Muni bonds for rich seniors

April 25, 2011

When I hear “municipal bonds” I usually think of the “public wealth” being used to assist the less fortunate or being used to build common assets that are available to all the public. But in Massachusetts it’s the very wealthiest that have benefited from public financing.

Linden Ponds, an upscale retirement community where President George H.W. Bush’s brother, Prescott Bush Jr., spent the last part of his life, is in the process of defaulting and restructuring on $152 million in municipal bonds.

From the Boston Business Journal:

Last month, Linden Ponds skipped a principal and interest payment on its bonds as a way to conserve cash. Linden Ponds is a nonprofit whose creditors include municipal bond mutual funds based in Boston. Sovereign Bank also plays a major role as the letter of credit provider, or financial backstop, on the variable rate portion of the debt.

On April 14, the board of the Mass Development Finance Agency, which in 2007 issued the original bonds on behalf of Linden Ponds, authorized a restructuring term sheet that would allow a bond refunding. Investors holding about 75 percent of the debt have agreed to refinance up to $152.2 million in outstanding bonds. MassDevelopment declined to give any more specific details.

Now I’m assuming that it is the bondholders who will be taking a loss on their investment in this high end, public/private retirement community. Because if it is the taxpayers that would be a hard one to stomach.

I spent hours reading Linden Ponds documents today and unfortunately can’t easily summarize all the cash flows between the local, public entity and private firm in Maryland that built the facility and earns substantial “management fees” for overseeing Linden Ponds. The private entity, Erickson Retirement Communities, went bankrupt last year, but this facility was not part of that proceeding.

Then I tipped my toe into the background of Mass Development, which is overseeing the refunding and reissuing of Linden Ponds bonds. From the MassDev website:

Created in 1998 when the Massachusetts State Legislature enacted M.G.L. Chapter 23G and merged the Massachusetts Government Land Bank with the Massachusetts Industrial Finance Agency, MassDevelopment is the state’s finance and development authority.

Both a lender and developer, the Agency works with private- and public-sector clients to stimulate economic growth by eliminating blight, preparing key sites for development, creating jobs, and increasing the state’s housing supply.

A quick perusal of their 2010 annual report (page 34) showed a $52 million project at Milton Academy, one of the nation’s most expensive boarding schools with a boarding student tuition of $43,975.

Who is benefiting from municipal bonds? It is really hard to determine.

Quis custodiet ipsos custodes?

MSRB’s EMMA: Linden Ponds Monthly Reporting Package for February 28, 2011

MSRB’s EMMA: Linden Ponds debt schedule

Guidestar: Linden Ponds 990 for 2009

Mass Development 2010 Annual Report

One comment

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Muni bonds are great until your local town bond issuer declares Chapter 9 like bankruptcy.

There have been about 250 “Non-payment Related Defaults” on file. To see a real portfolio of bankrupt muni bonds, go to  /752/example/1

The painful truth is that as muni debt increases, so do the risks that someday it will be politically, economically and financially worthwhile for borrowers to walk away from paying back their loans to bondholders.

As we all hate to hear, public employees are now paid higher total compensation than private sector employees. Yet the private sector pays for these public salaries thru higher taxes. This is not a sustainable system.

Bondholders should realize we are vulnerable to losses as cities, towns, and states unless we all take action today to reduce expenses and renegotiate public pension and health-care obligations.

Posted by Jim_Walker | Report as abusive

[…] was in the amount of $156 million and the issuer was the Massachusetts Development Finance Agency. I wrote previously how unreasonable it was for this project to be financed as a “municipal” bond. It is housing for […]

Posted by The declining welfare rolls | MuniLand | Report as abusive

[…] deal. Another senior housing complex that defaulted on its bonds, one in Massachusetts called Linden Ponds, was also underwritten by Ziegler Capital Markets. Of course that could be mere coincidence, […]

Posted by The SEC’s startling refresher on due diligence | MuniLand | Report as abusive