In Mayor Bill Johnson's ferry plan, city council would approve establishing a public authority to take ownership of the ferry in December, and the state legislature would approve it in early February. The authority might handle the operation itself, or it might hire a company to do it.
The authority would be appointed immediately so it could issue bonds that would pay for the ferry, its start-up costs, and establish a $4 million cash reserve. And the ferry would begin operation in late April. (The city's complete business plan can be accessed at www.ci.rochester.ny.us/)
It's a breathtakingly tight timetable for the resumption of a multi-million-dollar venture. Johnson insists that this is the only option for saving the ferry, and he seems optimistic that a public authority could be successful.
In discussions over the past week with City, he was firm in his rejection of CATS' plans for restarting the service. He was sympathetic, however, to CATS and the unforeseen events that led to the company's financial problems: the accident in the New York Harbor, the engine problems, the federal requirements dealing with truck transportation, the customs and pilotage fees.
"It can't be said often enough that they ran out of money," said Johnson, "and it's largely due to a run of bad luck and some changing circumstances."
"They were told they could waive Canadian Customs charges," said Johnson. "They were told that most trucks and other commercial vehicles could come aboard without meeting certain federal requirements. And they can produce letters with people's signatures on them that actually say this."
Johnson declined to cite the specific reasons why CATS' lenders turned down the company's initial proposal, saying their concerns were covered by a confidentiality agreement. But, he said, the city had its own objection to the CATS plan:
1) CATS wanted the city to reinstate the rights to develop the port area around the ferry terminal to Charlotte Harbor Group, a development company that shares some partners with CATS. The city initially awarded Charlotte Harbor Group those development rights, but rescinded them when CATS suspended ferry operations.
2) During restart negotiations, EFIC requested a $6 million "credit enhancement" --- the senior lender's attempt to protect its investment if service was terminated again and the boat had lost value. But no other lender --- including the city --- was willing to provide that guarantee.
3) CATS proposals called for the inclusion of Video Lottery Terminals on the boat and in the Rochester terminal as an additional revenue stream. But "that's pie in the sky" said Johnson. "I was in Albany last Monday, and I was told in no uncertain terms that the speaker of the assembly is absolutely opposed to the expansion of Video Lottery Terminals."
"Their deal was too heavily laden with contingencies for our comfort and for the comfort of the other lenders, including the State of New York," said Johnson. "They always want to point the finger at the Australians, but the State of New York was sitting at the table as well. And it was a unanimous conclusion, the city, the state, and the Australians, that it was too risky to try to restructure this deal based on the one proposal they brought in."
A few days before the city announced its take-over plan, CATS presented another proposal, this time solely to city officials. It called for the city to buy the ferry, lease it to CATS, and loan CATS about $8 million for operating funds, Johnson said.
"From our point of view," said Johnson, "that doesn't make any sense, to essentially turn over the boat to the people who had run it the first time and to give money to people who hadn't been able to raise it on their own." City officials said no.
So the city announced its own plan, which doesn't depend on VLT revenue, includes a scaled-back service during the winter, and allows the ferry to acquire fuel at a cheaper rate through a contract with New York State.
Here's an edited version of Johnson's discussions about the city's plan.
City: Why do you think a public authority can make a go of this when CATS couldn't? The authority doesn't have to make a profit, but you do need revenue to pay off the bonds.
Johnson: Oh, yeah. What you will see in the business plan is all our income projections, all the assumptions we base those projections on. CATS was basing their projections on about 700,000 to 800,000 passengers. That was, of course, for a full year at full operation. They were encouraged by the lenders to think about, since they were going to relaunch in the fall, running it on a more limited schedule in the winter.
Our assumption builds that in. We're talking about full operation from April to October, two round trips a day, seven days a week. From October to April, we would reduce that operation to one round trip a day, four days a week, on the assumption that we've got to adjust for wintertime travel. So our numbers are based on us having to carry fewer than 400,000 people. And we view that as extremely cautious and conservative.
When you analyze CATS' actual numbers [passengers who rode the ferry during its short service] and project them out for a full year under a reduced winter schedule, they could have carried somewhere in the neighborhood of 600,000 folks. We've based this on really conservative estimates in terms of passenger load as well as commercial freight traffic.
We also have something they probably didn't have. We're building in a significant cash reserve that will help us --- particularly in year one, when we're projecting a $900,000 loss. We'll have a $4 million cash reserve.
