Municipal bond explosion exposes flaws in corner of $600 billion market

(Bloomberg) — There are red flags flying around Randy Miller. He is bankrupt. He was accused – not once, but three times – of defrauding business partners. He points to a partnership with international football powerhouse Manchester United, although his other links with professional teams have been cited for more than three decades.

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But when the 68-year-old businessman and his son turned to Wall Street in 2020 and 2021 for money to build a sprawling youth sports center in the Sonoran Desert outside Phoenix — after repeatedly failing to raise enough financing on their own And then – it not only obliged, but also lent him $280 million.

An audit late last year showed that all it needed was an eight-page application to the Arizona Industrial Development Authority, which has never turned away any borrowers seeking state approval for its bond sales. Pending yields near 8%, the debt was snapped up by large institutional money managers like Vanguard Group Inc.

Soon, everything went south.

The group Miller said was lined up to use Heritage Park never showed up. At least seven organizations, including Manchester United, told Bloomberg News they had never signed the “pre-contract” or “letter of intent” cited in the bond prospectus. Three of the letters note that bondholders, meanwhile, who aggressively competed for high-yield bonds amid easy funding and low interest rates, are now all but wiped out.

In less than three years, the former minor league baseball player’s dream project has morphed into the third-largest default in the municipal bond market since the pandemic.

Miller and his son did not respond to emails and phone calls from Bloomberg seeking comment, and have not been accused of any wrongdoing by law enforcement.

Bad timing

To be clear, they had bad luck and bad timing, launching the project just as the pandemic was upending the sports industry and economy. Yet its collapse also exposed some long-running secrets on Wall Street: Billions of dollars of risky projects are financed every year with little scrutiny or government oversight — all because they leverage the names of state and local governments .

“This is going to be a classic example of the problems in these types of government funding arrangements,” said Stephen Griffin, a consultant at Saybrook Fund Advisors. The company set up an agency to file suit against Miller and other bond sellers. After default.

Such debt, which is not subject to rules that apply to corporate stock and bond sales, is sold by an array of institutions across the U.S. that do little other than lease access to municipal markets. Some of the deals were arranged for local universities, but they were also used to finance new nursing homes, charter school startups and for-profit ventures like the American Dream mall in the Meadowlands, New Jersey, which was one of Bonds create a risky corner, the safest haven in the market.

All told, there are about $600 billion in these so-called pipeline bonds, or about 15% of all municipal bonds.

There are few checks and balances, mainly because the agency is not responsible for the debt if the project fails. These securities are often unrated, and some of the highest-yielding securities in the industry succeeded when interest rates were at their lowest. It is easy to attract money managers to flock to it.

Now, more projects could be pushed to the brink as soaring borrowing costs close the door to low-cost refinancing.

“We are prepared for a default,” said Matt Fabian, a partner at Municipal Market Analytics.

His firm estimates that pipelines account for about three-quarters of the $15.5 billion in municipal bonds currently in default (excluding Puerto Rico’s bonds). That includes securities sold through the Arizona IDA, which has issued bonds that have fallen into default eight times, the fourth-highest number among such conduits since 2020, according to MMA.

By the time Miller approached the agency, it had already approved dozens of applications for bond sales. In fact, from the agency’s founding in 2016 through last June, borrowers had raised more than $8 billion through the sale of pipeline bonds, which funded 124 projects in the agency’s name, according to a state audit. Not a single application was rejected.

Dirk Swift, executive director of the Arizona IDA, said in an email that the agency left the review to underwriters and investors. He said the agency “does not substitute its judgment for the expertise of financial professionals” or “investment markets.”

In August 2020, the agency sold $250 million in bonds for the Legacy project, with investors receiving a top tax-free yield of 7.84%, followed by an additional $33 million in June 2021.

The more than 1,000-page prospectus describes Miller as a successful businessman with extensive ties to the sports industry, listing his ties to the NFL’s Arizona Outlaws and the 1980s Phoenix Giants. .

“We never signed”

The prospectus also said Miller’s management company has entered into binding “pre-contracts” with 25 organizations that plan to use the facility, which is expected to bring in $23 million in annual revenue. The prospectus also said that 26 other organizations, including Manchester United, had signed similar “letters of cooperation.” Intent,” committing an additional $19 million.

