Project Sugar has soured

By Cate Long
October 3, 2011

Missouri has a sweet mess on its hands. A half-completed manufacturing facility, financed with industrial revenue bonds underwritten by the small municipality of Moberly, has gone bust.

The politics around the project, called Project Sugar, also appear very messy. Originated by the American and Chinese firm Mamtek, the project was shopped around to 13 communities without adequate due diligence by the Missouri state economic development agency. The SEC has issued subpoenas to most of the players in the project.

Maybe over-eagerness to create jobs in a hard-pressed area made so many public officials blind to the viability of Mamtek. On the other hand, maybe there is criminal wrongdoing. Project Sugar will surely become the poster child for improper use of municipal revenue bonds and the fallibility of government officials as they try to pick economic winners and losers.

But the saga is not over; the Bond Buyer has the latest:

In the most recent development, the former chief executive officer of Mamtek has formed a new company and hopes to take over the project. The [bond] trustee is reviewing an agreement between the city and the new company, American Sucralose Manufacturing Inc., submitted last Tuesday. “The trustee is reviewing the implications of this agreement with its counsel,” the notice read.

[--]

The trustee also reported that last Wednesday it learned Mamtek had assigned its assets to Development Specialists Inc. to be liquidated and distributed to creditors. The trustee is reviewing the “implications of this assignment,” it wrote.

So a principal from the soon-to-be-liquidated firm, Mamtek, has rushed off to form a new corporate entity and wants to continue the project supposedly by acquiring the assets of the bankrupt company. The AP adds that the principal investors of Mamtek formed the successor company.

It really doesn’t get much richer than this. The important question for Moberly taxpayers is who will pay off the bonds. Assuming that the reconfigured corporate entity can pull it off on the second round may be foolhardy. The project has almost $39 million of municipal bonds outstanding and it’s not clear who is going to make those bond payments.

Standard & Poor’s thinks that the city owes payments to the bondholders since they issued the bonds through their Industrial Development Authority. From S&P:

The series 2010A, 2010B, and 2010C bonds were issued by the Moberly Industrial Development Authority and are secured by revenues derived from a financing agreement between the city and the authority. Pursuant to the financing agreement, the city has pledged to annually appropriate basic payments from legally available funds, to be paid directly to the trustee for deposit in the bond fund.

The local paper, the Moberly Monitor-Index, is reporting the opposite, i.e. the bond documents really do not require the city to pay off the bonds beyond the monies appropriated this year. From the September 20th Monitor-Index:

However, the bond document itself appears to indicate several times the city would not have any financial obligation beyond each current fiscal year, as the council votes annually whether or not to appropriate the funds to cover the payments to bondholders.

Page 28 puts it bluntly, in all capital letters: “The city is not legally obligated to appropriate funds to pay the basic payments or additional payments under the financing agreement.”

In the best-case scenario, Project Sugar would find a way forward that completes the project, creates jobs and pays off the bonds. But like many private municipal projects that go bust, the solution might be found in court. It’s too early to say for Moberly but I’m sure that every official involved is now doing a lot diligence on the situation.

I hope that Project Sugar is a warning to every public official about the harm of over-eagerness and committing their communities to projects they dont understand. Times are tough and tax dollars are precious. They must be spent carefully and not sprinkled away like sugar.

Further:

UMB Bank: Notice Regarding Recent Developments and Summary of Bondholder Call (Notice #3)

Moberly Monitor Index: Mamtek, city sorting out financial responsibilities

StlToday.com: Editorial: Who foots the bill when economic development deals fail?

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Was this a conduit deal or straight public debt?

Posted by etsrolltide | Report as abusive