Sunday, January 08, 2012

Southern California Logistics Airport (KVCV): Ready for a financial overhaul? Victorville, California.

Southern California Logistics Airport has been bustling with business activity. Boeing recently extended its lease agreement to test engines, M&M/Mars moved its candy factory to the airport and United Furniture snagged the largest commercial space available in the area.


VICTORVILLE • If you haven’t taken a turn on Phantom West in a while, you may be pleasantly surprised at the bustling business that now characterizes Southern California Logistics Airport.

For the first time since it was formed in 1997, charged with powering economic development for the entire Victor Valley in the wake of the closure of George Air Force Base, city officials say this year Southern California Logistic Airport Authority’s operating revenues are expected to equal its expenses.

Boeing recently extended its lease agreement to test engines there, two companies fought for hangar space, M&M/Mars moved its candy factory to the airport and United Furniture snagged the largest commercial space available in the area to build coaches and chairs.

But look beyond day-to-day business, and you’ll find the airport is bonded to the hilt, defaulting on debt payments and facing investigations by local and federal authorities.

Those challenges have neighboring cities increasingly itching to take control of the airport, while outside experts say it appears ready for a dramatic change.

“It would seem that it’s ripe for some sort of financial restructuring,” said Wilson White, a municipal bond expert out of New York City who’s followed Victorville’s recent woes. “It’s not bleak. There are a lot of possibilities. But it’s going to take years to straighten them out.”

SCLAA was formed in 1997 as a joint powers authority between the city of Victorville and Victorville’s redevelopment agency. Victorville fought hard to win control of the airport, battling the city of Adelanto for rights to develop the property after George Air Force Base closed in 1991.

Though all four local cities and San Bernardino County have some oversight at the airport through the regional Victor Valley Economic Development Authority, Victorville was given full power over daily operations at the airport and the ability to take out bonds to fund improvements there.

By 2008, SCLAA had racked up $330 million in bond debt, with lofty plans for a city-owned power plant, a railroad connection and an EB-5 visa investor program that would generate additional capital.

“If all had gone well, it would appear that it would’ve been fine,” White said.

Instead, Wall Street crashed and property values plummeted, slashing the tax revenues SCLAA receives. The power plant project fell apart after the agency had invested some $80 million and BNSF said the rail connection wasn’t going to happen anytime soon, with $30 million sunk into preparations for the spur. Then Victorville’s EB-5 program became the first in the nation to be terminated by the federal government, stripping away $25 million in loans proceeds the city had been counting on.

Further complicating the situation are questions about whether the city has mishandled funds, with SCLAA bond funds used to buy land near City Hall for a library that never got built, for example. The Securities and Exchange Commission launched an investigation into the expenditures, with the San Bernardino County Grand Jury and FBI also sniffing around.

In late December, SCLAA received notice from Bank of New York Mellon that it had defaulted on two of its bonds after missing a $535,000 debt payment.

The agency didn’t have money to make the payment, but had assumed the bank, which serves as trustee for the bonds, would cover it using reserve funds set aside for that purpose. However, the bond agreements state reserves can only be used to cover interest payments and not principal — a clause that’s unusual though not unheard of, according to Robert Doty, president of AGFS, a Sacramento firm that provides municipal bond advice to local governments.

“And the city should have known that,” Doty said. “That’s something that they were responsible for knowing.”

Mayor Ryan McEachron said he wasn’t aware of that limitation in the bond indenture. But based on his conversations with bond counsel, McEachron said the city still believes the bank could’ve chosen to make the payment but opted not to.

“Although we would have preferred the trustee to make the full payment, it is their decision,” City Manager Doug Robertson said via email.

Bank of New York Mellon did not respond to a request for comment on the issue. However, Doty said, “Normally trustees act only in accordance with the indenture.”

The city should be able to address the default by April, according to Robertson.

“We are estimating approximately $9 million in increment to come to SCLAA in the next VVEDA distribution, more than enough to cover the $7.5 million shortfall,” he said.

The bonds were sold in 2007 and 2008 to a combination of individuals and institutions — a sign that there was trouble from the beginning, according to Doty.

“To the extent that individuals are involved, what it says is that the bonds couldn’t be sold to an institution,” Doty said. “Normally a high-risk bond will be sold to institutions because they understand the risks better.”

Given the defaults, bondholders could call in immediate payment on the bonds — unlikely given the airport authority’s financial struggles.

They could also opt to bring suit against SCLAA to recover their investment. While Doty said it’s rare for individual bondholders to sue, institutions may opt to go that route to recover their funds.

“Certainly we have had a number of calls from investors in the last month,” said Jeffrey Kinsell, vice president of Kinsell, Newcomb & De Dios, the underwriter that sold the bonds. “All requests have been for facts and status, which is appropriate because that is all of the information we have available. No caller or investor has indicated an interest to us in filing any legal action against the city or SCLAA.”

San Bernardino County 1st District Supervisor Brad Mitzeltfelt, who also chairs VVEDA, said he met with the county’s CEO Thursday to discuss the implications of Victorville’s default. He declined to comment on the issue at this point.

“It’s all coming down around them right now,” said Hesperia Mayor Russ Blewett, who’s been openly critical of the job Victorville has done with the airport. “I wouldn’t let Victorville manage an outhouse let alone a major airport. ...My personal opinion is that eventually control of the airport will be ceded to the county.”

White remains optimistic about SCLAA’s potential. He predicts a broker dealer will swoop in and launch an effort to get new bonds in place, perhaps taking advantage of other revenue streams. The airport authority might be able to start imposing landing fees, for example, White said.

“They have two great pluses: They have an existing tax base and they have the airport actually working,” White said. “It’s going to be a complicated process, but it’s possible bondholders could come out pretty well.”

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