CHICAGO -- Polk County, Iowa, officials said they may attempt to force an early redemption of approximately $39 million of bonds sold to build a horse racing track to gain substantial interest rate savings.
County Manager James Koolhof said the county is considering exercising a "calamity clause" contained in the indenture of a $40 million industrial revenue bond issue done in 1984 on behalf of the Racing Association of Central Iowa. The proceeds were used to construct the Prairie Meadows racetrack in Altoona.
Under the calamity clause, the bonds can be redeemed prior to the Dec. 1, 1997, optional call date if the racetrack's is damaged beyond repair or condemned by a government body. The clause also contains an early-call provision if the racetrack does not operate for 12 consecutive months due to "unreasonable burdens or excessive liabilities" imposed on the county or the racing association, the operators of the racetrack.
Mr. Koolhof said the county is no longer willing to consider subsidizing operations at the racetrack unless interest rates on the outstanding bonds are lowered. The bonds, which mature in 2014, carry an average interest rate of 8.5%. He said the county has spent $9.3 million subsidizing operations at the racetrack since it opened in 1989.
If the county does not provide an operating subsidy, Prairied Meadows will be unable to hold a live-racing season next year, Mr. Koolhof said.
If the 1992 season is canceled, Mr. Koolhof said the county could redeem the outstanding bonds after Labor Day of next year. He said the county would issue GO bonds and turn over the proceeds to the racing association, which would then pay off bondholders.
He estimated that refinancing the outstanding bonds could reduce annual debt service payments by $700,000 a year.
Mr. Koolhof said the county would be willing to forego exercising the calamity clause if the bond trustee, First Trust National Association Inc., of St. Paul, Minn., agreed to a lower interest rate.
Although the racing association is responsible for paying the annual debt service on the bonds, the county is obligated under a lease-purchase agreement to make up the difference between the $4 million annual debt service payment and track revenues derived from a 6% wager tax.
County Budget Manager Jan Paterson said the county expects to have to provide $1.75 million to help make this year's debt service payment.
Some public finance officials in Iowa said by cutting off operating funds to the racing association, the county is forcing the closing of the racetrack it financed to get the trustee to accept lower rates.
Mr. Koolhoff said he realized the attempt to use the calamity clause to precipitate the early redemption of the bonds could be controversial.
Officials of the trustee could not be reached for comment.
Ann Lowenthal, vice president and manager of the Plains Region at Moody's Investors Service, said the county's proposal is "unusual." She added that if the outstanding debt is redeemed under the calamity clause, it would prompt a review of the county's credit rating.
In July, Moody's downgraded the county's approximately $22 million of outstanding GO debt to Aa from Aaa, citing a "lack of willingness to implement a long-term alternative to General Fund subsidization of Prairie Meadows racetrack operations and debt service." At the same time, the rating agency downgraded the rating on the racetrack bonds to A from A1. Standard & Poor's Corp. rates the county's GO debt AA, but does not rate the racetrack bonds.