Muddy waters for Reedy Creek


Barnett Chip: (00:03)
Hello and welcome to another Bond Buyer podcast. I am Chip Barnett. My guest today is Michael Rinaldi and he is the head of US local government ratings at Fitch Ratings. And we’re going to look at what’s going on in Florida, specifically the battle between the governor and this Disney company over recent sex education legislation in public schools. Welcome bond buyer, Michael,

Michael Rinaldi: (00:27)
Thanks, Chip.

Barnett Chip: (00:29)
OK. Let’s take a look at the problem first and it’s a bit complicated and it’s been a bit messy. Governor Ron DeSantis and the state Legislature recently decided to dissolve special tax districts like the Reedy Creek Improvement District after Disney said they planned to fight to repeal another recently passed law that prohibits teachers to talk about gender and sex in class, dubbed the ‘don’t tell gay law. Reedyy Creek is a special tax and administrative district for Disney-owned land in Orlando, Florida. It has the same authority as the county government and includes lands in Orange and Osceola counties. Fitch has just placed Reedyy Creek on negative watch, and the other rating agencies are reviewing and monitoring the situation. Michael, can you shed some light on this murky situation, but first give us some background on the issues surrounding these actions by the state and public entities.

Michael Rinaldi: (01:30)
Sure Chip, I’ll definitely do my best. So, as you mentioned, Fitch placed the AA-minus rating on Reedy Creek’s ad valorem tax bonds, as well as the A rating on its utility revenue bonds on negative watch. This action was primarily in response to the dissolution bill and uncertainty about servicing Reedy Creek’s debt after the dissolution date, which is set for June 1, 2023, between that period. And then we expect Reedy Creek to continue to maintain its facilities and operations and service its debt. But then there are question marks that the bill creates.

Barnett Chip: (02:17)
Do you think Disney, the counties or bondholders have reason to worry right now?

Michael Rinaldi: (02:22)
Well, our negative rating watch is about, you know, Reedy Creek debt and so if you’re a bondholder, you certainly face more questions today than before the enactment of the dissolution.

Barnett Chip: (02:41)
When do you think that actually means for bondholders?

Michael Rinaldi: (02:45)
Well, good question. You know, the dissolution bill was basically one paragraph. It did not prescribe a mechanism for the treatment of Reedy Creek’s outstanding indebtedness after the dissolution date. So there are questions as to exactly how the debt will be handled from then on. Going forward, Florida law provides for the debt to be transferred to local governments, which share similar boundaries with the district. This could therefore include Orange County and Osceola County, but also the towns of Bay Lake and Lake Buena Vista. There is also a path for a successor agency to be created and assume the assets and liabilities of the district, but neither the solution bill nor the state law gives much detail in terms of actual allocation and how it would actually work. And so we think the lack of mechanisms and state law and the bill, provides a level of uncertainty and that the implementation will be something that will be maybe quite complicated, uh, which, in our view, increases the likelihood of a negative rating action on the district. outstanding debt.

Barnett Chip: (04:04)
Yeah. There has been a lot of confusion about what this will mean for taxpayers, especially in affected counties and cities. Do you think this could have a ripple effect on the ratings of these entities?

Michael Rinaldi: (04:18)
At this point it’s really too hard to say, given the lack of clarity around the budget allocation, you know, all the financial and operational implications, at this point it’s just not clear to governments beneficiaries and what we know is that ad valorem taxes collected by the district totaled approximately $140 million in fiscal year 2021 there was approximately $155 million in utility revenue collected by Reedy Creek. So you know that’s the magnitude of the revenue gap that would have to be bridged or absorbed by existing local governments or a successor agency,

Barnett Chip: (05:06)
How many outstanding debts does Reedy Creek currently have?

Michael Rinaldi: (05:10)
They have, I think, about $950 million in outstanding debt, the majority of which comes from the ad valorem tax credit, which you know is interesting. Going back to the challenges associated with transferring debt to another entity, Reedy Creek’s promise to bondholders is backed by a commitment to levy a tax rate each year to pay for this service up to 30 mills on all taxable property, while this happens to exceed the maximum on rate capacity of 10 millage, which is held by counties and cities. So it just gives you the impression that, you know, debt assumption by other entities is complicated without further action or direction from the state.

