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Florida CDD Developer’s Bankruptcy Rulling Deals blow to Muni Bondholders

By: Distressed Debt Securities Newsletter

The Distressed Debt Securities Newsletter reports last Friday, the Federal Bankruptcy Court for the middle district of Florida (Tampa Division) approved a debtor’s plan of reorganization in the case of Fiddler’s Creek LLC, developer of a 6000 unit Florida Community Development District near Naples Florida. The plan was confirmed over the objections of bondholders who could not vote on the plan since the court said they had no standing in the case despite being the largest creditors.

The ruling could send shockwaves through the municipal bond market nationwide because it was rendered in a federal court thus affecting all the states with developers facing similar situations. Fiddlers Creek LC and its 27 affiliates confirmed the plan of reorganization after nearly 1 ½ years under the protection of the bankruptcy court. The largest named creditor in the cases were Fiddlers CreekCDD1 and Fiddlers Creek CDD2, which owed over $100 million of bond principal and over a year in assessment payments.

Bondholders argued that because the repayment of their bonds comes from assessments derived directly from the debtor’s land they were in essence the creditor of the estate. They also tried to get some of the CDD board of director appointments because, in one of the two districts, the debtor appointed the entire CDD board. The court noted that this “conflict” existed from the onset of the CDD, i.e. the defect lies with Florida’s CDD enabling statutes.

The approved plan provides for creditors junior to the bondholders to be paid immediately’ in some cases, and well before bondholders in others. The assessments are to be held in abeyance until April 2013 even though the debtors had not made bond such payments since October 2008. This, despite such payments being on parity with state and county taxes. The plan approves the developer making changes to the assessments of the CDDs on his lands. The fear of a bondholders’ group is that there is not enough value in the project to satisfy all claims which means they will be left with insufficient collateral to ever bring bonds current or make principal payments. Per a group representative, ‘This is of particular concern since there is a risk of self-dealing by the developer for which bondholders have no recourse since their claims are tied to the land.’ Because this is federal bankruptcy court, the question is how wide the effect of this ruling will reach. Developers across the nation are under financial pressure, a lot of it from the “governmental districts” they caused to be created. According to the Distressed Debt Securities newsletter, which maintains a website just for Florida CDDs (floridacddreport.com), there are presently 168 CDD districts in Florida which are in default on over $5.1 billion in bonds. Put in a broader context, some $6.5 billion in CDD bonds have been issued since 2003 which means 77% of these are now in default. This makes the Florida CDD defaults the single biggest default event in the history of the municipal market. It was predicted by a bondholder’s representative that the Fiddler’s Creek ruling may well lead to a rush to the courthouse steps as dozens of developers see this bankruptcy as a way to hang on without committing any of their own funds. Bond prices may quickly reflect this new market reality.

Pull Quote: The Fiddler’s Creek ruling may well lead to a rush to the courthouse steps as dozens of developers see this bankruptcy as a way to hang on without committing any of their own funds.

Reported by Income Securities Advisor, publisher of the Distressed Debt Securities Newsletter. Contact: Richard Lehmann at 305.557.1832. Income Securities Advisor is an investment advisory firm specializing in fixed income portfolio management. It also publishes the Forbes/Lehmann Income Securities Investor newsletter. Richard Lehmann is an SEC registered investment advisor and a columnist with Forbes magazine.