By Richard Bilbao
New York-based Fitch Ratings on April 22 placed the Reedy Creek Improvement District’s credit rating under a “negative watch,” indicating a possible downgrade in rating.
That means a primary funding mechanism for many Reedy Creek Improvement District projects in and around Walt Disney World has credit experts a bit wary.
Fitch identified more than $766 million in outstanding ad valorum tax bonds (rated at AA-) and $79 million in outstanding utilities revenue and refunding bonds (rated at A) tied to Reedy Creek.
“The negative watch reflects the passage of a bill by the Florida Senate and House of Representatives that would result in the dissolution of independent special districts created prior to 1968, including [Reedy Creek Improvement District], effective June 1, 2023, if signed into law by the governor. Such districts affected by the dissolution bill may be re-ratified on or after the dissolution date,” said a Fitch report.
The agency goes on to say the watch rating reflects the uncertainty ongoing around Disney’s (NYSE: DIS) Reedy Creek district, which could be dissolved by June 2023 if Florida Gov. Ron DeSantis signs a bill approved by the state Legislature earlier this week.
Fitch’s report mentions how Reedy Creeks debts and assets would be transferred to Orange and Osceola counties — the two municipalities that likely would assume their respective geographical assets/debts — but it could be complex. “Fitch believes the mechanics of implementation will be complicated, increasing the probability of negative rating action.”
This likely will raise the antennae on investors of Reedy Creek bonds or those closely watching it, sources with knowledge of the bond market told Orlando Business Journal.
Uncertainty is not great in the investment market and the health of a rating can determine how much an issuer pays in interest. In addition, the borrower could face higher risks — never a good thing in investing.
In fact, Investopedia, a New York-based financial website, defined a negative watch quite harshly. “Having its credit rating downgraded, or being under a negative watch, is a big blow for a company. It means it will have to pay a higher rate of interest to borrow money from a bank or issue bonds on the market for the foreseeable future.”
Fitch’s report did leave room for a silver lining when it said the watch would be removed if the bill is not signed or if the transfer of assets and liabilities plan preserves the credit quality and payment capacity pledged to the bondholders.
In that case, there may be some good news, Angel de la Portilla, president of government consulting firm Central Florida Strategies Inc., told OBJ. “The risk of default is very minor, because, if in fact the transfer of the debt goes to Orange or Osceola counties, those are two governments with high credit ratings. Therefore, the risk of default is minimal.”
However, Orange County Mayor Jerry Demings, during a post event briefing on April 21, said the potential shifting of operational burden is “catastrophic” to the county’s budget.
Meanwhile, Osceola County spokeswoman Krystal Diaz said her county will begin to assess the potential impacts.
Executives with Disney and Reedy Creek were not available for comment.
Source: Orlando Business Journal
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