BALD HEAD ISLAND — The privately run Bald Head Island ferry system now has two public bidders vying to acquire its assets, valued at $50.9 million.
One — the Bald Head Island Transportation Authority — has been tasked by legislation to purchase the assets. The other —the Village of Bald Head Island — runs a tiny local government with an operating budget that’s one-fourth of the system’s valuation.
To be fair, though, neither has any experience running a ferry system. Plus, the state-created authority’s $150,000 operating budget is dwarfed by the ferry’s value and lacks any credit history.
The seller, Bald Head Island Limited LLC, has no plans to entertain an offer (which has not yet officially been made) from the village.
“We are working in good faith, per the legislation, to close with the Bald Head Island Transportation Authority,” Limited CEO Chad Paul said Tuesday. “That’s our marching orders.”
Signed into law in July 2017, Senate Bill 391 created the transportation authority, obligating it to purchase Limited’s ferry assets; the assets “shall be acquired” at or below their appraised value. An LGC spokesperson could not immediately clarify whether the village was an eligible buyer.
“Until the governor or the legislature tells us otherwise, we’re working with the Bald Head Island Transportation Authority,” Paul said.
Two public buyers
Village council unanimously made its intentions known in a Mar. 22 letter to the Local Government Commission, stating its commitment to purchasing the system expeditiously. In the letter, council wrote “village ownership is expected to achieve significant economic advantage” for the system, island homeowners, and system ridership. A village spokesperson would not explain what council meant by this statement. (After this article published, the village addressed this question in a FAQ document, explaining the village may be able to obtain a higher bond rating and lower interest rate than the authority, leaving room for funds to be attributed to improvements rather than interest payments.)
Council and village stakeholders have taken issue with a number of concerns related to the sale, including its valuation (negotiated down to $47 million from $50.9 million), potential lack of funds for necessary capital improvement projects, high debt service with the authority, and lack of public engagement.
Overpaying and heightened debt could squeeze ticket fares higher and mean much-needed improvements and efficiencies never happen, village stakeholders worry.
Over a 30-year period, the authority would be obligated to $49 million in interest payments — double the principal, according to current estimates. The debt service is steep because: 1. the authority is brand new and lacks credit history; 2. revenues are tied to fares, with ridership fluctuating with market trends (specifically, new home construction, which will max out the island’s available real estate by 2050); and 3. demand and growth prospects are restricted, estimated to plateau.
On peak holiday weekends, island stakeholders complained of maxed-out parking lots, waiting hours to catch a ride, faulty equipment, and a disorganized baggage system. All these factors should devalue the system, they claim. On the other side, estimates credit Limited’s monopolistic operation as supporting its value.
Assigned a BBB- credit rating, the authority is considered the lowest-ranking investment grade bond before reaching non-investment grade, or “junk bond” status.
Eric Golynsky, the authority’s bond underwriter with USB Financial Services, Inc., explained in a February meeting the authority would be the highest rated unsubsidized ferry operation in the world.
Most local governments are rated “A” or higher, Golynsky explained, because their revenues are tied to property taxes, which are considered more reliable than ticket fares.
If a sale is delayed beyond mid-April, the rating must be reviewed again.
Should the village proceed with an official offer, the village would in all likelihood submit a bid lower than its current price tag, given its stated concerns that the valuation is inflated. Still, it is not clear at this point whether the village could obtain a lower interest rate or if its finances are robust enough to take on such an expensive endeavor, relative to its existing $12 million budget.
A village spokesperson said it had no further statements on whether it was prepared to manage a $47 million system
In January, village council asked the LGC, responsible for approving the issuance of revenue bonds, to delay the sale to the authority for at least six months to allow for public input and oversight — a request the village “vigorously opposes” and N.C. State Treasurer Dale Folwell said he intends to honor.
The sale was due to be approved in early February. Council halted the transaction when it first alerted the LGC to its dissent in a mid-December letter. The village’s mayor invited Folwell on a tour of the island, and days later, the treasurer put forth an unprecedented request: Limited’s owner, the estate of the late oil tycoon George Mitchell, should donate — not sell — the $47 million ferry system to the state.
Worth an estimated $2 billion in 2013, Mitchell and his family developed the island into a vacation and second-home haven in the ’80s.
In turn, Paul said the estate was not in a position to donate the system.
The treasurer was troubled by the authority when he first learned of the village’s objections in the letter; village representatives had indicated there was no opposition to the sale during their first preview presentation with the LGC on Dec. 1. An official vote didn’t take place until Dec. 8, when village residents on the authority opposed the sale 7-4. The village first wrote to the treasurer Dec. 15.
