BALD HEAD ISLAND — A week after the Bald Head Transportation Authority met and a majority approved moving forward with purchasing the island’s ferry system for $47 million, the island’s political leaders drafted a letter to the state treasurer, opposing the sale as it currently stands.
The authority is mandated by legislation to purchase the system, owned by Bald Head Island Limited LLC. Though there’s no deadline baked into the law that created the authority for this purpose, trustees have been working at this for three years — last week’s move to apply for revenue bond approval marked its most significant step yet.
Village political leaders, namely mayor Andrew Sayre and pro-tem Michael Brown, continue to oppose the deal in its current form.
The village cites projected increases to ferry fees, allegedly one-sided consulting documents, the authority’s apparent lack of an official credit rating, and concerns about overpaying for the system as major issues necessary to address before moving forward with the sale.
Village dissent
In a Tuesday letter addressed to State Treasurer Dale Folwell — signed off by the entire village council — the village urged the Local Government Commission (LGC) to reconsider approving the deal. The LGC is scheduled to review and consider approving the revenue bond issuance on Jan. 4, with a closing anticipated in early February.
At the core of the village’s letter is the claim the deal isn’t ripe for approval, and adequate due diligence has not yet been undertaken. Authority Chair Susan Rabon disagrees.
“This authority is following the statute, going through the process. We’re trying to do what we were told to do,” she said. “The statute says this authority shall purchase the system. We’ve been working on this and have done a whole lot of due diligence, more due diligence than most deals — from what I’m being told, out in the market — for three years now.”
The Asset Purchase Agreement passed the Bald Head Island Transportation Authority 7-4 on Dec. 8, with all four dissenting votes cast by Bald Head Island residents: Mayor Sayre, Pro-tem Brown, Dr. Rex Cowdry (a N.C. Department of Transportation appointee), and Claude Pope (a village appointee).
A motion to forward the authority’s application to the LGC passed 8-3, with Pope casting a vote in favor (he did so because he felt he had no option but to accept it, according to the village’s letter, but he continues to have concerns regarding the bond issuance).
By Wednesday, the authority met again to approve its LGC application. This time, given new LGC feedback, the authority approved forwarding the motion with one change: adding a do-not-exceed bond figure of $59 million (the original application stated $56 million). This motion passed 9-2, with the approval of island resident Cowdry.
Recently, Mayor Sayre has publicly stated he is interested in a different governance structure for the ferry system altogether. While the letter is comprehensive in its critique of the deal, it does not address the authority’s governing structure.
None of the four island trustees could be reached for comment; Brown redirected inquiries to the island’s spokesperson, Carin Faulkner. Faulkner explained village staff is not in the position to endorse or not endorse the letter; staff serves at the behest of council.
Rating without credit history
As the state’s only maritime authority and a brand new government entity, the private-to-public ferry deal is unique. Unlike other state-maintained ferry systems, organized under the N.C. Department of Transportation, BHITA would regulate itself under its own legislation.
State Treasurer Folwell said he was unfamiliar with the deal until his team heard a preliminary proposal of it last week. Folwell visited the island for the first time Thursday, after the mayor invited him for a tour.
A key issue in the letter is BHITA’s bond rating. As a brand new entity, the authority has no experience paying off debts. On paper, the authority’s bond rating is not yet confirmed. Folwell could not immediately confirm whether it is typical for the LGC to approve bond financing for an unrated entity.
“We have to anticipate if this were to happen again, what precedent are we creating?” he said.
Like individuals with good or bad credit, BHITA’s bond rating will impact how much debt it will need to cover the cost of the sale to account for interest. The better the rating, the lower the debt — and vice versa.
A lack of credit history makes rating BHITA complicated but not impossible.
“The modeling assumes an interest rate, but we will not know whether that assumption is reasonable until we receive the indicative bond ratings, possibly before next week’s meeting of the Authority, and can determine whether our debt is likely to be investment grade or non-investment grade,” the letter states, attributing the concerns to Cowdry.
Investment-grade bonds are issued to entities with high ratings; non-investment grade bonds, also referred to as “junk bonds,” are issued to riskier entities.
The Dec. 15 letter claims indicative bond ratings have not yet been received. The following day, the authority accepted a motion to review its third indicative bond rating. These preliminary ratings are confidential, Rabon explained.
“Before we would go to market we would know what the rating situation would be,” she said. “The point being is, it’s not that we don’t want to know or we won’t know those ratings. We’re in that process. And before we would go before the LGC, we would know that answer.”
Village leaders cite changing models and an apparent lack of information provided to village trustees as another reason to postpone the bond issuance. They point to a negotiating subcommittee, which worked out the transaction, that has no island residents on it.
Rabon said all trustees have had access to all information necessary to review the deal.
“As you move forward with your due diligence, it gets stale if you let it sit too long,” she said.
Pricing
BHITA has contracted and produced nearly a dozen consulting reports to prepare for the sale. It has paid (or has agreements in place to reimburse post-sale) its consultants with financing by Bald Head Island Limited. All of BHITA’s revenue has been funneled through at least six grant payments from the village, totaling at least $365,000, all provided by Limited.
The village — or any other public entity — has not contributed any funding to finance the deal.
“Many of the financial and performance projections are coming from Limited, as Seller, not from an independent study or industry expert,” the letter states. “We are concerned that the buyer has relied too much on the seller for information without seeking neutral appraisals and assessments on many items.”
Citing necessary operational improvements that have not been accounted for, the village argues the $47 million purchase price may be too high.
“This could lead to overpayment for a system that needs improvements,” the letter states. “The purchase price appears to assume that improvements have been made or are included, which are not.”
Chad Paul, CEO of Limited, calls it inaccurate that claims of the materials being studied aren’t independent. “We have provided independent, third-party, audited financial statements going back to 2014,” he confirmed.
In a concern attributed to Pro-tem Brown, the letter cites projected ferry rate increases set to kick in July 1, raising rates 17% from $23 to $27. Barge rates are projected to increase by 9%, from $55 to $60 per 6 feet, according to the letter.
“The facts are this: The ferry and the tram have been regulated since 1993,” Paul said. “Since 1993, there has been one increase on the ferry and the tram.”
In 27 years, the ferry fee has increased once, in 2011 from $15 to $23. “Price increases have not even kept pace with inflation,” he said.
Countering the letter’s point that the public or trustees have not been adequately briefed on the subject, Paul points to a preponderance of public input opportunities provided along the way. The village, the City of Southport, and Brunswick County all unanimously endorsed the legislation before it was signed into law.
According to Faulkner, village political leaders may choose to further address their concerns in the future.
“The LGC is not merely approving a bond issuance in this instance, its actions would immediately affect thousands of individuals and businesses
who depend upon the transportation system as their sole means of access to Bald Head Island and who have been provided no insight or input into the transaction,” the letter states.
Read the full letter below:
Village Council letter to LGC by Johanna Ferebee Still on Scribd
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