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Eaton Vance Dumps Dirt Bonds as Florida Land Districts Default

By Jerry Hart

March 9 (Bloomberg) -- Thomas Metzold, Eaton Vance Corp.’s co-head of municipals, sold all his defaulted bonds of Tison’s Landing, an unfinished housing development in Jacksonville, Florida, as the debt fell to a third of face value last year.

Dumping the so-called dirt bonds at a discount was a better bet, the Boston-based Metzold said, than taking over 218 empty acres (88 hectares) from the project’s builder and waiting for a real-estate rebound that may not come until the early 2030s, according to a Moody’s forecast.

Lord Abbett & Co., the 81-year-old mutual-fund manager in Jersey City, New Jersey, faces the same choice as Eaton Vance, with Florida community development district bonds defaulting faster than any U.S. tax-exempt debt. The two-year-old recession and the first population decline since World War II have virtually erased demand for new houses in the fourth-most- populous state, stripping value from a security dependent on incoming residents to pay investors.

“We’re managers of municipal bonds, not real estate people,” said Metzold, 51, whose company manages $161.6 billion, of which 16 percent are tax-exempt assets. “We thought about foreclosing but decided the risks were too great.”

Florida home-building permits in 2008 fell 45 percent from 2007 to the lowest since at least 1980, U.S. Census Bureau data show. That’s pushed a record $3 billion of debt sold by 122 community development districts into default, according to Distressed Debt Securities, a Miami Lakes, Florida, newsletter. The bonds total almost half the $6.3 billion of tax-exempt debt from 183 issuers that failed last year, the publication said.

‘Default Wave’

“It’s the single biggest default wave in the history of municipal bonds,” said Richard Lehmann, the newsletter’s publisher, who defines default as failing to pay debt service or tapping reserves to do so. “There are about 78 more districts with $2.7 billion of bonds on our watch list that are likely to go into default this year.”

Fast-growing states such as Florida, California, Colorado and Texas use tax-exempt community development district bonds to install roads, sewers and utility lines on raw land, making it suitable for building. By creating special taxing districts to pay for the work instead of having municipalities do so, only residents who benefit bear the cost. From 2003 through 2008, 438 Florida districts sold $6.5 billion of dirt debt, Lehmann said, fueling a housing boom that permitted 1.2 million new homes since 2000, the Census Bureau data show.

Private companies that build on development-district land must pay interest and principal on dirt bonds until residents buy homes, move in and take over the fees. If they don’t, investors are paid from reserves, putting bonds into technical default.

Missed Payments

About $2.4 billion in face value of Florida dirt bonds used reserves or failed to make interest payments in November, said a report last month by Interactive Data Corp., a market- information provider in Bedford, Massachusetts. The missed payments, up 41 percent from May, were mostly on bonds sold from 2004 to 2007, the height of Florida’s real estate boom, the report said.

That’s what happened to $36.8 million of bonds sold in December 2005 for Tison’s Landing, 15 miles (24 kilometers) north of downtown Jacksonville, where none of 680 planned homes has been built.

Bondholders were paid from reserves in May 2008 after the builder, Yellow Bluff Development LLC, a venture of local companies and Lennar Corp., the third-largest U.S. homebuilder, failed to deliver sufficient assessment fees, said Jonathan Johnson, a lawyer at Hopping Green & Sams, a Tallahassee firm that represents Tison’s Landing.

Private Purchase

Lennar won’t comment on its Florida development district activities, Marshall Ames, a spokesman for the builder in Miami, said in a telephone interview.

The district foreclosed on the property, which faced a public auction in August 2009 until a private investor bought the Tison’s Landing bonds, Johnson said, sparing debt holders the prospect of becoming landowners.

“If the assessment revenue stops, the district is obligated to foreclose,” said William Rizzetta, president of Rizzetta & Co. in Tampa, an adviser and manager for more than 100 Florida development districts. “If nobody is there to pick that up, the land goes to the bondholder.”

Owning Tison’s Landing dirt wouldn’t have been a good investment for Eaton Vance, Metzold said. Undeveloped real estate still incurs expenses, such as property taxes and keeping permits current for future building, he said.

‘Cutting and Running’

“We can’t just write checks for development costs that were not funded,” he said. “If you have a $10 million bond that someone offers $5 million for, there’s value to cutting and running and re-investing the cash in a solid project.”

Eaton Vance’s National Municipal Income Fund sold $2.1 million of Tison’s Landing Series A bonds and its Municipal Income Trust unloaded $840,000 of the debt in the third quarter of 2009, according to data compiled by Bloomberg. Both were managed by Metzold, who was named to his current position last month.

While Metzold wouldn’t say what prices he received, two trades in Tison’s A bonds were made on Aug. 17, 2009, in the amounts sold by the Eaton funds, according to Municipal Securities Rulemaking Board data. A customer sold at 26.79 cents on the dollar, the trades show.

Eaton Vance’s National Limited Maturity Municipal Income Fund sold $2.96 million of Tison’s Series B bonds in the third quarter, its filings say. MSRB trades show an Aug. 17 transaction for that amount, also at 26.79 cents.

‘Value Destruction’

Armando Codina, a former General Motors Corp. board member who’s chairman of Flagler Development Group in Coral Gables, bought all the Tison’s bonds with a partner, he said in an interview.

“Defaulted CDDs recognize the value destruction that’s taken place,” said Codina, 62, who’s revived the project with Lennar and other builders. “The distress is priced in, so you’re getting a true value.”

Selling out may be the best course for bondholders, said Dan Carter, president of ITG Holdings LLC, a debt-workout specialist in Naples, on Florida’s southwest coast. Neither he nor Rizzetta, the development-district manager in Tampa, had heard of a bondholder who had taken possession of land in a default.

“Some bondholders are starting to realize foreclosure isn’t the answer,” said Carter. “They would go from bondholders trying to get tax-free income to being real estate developers with all the costs of owning land.”

Too Expensive

Prices of defaulted dirt bonds aren’t low enough to justify the holding period required before an expected payoff, said Mark Doyle, president of Spotswood, New Jersey-based Sterling Grace Municipal Securities, which specializes in distressed securities.

“The stuff we’ve seen in the 50- or 60-cent range isn’t cheap enough,” said Doyle. “You’re going to have to sit through an entire real-estate cycle and I don’t think you’ll get this stuff all built out in three or four years. It’s going to take a lot longer.”

Daniel S. Solender, director of municipal bond management at Lord Abbett in Jersey City, New Jersey, said he’s willing to wait. His $1.7 billion High Yield Municipal Bond Fund holds “a small percentage” of Florida development district debt, including Series A of Tern Bay, a 1,780-acre project north of Fort Myers that missed debt payments in November, according to a filing by its trustee, U.S. Bank National Association.

Land Value

“If we have to hold the land we will,” said Solender. “If payments aren’t made on the land, bondholders can get control and there is value there because it can’t really go to zero.”

The day when Florida’s new-resident influx is sufficient to reflate property values may not come soon, a March 2 University of Florida report said. The state won’t return to the 300,000-a- year population gains it averaged over the last 30 to 40 years until 2014 or 2015, said Stan Smith, director of the school’s Bureau of Economic and Business Research in Gainesville.

“Florida’s gone through numerous booms and busts, but it’s always been bailed out by the fact population was growing rapidly,” Distressed Debt’s Lehmann said. “That’s stopped.”