High Finance: Should Standard & Poor's Put Windsor On CreditWatch
This is a key moment in the political career of Eddie Francis. Will he come out smelling like a rose, as Detroit Mayor Kwame Kilpatrick seems to be after the Tunnel deal announcement, or will he crash and burn, perhaps taking Windsor with him? Will someone get his ultimate revenge? We will know by the end of June at the latest it appears.!
It all depends on one tiny symbol from Standard & Poor's:
AA-
Over-dramatic? You be the judge after reading this BLOG. It will tie the arena, the Tunnel deal and the transportation hub/airport lands all together. Is it what Eddie has been working on for years as a big part of his agenda along with his Eminence Grise, distracting us in many ways so we won't catch on until he was ready to let it out of the bag?
I have been working the phones with my inside moles on both sides of the river trying to beg, borrow and steal information just so you, dear reader, will have the head's up as to what is really happening. Here is what I have uncovered so far. Is it all true.....who can really tell!
It appears that few in Windsor local Government seem to know anything about the deal except in its most general detail. If I was a Councillor, I would demand answers and demand them right away as Detroit Council did with their Mayor. The same if I was a WTC Board member.
It seems that Kwame had enough of waiting for Eddie to do a deal on the Tunnel. It had been in serious discussion since last summer at least, some claim much earlier, with Eddie having conversations with the Senior Levels brokered by a well-known personality in Ottawa political circles. No wonder we had the infamous Agenda Item #5
As for me, I'd be curious to know what role ex-Federal Minister Allan Rock played or will play, if any, given that he is a Partner in the law firm of Cliff Sutts, Eddie's lawyer on the Tunnel deal and did the Nine Point Plan with now Federal Finance Minister Flaherty when Flaherty was an Ontario Cabinet Minister.
For whatever reason, probably because it was Budget time, Kwame decided to announce the deal in his speech. From his point of view, the announcement was breathtaking. One of the worst cities in America facing huge economic problems in the auto industry had just wiped out its deficit. If Senator Carl Levin does decide to retire (unlikely now that the Democrats are in control in the Senate) who could possibly beat him if he decided to run for the US Senate? He can afford to wait a few more years and bask in the rejuvenation of Detroit under his watch as he builds up his Michigan power base.
From what I hear, Eddie and the Senior Levels were taken by surprise. Eddie had to do a lot of last-minute scrambling. The big questions on everyone's mind....how did a $20M deal made with the Bridge Co. for 100 years, turn into one for $75M for 75 years with the real start date not until 2020 and HOW was Eddie going to pay for it?
I think I know the answer to the first question but I cannot get confirmation. However, it must be said that Kwame and his team are great negotiators recognizing and using Eddie's ego and desperation against him. There was one remark in the Star story and by Eddie on Melanie Deveau's show that gives me comfort that I know what the background is. It is an inside comment said in passing that only a few in Detroit would understand and only two people (Eddie and his Eminence Grise) in Windsor PLUS the Blogmeister of course. Since my idea is too wild even for me, I won't BLOG it!
As for the second question, here is what Windsor's guarantor against loss in this deal, Cliff Sutts, said:
- “Windsor lawyer Cliff Sutts, who led the negotiations with Detroit, emphasized the deal will not be completed until he is fully assured local taxpayers will not be hurt…’’
Several months of negotiations remain to finalize the deal, he said.”
Eddie does have access to some cash. To find the balance and the really big money that he is counting on and desperately needs if his PLAN is to work, Eddie on Melanie Deveau's show said that he would look to the Senior Levels. Since the Province has no money for it, he really is looking only to the Feds.
In the Star, it was said, to prove the point:
- “The city has requested financial support from Transport Canada for the deal — given how the federal government also expressed strong fears about Moroun’s potential border crossing monopoly in Windsor.
“We have invited federal and provincial governments to participate and hope they will see the benefit of preserving the tunnel as a public asset and give us the legal and financial assistance we require,” Francis said.”
Kwame’s spokesman said:
- “We don’t want to be in the tunnel business.”