Friday, Limited wrote to the treasurer to object to the village’s attempt to purchase the system, stating authority representatives did not misrepresent the circumstances or facts in the LGC presentation.
While the authority is obligated by statute to purchase the system from Limited, the company isn’t obligated to sell to the authority.
Limited may consider selling off pieces of the system (which consists of ferry, barge, tram, and parking operations), the authority warned the LGC in a Jan. 27 letter. Even if Limited was willing to wait on a sale, the authority wrote, costs would accrue associated with updating consultants’ sale documents. To date, Limited has paid at least $365,000 to the authority (funneled through the village, which has expended no funds toward the transaction) to cover initial consultant fees related to the sale.
A delay could jeopardize the entire transaction, according to the authority, after more than three years of work.
“The uncertainty around the LGC’s willingness to consider the transaction casts a shadow on the transaction and may adversely impact investors’ willingness to purchase these bonds, thus further increasing the cost of operating the System through higher interest costs (thus requiring additional rate increases),” the authority wrote to the LGC.
Despite the authority’s concerns, Limited has made clear it intends to sell to the authority. In the company’s Friday letter to the LGC, it wrote it was “both surprised and disappointed” in the village’s transition from stakeholder to “competitive bidder.”
“[A]bandoning a transaction with the authority at this late stage would be inappropriate, irresponsible and in bad faith . . .” Limited wrote. [piece continues below]
The possibility of the village purchasing the system also presents a regional problem.
Deep Point Marina is located within Southport town limits (it’s also where the system’s most valuable asset — its $38.2 million unregulated parking operation — is situated). Brunswick County residents make up nearly all of the island’s working ridership, representing 45% of annual ferry traffic.
Village leaders have complained the authority lacks island representation. But the alternative would mean island-only representation for a regional transportation system.
Before the village’s public purchase statement, Mayor Andy Sayre said he’d like to revisit the original legislation to include more representation for the island on the authority board.
Currently, the 11-member authority has three direct village appointees. The N.C. Department of Transportation also has three appointees (one is an island resident), Brunswick County has one, Southport has one, the N.C. General Assembly has one, and the governor has one (Susan Rabon, who owns property on the island).
“Most of the members of the transportation authority are not engaged in the island. They don’t ride the ferry, they don’t use the barge, they don’t use any of that — we do,” Claude Pope, a BHITA trustee, said in a Dec. 9 village council meeting.
In late January, the Bald Head Island Club Board of Governors, representing its 1,200 members, told the LGC it had concerns with the composition of the authority and its lack of a majority of full-time island residents.
Southport mayor Joe Hatem said his board would discuss the village’s request at its next meeting.
Brunswick County Commissioner and Southport resident Pat Sykes said ultimately, it’s up to the authority to make decisions about the system’s operation and ownership.
“Transportation of all types is an important issue for the residents, workers, and visitors in Brunswick County,” she wrote in a statement. “The Brunswick County Commissioners have confidence in the authority to make the right decisions for the ferry system and the region concerning this issue.”
The village wrote it had a fiduciary responsibility to pursue economic benefits and public oversight during the purchase. What about its members’ fiduciary duty?
Three board members now sit on two boards that are competing with one another. How will the members honor their obligation to the authority, whose sole function at this point is to purchase the system, short of resigning or recusing themselves in future votes?
In a December authority meeting, held the day after council first objected to the sale (and before the village publicly entered the ring as a competitor), Sayre spoke up after Rabon read an ethics statement. He was concerned whether his role as mayor of the village would present an issue, to which attorney Hal Kitchin told him it posed no conflict of interest.
Last week, Kitchin said he could not address a question relating to the members’ fiduciary duty. Village appointees on the authority — Sayre, Pope, and Mike Brown — did not respond to requests to comment.
After this article published, the village released a FAQ page and the following statement on behalf of Sayre:
“We believe the Island will be better served in the long run if transportation operations are managed by the entity most closely accountable to people using the system and paying for the system in the form of parking and barge fees and ferry tickets. This development arises now, as only recently were the proposed transaction diligence, terms, and bond rating/finance costs made public by the Authority. We know that questions remain. We ask that you please be patient while the Village investigates the matter. Much here is beyond the Village’s control,” according to Sayre’s statement.
Catch up on the ferry sale saga:
Send tips and comments to Johanna Ferebee Still at email@example.com