Barnett Chip: (06:07)
There’s been a lot of controversy around what’s happening in some other states as well. 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: (06:32)
Well, we know what’s going on in Florida, that’s for sure. What will happen in other states in the future, somehow less confident to talk about it. Our concern, of course, comes from the perspective of a rating agency, it’s, you know, the focus on, you know, the ability of a credit to repay its debts in full and in a timely manner. And the state’s action to dissolve Reedy Creek and several other much smaller special districts is certainly an unusual action. In our view, this does not necessarily serve as a precursor to similar dissolution measures or interference in the operations of other local governments across the state. In our view, this really reflects a very unique level of discord between the state and Disney.

Barnett Chip: (07:27)
What do you think investors should be aware of right now?

Michael Rinaldi: (07:30)
Well, for starters, there’s the dissolution date again, June 1, 2023. So, you know, while the dissolution bill is limited in wording and direction, the state s a little time is given to solve this problem, isn’t it? The bill does not dissolve the district effective May 1 or June 1, 2022, which it quite frankly could have done. So there is a little time left. And at this point, you know, Fitch expects to stay to answer, you know, some of these unanswered questions about the orderly allocation of the district’s outstanding debt, as well as the preservation of the rights of bondholders because there are certainly issues like the state violating some of the deficiency language that exists, it’s called that duty bearers in Reedy Creek’s enabling statute.

Barnett Chip: (08:27)
What do you think will happen in the longer term?

Michael Rinaldi: (08:30)
Well, you know, it can go one or more ways. We have 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 dissolution date of June 1, 2023. It’s certainly a, a possibility that a successor agency will be created, which, you know, may result in changes to the governance and administrative structure of Reedy Creek or the successor agency, but this, this may still potentially preserve much of the operational and fiscal powers that are, uh, critical to our current view of the, uh, creditworthiness of the district, uh, and, and the ratings assigned to its outstanding debt

Barnett Chip: (09:28)
Separately. Fitch has just released an ESG scorecard for Reedy Creek. Can you talk a bit about that?

Michael Rinaldi: (09:34)
Well, ESG scores, they’ve been outstanding, both for ad valorem bonds and utility revenue bonds, you know, for several years. So they’re not new, but what’s happened is that the scores have been revised to a level five, which according to, you know, our relevant scoring framework suggests the act that l The State took in enacting the Dissolution Bill has great relevance to the District’s governance structure and other provisions relating to the rule of law and the protection of the interests of bondholders and creditors who were very relevant and essential for the, the ratings of these two dead instruments being placed on negative watch.

Barnett Chip: (10:28)
Do you have a final thought for our listeners today?

Michael Rinaldi: (10:31)
Oh, like I said earlier, this is a pretty unique circumstance. So when you consider, you know, I mentioned that Reedy Creek wasn’t the only special district subject to the dissolution bill, but the others pale and compared to the Reedy Creek dissolution in terms of scope of their operations and Reedy Creek being a pretty big player in the capital markets with almost a billion in outstanding debt. It’s an unusual action, we think somewhat targeted and isolated from Reedy Creek, given his relationship with Disney. And, it’s the fact that it’s Disney, which you could say is synonymous with the economic fabric of the state, right? It’s a major player from an employment perspective, from an income perspective, and it all adds to the intrigue around the current situation. So I would just say keep your eyes and ears open. It might be a while before we have a definitive answer to the questions we discussed today, but it’s definitely been an interesting week here.

Barnett Chip: (11:41)
Michael Rinaldi from Fitch, thank you very much for being here with us today.

Michael Rinaldi: (11:45)
Oh thank you. Chip. Appreciate the time.

Barnett Chip: (11:48)
And thank you to the listeners of this latest Bond Buyer podcast. Special thanks to Kellie Malone, who did the audio production for this episode.


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