Florida CDDs in Dirt-Bond Quagmire
By Shelly Sigo
The Bond Buyer
BRADENTON, Fla. — Defaults by some Florida community development districts that sold “dirt bonds” to finance infrastructure improvements for residential and commercial real estate projects continued Monday as debt-service payments came due.
Several CDDs warned the market last week that they anticipated having problems making their Nov. 1 payments.
In just two days after they were due, 23 districts reported problems with their payments, including 13 defaulting and eight drawing on reserves, said Matt Fabian, managing director and senior analyst for Municipal Market Advisors.
In the wake of the economic downturn that has battered Florida’s real estate market, Fabian has tracked CDDs that have drawn on reserves and had payment defaults for well over a year.
According to Fabian’s methodology, 75 CDD credits have had payment defaults on more than $1.3 billion of bonds while another 40 representing $884 million of debt have drawn on reserves.
“To me it seems like it’s getting worse,” he said, referring to the rate of defaults. He noted that there has been a “handful” of CDDs that restructured debt, in some cases pushing maturities out from 2010 to 2017 in return for higher interest rates.
While it is still too early to tell the full extent of debt-service problems related to the Nov. 1 payment date, default specialist Richard Lehmann said that since December 2007, some 154 CDDs have defaulted on $4.7 billion of bonds. Another 62 districts representing $1.3 billion of bonds are on his “watch list” of districts likely to default.
His definition of default includes nonpayment of principal or interest, as well as draws on reserves to make payments. However, most CDDs are structured so that a draw on reserves is not considered a default.
“We call it a default when they invade reserves,” said Lehmann, author of the Income Securities Advisors and publisher of Distressed Debt Securities, which has tracked corporate and municipal bond defaults since 1983. He also launched the subscription-based website www.floridacddreport.com last year just to track all of Florida’s CDDs. Lehmann said it is too late for bondholders to know about problems when no reserves are left to assist in making payments.
“We say that doesn’t serve the interests of bondholders and the bonds continue to trade as if they were current on their payments,” he said. “The next bond buyer, if not apprised of the situation, might buy something that will blow up on them.”
Lehmann said Florida’s combined CDD defaults in the current economic crisis represent the “biggest municipal default in terms of the number and dollar amount.”
From the Nov. 1 payments, he predicted that more than 60 defaults are likely to occur. Most of those will be continuing defaults, but as many as 15 may be new CDDs defaulting, he said.
Of Florida’s nearly 600 CDDs, few issued insured bonds with most of the debt unrated. Several hundred have been approved but never sold debt. In a Florida CDD sector study released in late September, National Public Finance Guarantee Corp. said it has exposure to $296 million of bonds in 24 districts.
“By and large, our portfolio performed better than the overall [CDD] market,” said managing director Nick Sourbis in an interview Wednesday. “We’ve avoided some of the major pitfalls. We were extremely selective in what we underwrote.”
Noting that the Florida CDD market is not a large segment of the overall muni market, Sourbis said National Public Finance Guarantee’s underwriters reviewed the credits rigorously and generally focused on districts that achieved a certain amount of development and occupancy.
Additionally, all of the credits that were insured had a reserve requirement that was initially met with cash or a surety policy, according to the study.
The insurer’s study also reviews the evolution of Florida’s CDDs, their structure and assessments that typically secure bonds, and observes various problems such as unclear reporting requirements.
Lehmann said the problem will be exacerbated because many districts sold bonds and used proceeds to install infrastructure, but further development has stalled due to the weak real estate market.
In a recent study of the potential build-out of Florida CDDs, Lehmann surveyed 218 projects where developers are still actively planning to build new homes to determine the forecast of build-out time.
“It involves about 250,000 housing units in terms of the magnitude of the problem here with CDDs,” he said. “These are lots developed and ready to be sold and therefore represent another drag on the housing industry.” The study found that developers are actively planning to build 34 million square feet in association with those yet-to-be built housing units, according to Lehmann.
“The lots are platted and ready to build,” he said. “But what differentiates them from any empty land is you’ve got infrastructure for each of these properties already in place and tax assessments already running on the properties.”
Assessments on property tax bills are typically used to secure CDD bonds. “One other thing highlighted in the study is that 84 of the districts have not reported a single sale and those projects present $2.4 billion of bonds there at very high risk of total failure,” Lehmann said.
Of those districts, he said 49% consist of single-family homes and 40% are multifamily projects.
Lehmann said that represents yet “another drag on the housing industry” in Florida where the foreclosure rate on existing homes is one of the highest. In a recent report to the Legislature on the state’s long-term economic prospects, forecasters said that the state’s current “excess supply of homes is approaching 450,000.”
In normal economic times, an inventory of roughly 50,000 is considered good, they said.