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DISTRESSED DEBT SECURITIES - FLORIDA CDD BONDS

FLORIDA CDD BONDS
06/01/09
BY Florida CDD Report

A major wave of municipal bond defaults is underway in Florida as a direct result of the national housing collapse. Since last October we have recorded over 100 CDD defaults on bonds totaling $2.3 billion and the pace of default is accelerating. The problem lies with what are termed Community Development District bonds or CDDs. Such municipal entities are created within a county as a self-standing taxable district that assesses the homeowners for the cost of the amenities created for the community. Amenities such as roads, sewers, electricity, landscaping, clubhouses, golf courses, etc. While they have the appearance of being true municipal purpose bonds, they are little different from private purpose bonds and the level of risk they entail is not obvious. The major problem with such bonds is that all the money is spent up front to make a parcel of land suitable for home building. During this phase of the development, there is only one landowner, the developer. The sale of individual home sites is difficult until buyers can see the actual amenities in place and feel confident that they will not be living on a construction site for the next five years. The current freeze in the housing market has brought the sale of new lots to a halt leaving the developers to meet all the bond assessment payments on the unsold properties. This monthly cash drain is leading to a string of defaults as developers delay payments and eventually, walk away or file for bankruptcy. Such housing default waves are not new. They occurred in Colorado and Texas in the 1980s and in California in the 1990s. The Florida collapse, however, promises to dwarf all previous collapses both in the number and dollar amounts involved. Some questionable business practices are also likely to come to light given the concentration of issuance by two underwriters and the sale of entire issues to a single buyer, usually a mutual fund. Disclosure of the status of individual projects has been scant which creates concern that current holders of bonds with assessment payment problems will dump them in the secondary market on unsophisticated buyers. To deal with the volume of these defaults and the special reporting needs for what will likely be a lengthy workout period and opaque pricing situation, we have decided to launch a website called 'floridacddreport.com' . This website will provide status information on all the CDD issues, whether or not in default, and key documentation for the various bond issues in default. We will also visit the various project sites to report first hand on where the project stands including pictures. Note that our definition of default is whenever a project has fallen so far behind in its collection of assessments that it has to invade the debt reserves in order to make the periodic interest payment. We use this more conservative definition to alert secondary market buyers who may not yet have heard the term 'caveat emptor'. However, it is not hard to predict a high rate of default for the hundreds of bond issues which were launched in 2007-8 that are still in their development stage and are paying debt service out of reserves as allowed for in the indenture. Such issues face a more daunting challenge once the build-out period expires since they don't have even a partial occupancy to stimulate new sales. Where is inflation when you need it!