It would be easy for the Finance Minister to ask why Windsor should be in that business and why the Feds should pay out money. He need only point Eddie to what Kwame asked in one of his State of the City speeches:
- “First we must examine this very basic question: Which are the core services city government should provide?”
The answer is easy. Mayor Daley of Chicago said in relation to one of his assets:
- "running a toll road is not a core function of city government"
Neither is running a border crossing Tunnel when we do not have enough money for parks and to fix roads and sewers! $4.5 million in road rehabilitation available this year when we need $230M.
Eddie's secret weapon though is politics and elections. One has a lot of leverage right before an election and can apply all kinds of pressure on the incumbents or help out wannabees. Of course Eddie does not do it but his buddies like to bash. As Gord Henderson said:
- "By the way, I now understand why Francis kept his head down and left it up to the NDP to hammer Pupatello over her acquiescence on the arena deal involving Windsor Raceway and Tecumseh that could cost Windsor millions of dollars annually in slots revenues.
That's a battle that can be fought, or finessed, down the road. What matters right now is the training fund the Windsor West MPP is tapping into to lure a thousand jobs to her own riding."
Let others do your dirty work so you can appear pure and wholesome and be able to ask for favours. How else to explain the vicious attacks on Sandra Pupatello at Queen's Park by NDPer Michael Prue and the Gord Henderson columns. How else to explain the recent Howard Hampton Tunnel Motion. Give in or die in the next election Dwight and Sandra.
Now Henderson can report glowingly:
- "Every time we call those ministers, they're there," said Francis as he heaped praise on the pair for their work on behalf of Windsor and their success in extracting provincial dollars for a done deal. The two ministers beamed in their donated Windsor Spitfires jerseys, oblivious to the bitterly cold wind at the construction site, while Francis laid it on with a trowel."
Are the Federal Conservatives next to be beaten up, especially if there is a Federal election soon, since they want to keep Jeff Watson's seat and win at least one more here. Will Dwight and Sandra soon feel the wrath again?
Just be patient, I will explain AA- soon and its significance.
We need to look at the City's financial picture and the ratings given by Standard & Poor's over the past few years. "Many investors know Standard & Poor’s for its respected role as an independent provider of credit ratings."
I am no financial wizard but Eddie keeps telling us that the City has done a good job in its finances, meeting the criticisms of the Standard and Poor's analysts:
Windsor Star 04-08-2004
- "S&P's assessment says: "Windsor continues to face budgetary challenges despite relatively strong assessment growth. Although manageable debt levels and debt-service obligations have kept the city's debt burden moderate, the burden is expected to rise significantly in the medium term due to the funding of various capital projects."
Windsor Star 03-19-2005
- "The City of Windsor's credit rating for 2005 is unchanged at AA-/ Stable
Although the rating is considered strong, a review by the bond rater said the city doesn't have enough cash "to finance its planned capital expenditure program in the next five years."
Windsor Star 11-30-2006
- "Standard & Poor's rating service on Wednesday reaffirmed the city's AA- rating but elevated the municipality's outlook to positive from stable.
If Windsor stays on track, its rating will be upgraded to AA. ...
But Windsor still faces challenges, according to the report, including an economy that is unusually cyclical because of its dependence on the auto industry, $170 million in benefits for retired employees and inadequate reserve funds.
Finance staff are also working on a proposal to be presented during upcoming budget deliberations to put more money in reserve funds, said Colucci."
Clearly, the reserves are Windsor's big issue after the last S&P review.
12-04-2006
Here is what the Mayor said in his Inaugural speech:
- "Now, we need a balanced fiscal plan.
I will ask Council to consider such a plan, that fully funds major projects, allows flexibility through unallocated funds, decreases debt, and increases reserves...
This plan will reduce our debt – and it will also increase our cash reserves.
This is important, because higher cash reserves will help us to improve our bond rating.
That bond rating directly impacts our cost of borrowing – the interest rate we pay, as a municipality, on our debt. It is also an important economic investment tool.
Standard & Poor recently gave us a great report card – revising its outlook on the City of Windsor from stable to positive.
However, in their report, they were concerned about our cash reserves, and urged us to increase them.
