say gay' law. Reedyy Creek is a special tax and governing district for the land owned by Disney in Orlando, Florida. It has the same authority as the county government, and it includes land in Orange and Osceola Counties. Fitch just placed Reedyy Creek on rating watch negative, and the other rating agencies are looking and monitoring the situation. Michael, can you bring some clarity to this murky situation, but first give us a little background on the issues surrounding these actions by state and public entities.
Michael Rinaldi: (
Sure Chip, I will certainly do my best. So as you mentioned, Fitch placed the AA-minus rating on Reedy Creek's ad valorem tax bonds, and also the A rating on its utility revenue bonds on rating watch negative. That action was primarily in response to the dissolution bill and the uncertainty with respect to the servicing of the Reedy Creek debt after the dissolution date, which is established as June 1st, 2023, between this period. And then, we fully expect that, Reedy Creek will continue to maintain its facilities and operations and to service its debt. But thereafter, there are some question marks that the bill creates.
Chip Barnett: (
Do you think Disney the counties or the bondholders have cause to worry right now?
Michael Rinaldi: (
Well, our rating watch negative is, you know, pertains to the Reedy Creek deb and so, if you are a bond holder, you're certainly faced with more questions today than you were prior to the dissolution bill being signed into law.
Chip Barnett: (
When do you think this means actually for the bondholders?
Michael Rinaldi: (
Well, good question. You know the dissolution bill was essentially a paragraph long. It did not prescribe a mechanism with respect to the treatment of Reedy Creek's outstanding debt, subsequent to the dissolution date. So there are some questions as to exactly how the debt will be treated from that point. Going forward, Florida law does provide for the debt to be transferred over to the local governments, which share similar boundaries with the district. So that could include Orange County and Osceola County, but also the cities of Bay Lake and Lake Buena Vista. There's also a path for a successor agency to be created and to assume the district's assets and liabilities, but neither do the solution bill or state law give much detail in in terms of the actual allocation and how that would actually work. And so we think that the lack of mechanics and state law and the bill, provide a level of uncertainty and that the implementation will be something that will be perhaps quite complicated, uh, which we believe increases the likelihood of negative rating action on the district's outstanding indebtedness.
Chip Barnett: (
Yeah. There's been a lot of confusion about what it will mean for taxpayers, especially in the counties and the cities that are affected. Do you think that might have a trickle down effect on the ratings for those entities?
Michael Rinaldi: (
At this point it's really too difficult to tell, given the lack of clarity around the fiscal allocation, you know, the full financial and operational implications, at this point it is just unclear for the receiving governments and what we do know is that the ad valorem taxes levied by the district totaled about $140 million in fiscal 2021, there was about $155 million or so in utility revenues collected by Reedy Creek. So, you know that's the extent of sort of the revenue gap that would need to be, make made up or absorbed by the, the existing local governments or some successor agency,
Chip Barnett: (
How much upstanding debt does Reedy Creek have right now?
Michael Rinaldi: (
They have I think about $950 million in outstanding debt with the majority of that being on the ad valorem tax credit, which you know is interesting. Going back to the challenges associated with the, the transfer of the debt to some other entity, the pledge that Reedy Creek has made to bond holders is backed by a covenant to levy a tax rate each year to pay that service up to 30 mills on all taxable property, while that happens to exceed the maximum on 10 millage rate capacity, that is held by the counties and the cities. So it just gives you a sense that, you know, the assumption of the debt by other entities is complicated without additional action or guidance from the state.
Chip Barnett: (
There's been a lot of contentiousness around what's been going on in some other states too. There are other places that are looking at laws that limit what can be taught to children. Do you think this can happen in other states?
Michael Rinaldi: (
Well, we know what's happening in Florida, that much is certain. What will happen in other states going forward, sort of less confident to speak about. Our concern of course is coming from a rating agency perspective is, you know, the focus on, you know, the ability of a credit to repay its debts in a full and timely manner. And the action by the state to dissolve Reedy Creek and several other much smaller, special districts is certainly an unusual action. In our opinion, this doesn't necessarily serve as a precursor to similar dissolution measures or interference in the operations of other local governments across the state. Our view it really reflects a very unique level of discord between the state and Disney.
Chip Barnett: (
What do you think investors should be aware of right now?
Michael Rinaldi: (
Well, for one, there's the dissolution date again, June 1st, 2023. So, you know, while the dissolution bill is limited in terms of its, its text and guidance, the state has allowed itself some time to work this out, right? The bill doesn't dissolve the district effective May 1st or June 1st, 2022, which it quite frankly could have. So there's some time. And at this point, you know, Fitch expects to stay to address, you know, some of these unanswered questions about the orderly assignment of the district's outstanding debt, and also the preservation of bond holders' rights, because there are certainly some question as to the state violating some of the impairment language that exists it's called than the bond holders within the Reedy Creek enabling act.
Chip Barnett: (
What do you think will happen in the longer term?
Michael Rinaldi: (
Well, you know, it can go one or several ways. We've already mentioned the possible transfer of assets and liabilities to existing local governments. The law also provides for the district and other districts affected by the legislation to be re ratified on or after the June 1st, 2023 dissolution date. That is certainly a, a possibility that there's a successor agency created, which, you know, may result in some changes to the governance and administrative structure of Reedy Creek or the successor agency, but it, it can still potentially preserve a lot of the operating and fiscal powers that, uh, are critical to our current view of the district's, uh, credit worthiness, um, and, and the ratings that are assigned to its outstanding debt
Chip Barnett: (
Separately. Fitch just released an ESG scorecard for Reedy Creek. Can you talk a bit about that?
Michael Rinaldi: (
Well, the ESG scores, they they've been outstanding, for both the ad valorem and the utilities revenue bonds, you know, for several years. So they're, they're not new, but what happened was the scores were revised to a level of five, which under, you know, our relevant score framework suggests the act that the state has taken in signing into law the dissolution bill has a very high relevance to the district's governing structure and other provisions pertaining to rule of law and, and protection of bondholder and creditor interest that, were very relevant and critical to the, the ratings on both of those dead instruments being placed on rating watch negative.
Chip Barnett: (
Do you have any last thoughts for our listeners today?
Michael Rinaldi: (
Oh, as I said earlier, this is a fairly unique circumstance. So when you consider, you know, I mentioned Reedy Creek was not the only special district subject to the dissolution bill, but the others pale and comparison to the dissolution of Reedy Creek with regard to the scope of their operations and Reedy Creek being a pretty significant player in the capital markets with close to a billion in outstanding debt. It's an unusual action, we believe somewhat targeted and isolated to Reedy Creek, given its relationship to Disney. And, it's the fact that this involves Disney, which you could argue is synonymous with the state's economic fabric, right? It's a major player from an employment point of view, from a revenue point of view, and all adds to the intrigue around this current situation. So, I would just say keep your eyes and ears open. It may be some time before we have a final answer to the questions that we've discussed today, but it's certainly made for an interesting week around here.
Chip Barnett: (
Michael Rinaldi of Fitch, thank you very much for being here with us today.
Michael Rinaldi: (
Oh, thank you. Chip. Appreciate the time.
Chip Barnett: (
And thank you to listeners of this latest Bond Buyer podcast. Special Thanks to Kellie Malone, who did the audio production for this episode.