But United never authorized the use of the park as a U.S. training ground, said Andrew Ward, part of the team. Ward said the letter from the English club contained in the prospectus was false.

Officials from at least six other groups told Bloomberg News they had never signed such an agreement, with two of the groups questioning the authenticity of letters expressing interest in the facility.

These include Real Salt Lake City, a youth soccer league club affiliated with Major League Soccer’s Real Salt Lake. The prospectus included a letter from Real Salt Lake executive director Brent Irving saying the club agreed to relocate its 7,000 players and tournaments. and camping at Heritage Park.

But Irvine said the organization made no such commitment and the signature on the letter was not his.

“We never signed or committed anything to Heritage Sports Center,” Irwin said in an email. “We attended meetings when they were marketing the complex but decided not to move any games, practices or championships. to the facility.”

Miller did not respond to a series of questions about the statements in the offering documents, which were sent to his email account, his LinkedIn profile and a spokesman for his company.

Michael Grimm, a staff writer at BC Ziegler & Co., the investment bank that underwrote the bond issuance, declined to comment for this article. The underwriter is one of those charged in a lawsuit led by Saybrook, and Grimm said the company will address any issues. Regarding its role “in any proceedings”.

Even before the Legacy project, Miller was already in trouble with his business.

In 2005, he purchased a small pool cleaning business from John Hunt, who later sued Miller, accusing him of failing to pay expenses for the business. Miller agreed to settle, according to the court, which handed him down after he failed to pay costs. Five years later, Miller was ordered to pay Monica Labadie $96,000 after trying to raise money to start the sports park project. For dollars, Monica Labadie sued him for failing to repay a loan she was told would fund the project.

Unable to pay his debts, he filed for bankruptcy in 2012 – having filed for bankruptcy twice in the early 1990s – listing debts of $539,456 and assets of $890. Labadie said she eventually got what she was owed, but Hunter said he gave up on the collection.

The plan went wrong

In 2018, Miller again sought funding for the complex, planning to use the cash to obtain a letter of credit and then use the letter of credit as collateral for a $200 million loan.

But a man claiming to be an agent absconded with $2.4 million raised by Miller’s company, Legacy Sports, according to federal court records. Three people who invested in Miller’s letter of credit scheme filed a Maricopa County securities fraud lawsuit against him and his companies. One of them, Walter Simmons, said they dropped the case after reaching a settlement with Miller. Simmons said Miller paid back what he was owed, but he never received equity in the projects he was promised.

Miller’s options were running out. Then, through a real estate consultant, he connected with Ziegler, who had a niche in raising money for nursing homes.

They decided to go through the Arizona IDA. To qualify for pipeline financing, Miller converted one of his companies into a nonprofit called Legacy Cares and lost his job on the board. Legacy Sports then signed a contract to develop and operate the complex, and his son, Chad Miller, became CEO. Chad Miller did not respond to phone calls and emails. Doug Moss, who serves as president of Legacy Cares, did not respond to questions sent to his personal email and requests sent through the nonprofit. Moss, who did not respond, has not been accused of wrongdoing.

Ziegler received about $5.7 million in underwriting fees to sell the bonds to large investors such as Vanguard and AllianceBernstein, which were among the largest buyers. Vanguard spokesperson Jessica Schifalacqua said the investment is part of a broader investment plan. Diversified Fund Portfolio. AllianceBernstein spokesperson Carly Symington declined to comment.

The pandemic posed challenges from the start, delaying full openings, causing labor shortages and triggering event cancellations. Weakness in the restaurant and concession business also played a role, with the park taking in just $27.7 million last year, well below its forecast of nearly $100 million.

After failing to refinance the bonds, Legacy Cares began exploring alternatives, including selling the park. Miller’s company was fired as operator in March. Two months later, it filed for bankruptcy.

In October, a preliminary agreement was reached in bankruptcy court to sell the facility for $25.5 million, most of which would go to contractors awaiting payment.

If the deal goes through, bondholders will receive $2.2 million in cash and an 11% stake in the new business, which would use up nearly all the money they invested.

–With assistance from David Hellier, Neekait Mokashi and Wilson Lees.

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