The size of our reserve fund is an indicator of a city’s financial strength.
And it also provides us with the security to deal with emergencies. It’s our savings account. And our savings account is lower than most of our peer municipalities.
Today, our debt-to-reserve ratio is 2.55.
That means we have 2.55 times more debt, than we have in our Savings Account.
Today, Windsor has $74.1 million in reserves. We need $140 million...
We will increase our reserves."
That was very commendable. But something happened! I have asked the Treasurer why but have not received an answer yet. Instead of our reserves being built up, they are being drained by half by year-end. Our reserves target number has also been reduced by 20%. On April 11, The Star reported:
- “City needs to build reserves
By Dave Battagello
While the city is on the right track to financial recovery, concerns remain over the lack of reserve funds and woeful condition of many streets, administration told council Tuesday during deliberations of this year’s capital budget...
Among administration’s concerns is their projection to have only $39 million in reserves at the end of this year, among the lowest of comparable municipalities across Ontario, said Onorio Colucci, the city’s treasurer.
The goal is to build up the municipal reserves to $112 million by 2012, Colucci told council.
“The plan is cut down on the amount coming out and develop an enhancement program putting money back in,” Colucci said.
But that will cut into city infrastructure spending.”
What dramatic event or deviation, happened between December 2006 and April 2007 that our target number went down from $140M to $112M, a reduction of $28M. Instead of an increase in reserves, they will go down from December's number by $35.1 to $39M
Note the last sentence I put in “bold.” Does it mean roads and sewers as most of us would automatically think or something else? Could it mean that the reduction in reserves of $35.1 is going to go for the purchase of the Detroit’s Tunnel interest? With the $30M that the three levels of Government have put in already supposedly for the Tunnel Plaza Improvement Project, the total is US$57.2M which is remarkably close to the number, US$58M, that the Detroit Mayor needs to eliminate his debt although not the full $75M.
- "Much of the $75 million is expected to be paid up front by Windsor."
Of course Kwame’s buy-out number is US$75. I am sure that expenses and fees are NOT $17M! Some of that money is clearly going to be used to buy out Alinda’s management agreement so Windsor won’t have to wait until 2020 to take over. Let’s assume that Detroit will put in $15M and Windsor will match it.
Eddie needs $90M immediately to do the deal ie $75M to Kwame and $15M to Alinda.
Ok, here is where Standard & Poor's comes in and "AA-" becomes vital. If S&P puts Windsor on CreditWatch and then lowers the rating to say “A+” because of reserve issues then Eddie is in BIG trouble!
CreditWatch means:
- "Standard & Poor's also recognizes the potential for future performance to differ from initial expectations. Rating outlooks and CreditWatch listings address this possibility by focusing on the scenarios that could result in a rating change.
CreditWatch highlights potential changes in ratings of bonds, short-term, and other fixed-income securities.
Issues appear on CreditWatch when an event or deviation from an expected trend has occurred or is expected and additional information is necessary to take a rating action. Such rating reviews normally are completed within 90 days, unless the outcome of a specific event is pending. A listing does not mean a rating change is inevitable. However, in some cases, it is certain that a rating change will occur and only the magnitude of the change is unclear."
You remember that I was concerned about whether the way the City was going to do its financings met the requirements of the Municipal Act. Under Regulation 276, to do the borrowing the City wants to do , it must have a minimum of an “AA-“ rating from Standard and Poor's!
The City chose to use “variable interest rate” banker’s acceptances:
- 1. In this Regulation,
“bank loan” means a loan made by a bank and includes,
(b) a banker’s acceptance, whether or not it is discounted
8. (1) A municipality may enter into a variable interest rate bank loan agreement.
9. On the date a municipality enters into… a variable interest rate bank loan agreement, either the municipality itself or all of its long-term debt obligations must be rated,
(c) by Standard and Poor’s as “AA-” or higher.
Some obvious questions arise:
1) When were the reserves projections made by Finance showing the drop to $39M
2) Was the S&P analyst told about the projections and did he take it into account when the "AA-" rating was given
3) If not, does he know about the projections now
4) Will the drop in reserves result in a CreditWatch or downgrading?
