Texas city borrows to pay insurers of its defaulted debt

A small Texas city struggling with water scarcity disclosed this month that it took out a high-interest, short-term loan to repay companies that insured defaulted certificates of obligation.

Clyde, a city of less than 4,000 in central Texas, reported it sold a taxable $1,272,500 tax and revenue anticipation note issue to First Financial Bank in Abilene, Texas, to repay Build America Mutual and Assured Guaranty (AGO) pursuant to insurance policy terms, according to a notice posted on the Municipal Securities Rulemaking Board's EMMA website.

Proceeds are also earmarked for the city's ongoing operations until additional tax revenue can be collected.

The one-year notes due Nov. 20, 2025, carry a 9.5% interest rate, according to the notice.

In September, S&P Global Ratings reported the Clyde City Council increased the property tax rate and enterprise user fees to generate a projected $1.2 million to $1.4 million, while cutting the fiscal 2025 budget by about $1 million.

Following an Aug. 1 debt service payment default, the rating agency downgraded the underlying ratings on Clyde's 2022, $14.35 million combination tax and surplus revenue certificates of obligation issue insured by Assured Guaranty (AGO) and a 2013, $3.815 million taxable issue wrapped by Build America Mutual to D from A-minus.
About $675,000 of the new loan was used to repay the bond insurers, according to the loan agreement, which was included in the EMMA disclosure. The insurers paid interest and principal due to bondholders after Clyde's default.

Clyde's general obligation rating, which was cut to B from A-minus in August, was downgraded again in September by S&P to B-minus. A negative outlook on the lowered rating reflected near-term constrained liquidity given the city's plan to issue revenue anticipation notes.

Moody's Ratings, which does not rate Clyde, highlighted the city's default in a report this week on third quarter public finance delinquencies, noting city officials failed to increase the property tax levy as debt service requirements rose following bond sales in 2022 and 2023.

"The city had ample headroom under the tax rate limitation but did not set rates at a level to comply with the bond ordinance," the report said. "This situation was somewhat exacerbated by a drought which reduced utility revenues."

Moody's added that had property taxes been levied at an appropriate rate, the drought alone would not have been material.

In Clyde's annual financial report for the fiscal year that ended Sept. 30, 2023, auditor Cameron L. Gulley, CPA, said the defaults indicate "the city will be unable to meet future obligations as they come due raising substantial doubt about its ability to continue as a going concern." The city had nearly $43.13 million of outstanding bonds and notes at the end of fiscal 2023.