That will be part of the financing. An authority can actually borrow money to create this kind of reserve. City governments can't do that.
City: So the money you get through the bonding will also pay for start-up costs?
Johnson: Start-up costs, paying down some of the debt in addition to the boat. There are some maritime liens that have to be paid off. CATS has significant debt. It's up to them to disclose what that debt is. It's impossible for us to retire all that debt. But we have considerations to take care of what we call the maritime debt: those things which are essential to the operation of the boat. The maintenance contracts, the piloting, fuel. And we're going to pay back the ticket holders.
We're not seeking to acquire the company CATS. We're only seeking to acquire a boat, which is heavily leveraged. It's going to be sold anyway. If CATS chooses not to sell it to us, the senior lenders [EFIC] will go into court, fight it out with them, get the boat, and sell it.
Our worry is that the way they'll sell it fast is by discounting it. And if they can sell it just to recoup their costs --- I mean, there's $40 million in that boat. They only need to sell it for $33 million to pay themselves off. That leaves the state and the city as well as every other unsecured lender having to write off a loss.
Paying the debts
City: What about the debts that aren't tied directly to the boat? Is there a chance the people who are owed that money will demand that CATS doesn't sell the boat? It's essentially CATS' only asset.
Johnson: Those creditors have no standing. They are unsecured. In other words, the interests of secured lenders are paramount and the maritime liens are paramount. Then you've got anyone who's unsecured in a very risky position.
City:But would it even be legal for the board of CATS to sign the boat over, given the unsecured debts? The board has a fiduciary responsibility to its lenders.
Johnson: We have had endless discussion about this. And the fact of the matter is: Here's a company with only one tangible asset, the boat. Its value is just about equivalent to what CATS owes the senior lenders [EFIC]. And it's highly unlikely that this boat's going to be sold for millions of dollars more. As you look at CATS' books, the question that has to be determined is: How much remaining value does the company have? And that becomes tricky.
We hear from some of the unsecured lenders. I have one who calls me all the time. She called me this morning. She's a small-business owner who needs her money. And this is a very troublesome area. But what I have to keep saying to her is: It was CATS who ran up that loan, not anyone else.
City: Will some of the $40 million go to CATS?
Johnson: No. It will relieve some of CATS' debts. We're still trying to sift through what is what. That's why we can't say at this time what the real number is. We have been in regular discussions with the staff of CATS, so we were able to come up with a pretty good understanding of what the level of indebtedness is. But at this point, it's not appropriate for me to talk about it. It's not our company, and it's not our responsibility.
City: And CATS is objecting to the city's proposal.
Johnson: They just aren't there yet. Our hope is that they will get there. And if they don't, it'll be between them and EFIC in court.
City: Who owns the boat: CATS or EFIC?
Johnson: The boat is mortgaged. It's the same as an automobile. We have a title on the car, but we can't sell it outright because there's a lien attached to it.
City: Was there not enough interest for there to be any private investment in the ferry?
Johnson: This was a pretty public process. To my knowledge, there were only three parties who ever expressed any interest in putting money in this deal. Two of them also had discussions with CATS. So only they can tell you why --- after going through whatever due diligence they had to go through --- they decided not to go forward with the deal.
City: Does that indicate that this is a risky venture?
Johnson: I think what it suggests is that given the amount of debt an investor would have to assume, and given the terms, they couldn't see how they could get the money back quickly or at the profit they needed. All this kind of capital venturing assumes you're going to be able to maximize your investment. But again, I'm not able to say what reasoning went into their decision not to get into a deal.
City: So you don't feel the city's announcement jeopardized the ability to bring private investors to this project.
Johnson: Listen, I made it very clear to Dominick on Thursday [November 18]: We're shooting for a deadline sometime in December to get city council to take action on this. CATS has until then to go out and put their own deal together. There's nothing that precludes that.
And to be perfectly honest, we have no interest in running a ferry business. We would not discourage anybody in the private sector, including the current operators, from taking a second look at this deal. That's fine with us. And they still have time to walk in and say: It took us a while, but we got it done. We will gladly step out of the way. But for now, this is being done out of a matter of necessity, not out of some sense of a mission that we have to run this ferry service.
City: Will the bonds issued by the public authority be insured?