The obvious pressure now on Eddie is to increase the reserves. How can he do it? One way only that I can see that makes any sense:
SUB-LEASE THE TUNNEL OPERATIONS.
I do not remember doing anything like this with the Tunnel being an election issue do you? I have not seen this subject being debated by Council. Was it something overwhelmingly demanded by Windsorites in the People-based Strategy sessions? With the light agenda tonight, why wasn't this subject placed on it as an emergency issue? Or will Eddie get the Councillors onside or else in camera tonight? Oh well, it does not matter...just spring it on us and expect affirmation.
I have suspected for a long time that this was always Eddie's plan to get money and regular BLOG readers will have known it too. He merely followed the lead of Mayor Daley in Chicago who leased his six-lane Skyway toll road for $1.83 billion and for 75 years too.
If Kwame’s half is worth US$75M, then our half should be worth at least the same provided someone will pay Eddie that amount. After taking away the Kwame and Alinda payments, Eddie could net US$60M or CDN$68M. If you put in all of that $68M into the reserves and add together $39 and $68M, then you reach $107M which is pretty darn close to the $112M reduced reserves goal of Eddie and way ahead of the 2012 target date! That should INCREASE the S&P rating shouldn’t it!
After the increase, Eddie could take out some of the reserves and put it into the transportation hub/airport lands and make it "shovel ready" for the Gazelle feeders to flog to outside investors or pay of a good chunk of the arena debt in advance.
Clearly, Eddie is counting on the Senior Levels ie really the Federal Government only, to bail him out! They need to come up with US$150M right away to save Eddie’s bacon. Eddie’s future depends on all of the forces of the Universe unfolding as they should at precisely the right time. One little hiccup could cause the whole PLAN to collapse.
If you see massive Conservative Party attacks and anti-Conservative news stories and columns soon, you will know what Sandra and Dwight had to put up with until they caved and gave Eddie his $4M arena offering. US$150M is a bit more wouldn’t you think so will the Feds knuckle under! Really, what will they get for their investment to induce them to do so?
If Eddie fails to get their money, then there are huge problems for him. Kwame blames Eddie so Eddie needs a fall guy. And he has already chosen one: Matty Moroun. If the Eddie Plan fails it is because Moroun messed it up. After all Eddie can never fail. See how easy it is and with no Eddie fingerprints at the scene of the smear:
- “Sutts anticipates Moroun — or potentially other private investment companies — will attempt to derail the deal before it is completed.
“They are going to give it their best try,” he said. “I’m optimistic they are going to fail. Mr. Moroun already has his hands full trying to twin his bridge. But he doesn’t give up. We will have to wait and see.”
Now Melanie asked Eddie a nice follow-up question: what if the Feds did not do so. Of course, Eddie did not answer that. He dared not. He knows enough about infrastructure financing to understand that few investors would put money into a Tunnel that
- has seen its traffic decreased dramatically since 1999
- may not be able to increase traffic if tolls go higher to cover the huge investment cost as in Alabama,
- is quite old,
- is limited in toll increase possibilities,
- has a very strong competitor and
- can have a new DRIC bridge as another competitor.
There is only one infrastructure investor who might help Eddie out and Eddie knows it. Why it would NOT surprise me if Eddie is close to doing a deal with that Company as backup if his attempt to get money out of the Feds fails.
Oh you know who it is: OMERS/Borealis/DRTP! Need I say more. Why else is Mike Hurst trying to re-invent DRTP by putting money into Festival Epicure. Is he bringing in the Bridge Co. with him as a partner?
If it comes down to that, who knows what Mike will demand out of Eddie…. help in getting a doublestack rail tunnel, a Lauzon/E C Row connection to Highway 401, a DRTP truck expressway for DRTP North, sale of the DRTP corridor, approval of an enhanced Ambassador Bridge financed by Borealis, blood!
I wonder if Mario Angastiniotis, Standard and Poor's main analyst on the Windsor file reads my BLOG. He may hold the power of life and death over Eddie's career.
Now this is real drama eh, eh!
posted by JoeBlog at 5:45 a.m.
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