On April 22, 2022, Florida’s Governor, Ron Desantis, signed a bill dissolving Reedy Creek Improvement District (“Reedy Creek” or “RCID”), a special district in which Walt Disney World is located. Governor Desantis claimed Disney was “trying to impose a woke ideology on our state” after The Walt Disney Company (“Disney” or the “Company”) spoke out against Florida HB 1557 “Parental Rights in Education,” a bill that has generated a significant public and editorial response, with editorials and articles addressing topics ranging from legal challenges to the treatment of public debt and how principal and interest is to be paid.
Reedy Creek Improvement District, created in 1967, encompasses around 25,000 acres in Orange County (FL) and Osceola County (FL), and is responsible for overseeing land use, providing essential services, and operating and maintaining all public roads and bridges within the district. The district’s boundaries include 4 theme parks, 2 water parks, 1 sports complex and over 40,000 hotel rooms along with numerous restaurants and retail stores.
The dissolution of Reedy Creek Improvement District, set to occur on June 1, 2023, leaves several questions unanswered including the treatment of outstanding debt. If dissolved, approximately $79 million in utility debt and $766 million in ad valorem tax bonds would likely fall to Orange and Osceola County. Desantis’ opponents have been quick to point to the increased debt load and the possibility of significant tax increases. In response, Desantis claims “the bonds will be paid by Disney. They will be paying taxes, probably more taxes…and they will no longer have the ability to run their own government.” No details about the state’s plan have been released but some point to a possible “substitute entity” to replace Reedy Creek Improvement District.
“APA continues to stress the importance of strong security pledges and explicit bondholder provisions.”
The move to dissolve Reedy Creek has also been scrutinized by the rating agencies. Fitch placed Reedy Creek’s debt on negative outlook. In addition, Fitch dropped RCID’s general government score from 5 to 3 due to “a substantially reduced degree of independence from political pressure.” Standard & Poor's assigned a “developing” outlook stating “Developing scenarios do not come up very often…the committee could see different credit paths.” Out of the more than 20,000 municipals rated by the agency, only six have a developing outlook. Moody’s also assigned a “developing” outlook noting RCID’s debt “could improve, remain the same or weaken” as “future events remain unclear.”
APA continues to monitor the ongoing situation. We reduced exposure to Reedy Creek bonds prior to the passage of Florida HB 1557 due to uncertainty surrounding the treatment of the debt. We believe Desantis’ bold move was about garnering headlines and showing his base that he will stand up to corporations, no matter how big or powerful. In the end, we expect bondholders to continue to be paid principal and interest without any disruptions, and we expect the state of Florida and Disney to reach a solution before the June 2023 deadline.
APA will continue to monitor political risk, and seek to manage the instability that often arises from an uncertain political climate. Reedy Creek bondholders have the benefit of strong bondholder provisions. However, there may be situations in the future where bondholder rights are trampled in a messy political battle. For that reason, APA continues to stress the importance of strong security pledges and explicit bondholder provisions.
Source: Reedy Creek Improvement District (“RCID”) Planning and Engineering Department.
Disclosures:
APA is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about the advisor including its investment strategies and objectives can be obtained by visiting www.assetpreservationadvisors.com. A complete description of APA’s fee schedule can be found in Part 2 of its FORM-ADV which is available at www.assetpreservationadvisors.com or by calling (404) 261-1333.
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Information herein is as of May 6, 2022 and is subject to change.