Costliest Mickey Mouse Bonds Refuting Detroit Shock: Muni Credit

Municipal-bond investors seeking refuge from Detroit’s record bankruptcy may find it in Florida’s Reedy Creek Improvement District, which helps keep Walt Disney Co.’s Magic Kingdom running and is planning its biggest borrowing since at least 1990.

The 40-square-mile Reedy Creek, based in Lake Buena Vista and home to the Walt Disney World Resort, relies on the entertainment company’s affiliates for 89 percent of its taxes. About 85 percent of Florida bonds sold to finance housing developments have defaulted since 2008. Yet the district has seen the extra yield on its debt over benchmark munis fall to the lowest level since April, data compiled by Bloomberg show.

Reedy Creek plans to borrow $384 million this week to help finance road improvements. Disney’s support will benefit the issue, said Justin Land, who helps manage $3 billion of munis at Wasmer Schroeder & Co. and said he’s buying district bonds.

“There are numerous U.S. corporations that are better credits than some cities and counties, and Disney is one of them,” he said.

Burbank, California-based Disney owns two-thirds of the land in the district, where only 31 residents live, according to offering documents. The resort near Orlando played host to a record 57 million visitors in 2012. Disney shares increasing about 28 percent this year through yesterday should also encourage Reedy Creek investors, Land said.

Disney Favored

“As Disney goes, so goes Reedy Creek,” he said in a telephone interview from Naples, Florida. The sale may feature tighter spreads to benchmark debt “than their rating would otherwise indicate,” he said.

Investors in local debt have favored higher-grade bonds since Detroit filed the biggest U.S. municipal bankruptcy last month and as individuals continued to pull money from tax-exempt mutual funds. Top-rated munis have lost 4 percent in the past three months, half the decline of BBB securities in the period, Bank of America Merrill Lynch data show.

Developers in Florida took advantage of rising home prices to set up districts that sold tax-exempt securities before the 18-month recession that started in 2007. They were dubbed dirt bonds because they were secured by levies and special assessments on land. The debt is among the riskiest in the $3.7 trillion municipal market, with much of it offered without a rating. Defaults soared when the housing bubble burst.

Reedy Creek was created 46 years ago as a special taxing district and functions like a local government. The move helped jump-start Disney World’s development without burdening taxpayers in the unit’s territory in Orange and Osceola counties.

Rated Higher

The district is rated higher than the company that pays most of its taxes. Standard & Poor’s upgraded Reedy Creek last week to A+, its fifth-highest level. Moody’s Investors Service and Fitch Ratings assign it their fourth-best ranks. All three companies rate Disney, the world’s biggest entertainment company, sixth-highest.

The district’s limited-tax general obligations rallied after Detroit’s bankruptcy. The extra yield investors demanded to own some bonds maturing in June 2015 a week after the filing dropped to 0.39 percentage point, the lowest since April, Bloomberg data show.

Disney, the 29th-biggest company by market value in the S&P 500 stock index, recently opened the first phase of its New Fantasyland expansion, the largest project in the history of the Magic Kingdom Park. Last year it also opened the 2,400-room Art of Animation resort.

‘Huge Commitment’

“Disney has made a huge commitment on this property,” Ann Blakeslee, Reedy Creek’s comptroller, said in a telephone interview. “We think it’ll help the sale because it has name recognition.”

The district 15 miles (24 kilometers) southwest of Orlando is home to Disney’s Magic Kingdom, Epcot and Animal Kingdom theme parks and has about $7.3 billion of taxable property, according to state tax records.

Disney’s parks, hotels, resorts and other property make up almost 90 percent of the tax roll. More than 60,000 people work in Reedy Creek and 85,000 visitors sleep in Disney’s resorts each night, district documents show.

The small number of permanent residents in Reedy Creek is part of a governing structure that lets Disney World operate like a local government. Only landowners, primarily Disney, are eligible to elect the board of directors. That structure is similar to one that drew an unfavorable ruling from the Internal Revenue Service at a Florida development created by billionaire H. Gary Morse.

Private Control

A May 30 IRS ruling found bonds issued by Village Center Community Development District to help finance amenities at a sprawling retirement complex weren’t tax-exempt. The IRS said the community, called The Villages, is designed to maintain private, not public, control of the governing board. It had issued $426 million of debt since 1992.

While a 1968 Florida Supreme Court ruling found Reedy Creek could issue tax-free bonds for public projects, even if Disney was the sole beneficiary, the similarities between the Disney-dominated district and The Villages “may cause an increased risk” of an audit, according to offering documents.

Reedy Creek’s deal may benefit from the lack of Florida bond issues this year, said Ted Swinarski, a senior vice-president at FMSbonds Inc., a broker-dealer firm based in Boca Raton. Florida issuers have sold $8.4 billion of debt this year, down from $9.4 billion over the same period in 2012, data compiled by Bloomberg show.

No Tax

Florida doesn’t have a personal income tax, meaning residents benefit only from the federal tax-exemption on munis, which they can get from bonds across the country. Floridians still tend to prefer in-state issuers that they know, Swinarski said.

Proceeds from the district’s record sale will mostly fund improvements to Buena Vista Drive, which runs through the resort and leads to areas including Disney’s Hollywood Studios theme park, Downtown Disney shopping and entertainment complex and Blizzard Beach water park.

The district also wants to construct two parking garages near Downtown Disney. Disney announced in March plans to rebrand the area as Disney Springs, doubling the number of shopping and entertainment venues.

Disney Springs is expected to be completed in 2016, Tom Staggs, chairman of Walt Disney Parks and Resorts, wrote in March 14 post on the company’s website. He called the project “a timeless and vibrant place that celebrates the turn-of-the century lakeside towns that dotted the Florida landscape.”

‘Really Well’

Reedy Creek “is Disney, and everybody knows it’s Disney,” Swinarski said. “The credit is fine. It’ll do really well.”

Disney spokesman Bryan Malenius declined to comment.

Municipal issuers such as Dallas-Fort Worth International Airport are set to sell $5.2 billion in long-term debt this week, Bloomberg data show. California will issue about $5.5 billion in revenue-anticipation notes, or RANs, as soon as tomorrow.

At 2.85 percent, yields on benchmark 10-year munis are close to the lowest since July 24. The interest rate compares with 2.62 percent for similar-maturity Treasuries.

The ratio of the two yields, a gauge of relative value, is about 109 percent, compared with an average of 93 percent since 2001. The greater the figure, the cheaper munis are compared with federal securities.

Following is a pending sale:

Connecticut plans to sell $500 million in general-obligation securities in a negotiated issue this week, according to data compiled by Bloomberg. The borrowing includes $235 million in state and federal tax-exempt debt, $165 million in variable-rate bonds and $100 million in taxables. Orders for individuals began yesterday and institutional sales were set for tomorrow. M.R. Beal & Co. and Loop Capital Markets are managing the negotiated sales. The securities are rated AA by Standard & Poor’s, its third-highest grade, and Aa3 by Moody’s Investors Service, one step lower.


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