Tuesday, January 22, 2013

Carmel CRC Bail Out Revisited

Carmel's shady financial dealings came to a head this past year after Mayor James Brainard came to the same city council he had ignored on most matters pertaining to his ambitious development efforts, including such marquis projects as the Palladium and the City Center project in Carmel's downtown, and asked it to take over a mountain of debt the Carmel Redevelopment Commission had accumulated for Brainard's grandiose projects without council approval. I thought I would take this opportunity to revisit the issue in an attempt to shed a little bit more light on what transpired.

The CRC managed to rack up about $267 million in debt over the past several years. Because Brainard wanted to complete the projects he initiated in the lead-up to his 2011 re-election bid, he turned to alternative debt instruments to borrow money to avoid the necessity of getting the approval of an increasingly skeptical council. Soon after Brainard secured his re-election, he came clean on the fact that the CRC lacked sufficient revenues to meet its ongoing debt obligations without offering a public mea culpa, further infuriating some members of the council.

Brainard and his apologists in the media likened the proposed transaction to a refinancing, but it was a bail out in its purest form. The CRC, in short, had become insolvent and could no longer operate as a going concern without massive financial intervention. Eventually, the city council went along with assuming a portion of the CRC's $267 million debt by issuing general obligation bonds. When the bond issue went to market in December, the City got a 3.24% rate on a debt of $185 million payable over a 25-year period. The City said it expected to save about $75 million in interest payments over the life of the bonds, but it first had to eat about $21 million in repayment penalties on the old debt instruments that were being paid off.

Brainard's CRC got pretty creative in finding the money it needed without issuing bonds. It utilized installment purchase contracts, a 3-way transaction whereby the lender would advance funds to vendors who were performing construction work on various projects and, upon completion, the City would repay the construction debt over varied repayment periods at varying interest rates. Certificates of participation, which allows a lender to receive a pledged revenue stream typically in the form of lease payments by the issuer, were also utilized. When neither of those options were viable, the CRC turned to good ole fashioned lines of credit. The interest rates varied from a low of about 3% to as high as about 9%.

In entering into these unconventional transactions for significant borrowing by a local governmental entity, the lenders understood that they were not getting a well-secured form of debt instrument since the debt obligations were neither backed by the full faith and credit of the municipality nor was there a dedicated revenue stream sufficient to ensure their repayment. It's frankly alarming that so many supposedly reputable lending institutions would participate in the CRC's scheme to evade council scrutiny in racking up debt for Brainard's publicly-financed projects. I thought you might be curious as to what institutions participated in the CRC's backdoor financing scheme. Here's a look at them in descending order:
  1. Oppenheimer--$40,415,000 (Certificates of Participation)
  2. Regions Bank--$33,753,552 (Installment Purchase Contracts)
  3. BMO Harris Bank--$17,000,000 (Installment Purchase Contract)
  4. BMO Harris Bank--$12,500,000 (4CDC Grant Subsidies)
  5. National Bank of Indianapolis--$9,860,696 (Installment Purchase Contract)
  6. Mercantile Bank--$9,613,041 (Installment Purchase Contract)
  7. Lake City Bank--$8,000,000 (4CDC Grant Subsidies)
  8. Star Financial Bank--$5,000,000 (Line of Credit)
  9. Community Bank--$3,038,990 (Land Purchase Contract)
  10. Fowler State Bank--$2,500,000 (Line of Credit)
  11. CIBM Bank--$2,500,000 (Line of Credit)
  12. Mercantile Bank--$2,500,000 (Line of Credit)
  13. BMO Harris Bank--$2,500,000 (Line of Credit)
  14. United Fidelity Bank--$2,500,000 (Installment Purchase Contract)
Although the amount of debt being assumed and refinanced by the City was about $153 million, prepayment penalties pushed that amount up $21 million to nearly $175 million. The prepayment penalty that really stuck out was the one paid to Oppenheimer. The CRC took on more than $40 million in debt in 2010 courtesy of Oppenheimer in the form of certificates of participation. Oppenheimer's debt obligation carried an interest rate of 7.75% to 9.25%. The prepayment penalty on the Oppenheimer debt was a whopping $16.2 million. Interestingly, Leo Dierckman was serving as President of the Carmel Plan Commission at the time that debt was taken out. Dierckman works as a senior director of portfolio management at Oppenheimer Investment Management. His job description includes research responsibilities in the municipal bond sector.

The  National Bank of Indianapolis, where Mickey Maurer is one of the largest shareholders and serves as its chairman, plopped down nearly $10 million in the form of certificates of participation that earned interest at a 5.3% rate. NBI received just under $200,000 as a prepayment penalty. During the debate over what to do about CRC's insolvency, the IBJ, which is owned by Maurer, editorialized in favor of the refinancing plan and pretty much assumed the role as leading apologist for Brainard's out-of-control spending. His publication even ingratiated itself to Councilor Lucy Snyder, who chaired the Finance Committee, by bestowing special recognition on her as leading woman of influence while the council was debating the refinancing of the debt. At no point do I recall the IBJ disclosing their publisher's personal financial interest in the outcome of that council action where journalistic integrity should have dictated public disclosure.

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