Johnson: They may have to be secured through the full faith and credit of the city of Rochester. But they would be issued under the name of the authority. We don't intend yet to pursue this until that authority is created.
City: If the revenue from the ferry can't cover the debt service, who would be at risk? If the public authority doesn't have any money, wouldn't the bondholders expect the city to step up?
Johnson: If we put the full faith and credit behind it, you're right. But I think we're a long way from getting to that point. And when you look at the 10-year income projections in the business plan and you see all the assumptions we base them on.... This is certainly what the bondholders are going to ask: "Can these people make reasonable assumptions? Is there revenue that will support this expense?" And I think the answer we will provide to that is a very strong "yes."
City: Who will be on this public authority?
Johnson: That has yet to be determined, because we still have to negotiate this authority with the state legislature. So we don't know what they're going to require.
There will be an appointed board. And the question is: Who will be the appointing authority? Since we are the ones issuing the bonds, and since we will be probably the ones guaranteeing the bonds, I can't imagine that we wouldn't have anything other than a significant role in the appointing authority.
Why not RGRTA?
City: From the beginning, the concept was that the ferry would benefit the entire region, not just the city of Rochester. If that's the case, why is the city the only entity getting involved in the financing of this project? What about the county or RGRTA?
Johnson: The county has its own major project it's trying to get financing for: Renaissance Square. The transit authority is in the same position.
We are in the rare position as a municipality to have sterling credit. We have the highest credit rating of any municipality in Upstate New York. That puts us in the position that if we want to put that at risk, we can put it behind this deal. And you can see in the business plan that it's a pretty safe risk. So we don't need to go out and get other people to help us with this.
We have plenty of opportunities to go out and get participation in a lot of other ways that enhance this deal. But it just slows the process almost to a snail's pace.
City:Some critics would say that you pushed for government consolidation when you were running for county executive. And here, instead of going with RGRTA, you're talking about creating yet another authority.
Johnson: Yes, and I have a pretty solid reason for that. Authorities in this state are under scrutiny, mainly because they conduct their business shrouded in tremendous secrecy. By creating a brand-new authority, the state can essentially ensure more transparency. I think at this point, people are trying to figure out a fast track. And I think there's some recognition that trying to tie it to an existing authority would cause us to lose some of the support we have. This is a clean deal. And it's a clean deal because we're creating a brand new authority.
City:Members of the local state delegation have been critical of public authorities. Now you're asking them to approve the creation of a new one. How do you expect them to go for that?
Johnson: We're trying to construct a body with such limited authority, with a single purpose. And we'll create it in an open, transparent way. We're talking about a fresh oversight and accountability mechanism that has to be negotiated about who appoints the board. But I would be certainly sensitive to not putting political hacks on it and creating all kinds of positions for people to get paid. Our job here is to get this thing up and going for the public benefit.
Rather than furthering an institution that is rampant with abuse, I'd set a model for how new authorities should conduct themselves.
Will it float?
City: What exactly is the status of the ferry right now? It's still impounded, right?
Johnson: Yeah, it's under arrest because of Amerada Hess [the fuel supplier whom, according to CATS' Dominick Delucia, CATS owes nearly $370,000].
City: What commitment do you have that EFIC and the other lenders are going to go along with the city's plan?
Johnson: Let me tell you this: I wouldn't have even raised this plan publicly if I got any indication at any level --- the lenders, the state, the city council.... We have been quietly discussing this for weeks. And in no way would I proceed without their reassurances. And the state has $14 million in this deal it's trying to rescue.
City: Who was involved in drawing up the city's business plan?
Johnson: My staff: [Commissioner of Environmental Services] Ed Dougherty, [Corporation Counsel] Linda Kingsley, [Deputy Mayor] Jeff Carlson, [Director of Finance] Vince Carfagna. We put a team together.
City: How long was the process?
Johnson: It's been about a month now.
City: The business plan estimates that the ferry will break even in its second year of operation. What will happen if it doesn't break even?
Johnson: We could sell the boat and get out of the business.
Look, we have come up with a very conservative business plan that shows that incomes will be sufficient to pay expenses as well as debt service. I can't say for an absolute certainty that this won't ever require a public subsidy. But we've gone out of our way to construct a plan that will not need any. And if we exhaust all our reserve in one year, it forces us to take a second look at the viability of this venture.