Loveland's Independent News Source
Loveland - September 19, 2012

Most Loveland taxpayers probably believe their municipality is well insulated from the headline news of the
European banking crisis.   However, the recent bailout of Spanish banks like BBVA (Banco Bilbao Vizcaya Argentaria
S.A.) by the European Union may have not only saved the Spanish economy from an even bigger crisis but also the
$130,920,000 public bonds issued for the McWhinney controlled Centerra Metro Districts encompassing nearly
2,000 acres in east Loveland.  This is because repayment of the Centerra bonds rely, in part, on performance by
BBVA depending on current interest rates according to Centerra's 2011 financial disclosure to the city.

Fitch Ratings agency recently downgraded the credit rating of the Spanish bank, BBVA, following an infusion of cash
from the European Union to help the faltering financial institutions of Spain like BBVA meet their obligations while
holding excessive amounts of their own government's bad debt.  Among BBVA's financial obligations, according to
Centerra's board, is an
interest rate swap agreement  with Centerra where the Spanish bank has agreed to repay
the Centerra bonds' interest should interest rates increase since revenues from the Centerra Metro Districts is
insufficient to cover an increasing cost of its own burgeoning  public debt.

In 2011 Centerra issued a third series of public bonds (series 2011) accumulating a total public debt in excess of
$130 million.  Like Centerra's previous bond issuances ($60 million/2004 and $112 million/2008) the future annual
repayment plan for the bonds exceeds current Centerra revenue.   While the Centerra bond repayment amounts
are based on an amortized schedule between now and 2029, the bonds actually mature in 2016 requiring a
onetime balloon payment of over $116 million due now in four years.  Such a payment would be impossible for
Centerra to make in 2016 thus bankrupting the quasi-municipal corporation unless additional financing can be
found.   In the meantime, Centerra is expected to pay millions of dollars in principle annually while also making
quarterly interest payments on the debt.  Even a modest rise in interest rates could spell disaster for Centerra since
most of its revenue from special fees, mill levies and property tax rebates (Urban Renewal Authority) are already
consumed for debt payments today on an interest rate of under 4%.

reported in 2009 by LovelandPolitics, Centerra's 2008 bond series also called for escalating payments by the
Centerra Metro Districts that exceeded current revenue at just under $10 million annually.  Unless Centerra grew
(thus increased tax and fees revenue) at a rapid pace default was likely provided additional financing could not be
arranged.  In 2011 Centerra found that refinancing opportunity and increased its public bond debt to $130 million
adding $9 million to its side of the financial statement as revenue from "debt proceeds."  

Problems With Short-Term Financing and Conflicts of Interest

Similar short-term financing caused the Promenade Shops at Centerra to foreclose in 2009 following this country's
2008 financial crisis.  Failure to refinance the Centerra bonds by 2016 will put the Centerra Metro Districts in
default but this time it will be a public and not private entity in default.  McWhinney, which operates Centerra,
would have no liability in a Centerra default but could lose the annual payments it takes out of Centerra to operate
the phantom quasi-public organization now supporting McWhinney offices and staff.
(see Centerra Enigma Story)

BBVA, the second largest bank in Spain, also holds $56 million of the Centerra bond debt through its wholly owned
U.S. Subsidiary bank
Compass BBVA.  Following the financial crisis of 2008, the United States government has been
implementing various
reforms on how the derivatives market operates.  Among those reforms is an attempt by
regulators to prevent financial institutions from betting against their own investments.  For example, a rise in
interest rates will mean higher returns for Compass BBVA as a holder of Centerra's bond debt but constitutes a
liability for its Spanish owner swap agreement with Centerra which requires the Spanish bank pay the rising interest
costs of Centerra's public bonds.  Whether interest rates rise or fall, BBVA will profit from one or the other since it
has hedged its bets and is on both sides of the ledger as both lender and swap agreement holder.

However, a default by the parent Spanish bank on that swap agreement doesn't mean Compass BBVA and the
other bond holders cannot hold the borrower responsible.  Despite the swap agreement, Centerra is still obligated
to repay the variable rate bonds regardless of the changing interest rate environment or solvency of the two banks
obligated under interest rate swap agreements (BBVA & Royal Bank of Canada).  In other words, the Spanish bank
has hedged its bet on both sides of an interest rate change but failure to perform on either end doesn't mean
Centerra is off the hook since the it owns the liability to the bond holders to pay them back at floating interest rates
regardless of whether BBVA can meet its obligations.

These types of speculative agreements are considered especially risky for the borrower if the party providing the
swap agreement (in this case BBVA) will be unable to pay its portion of the agreement should interest rates rise in
the future.   In essence, McWhinney's Centerra takes out variable rate bonds (similar to an ARM or Adjustable Rate
Mortgage on a home) that must be repaid at much higher rates should interest rates rise according to the LIBOR
index.  The Spanish bank, in this case, is speculating interest rates will not rise thus any drop in rates below the
agreed upon negotiated synthetic interest rate of 3.5% means the savings of a lower bond repayment goes to the
Spanish bank instead of Centerra.

Compass BBVA is the largest investor owning 43% of Centerra's bond debt while U.S. Bank is the second largest
investor at 23%, Colorado State Bank and Trust at 13%, Vectra Bank at 10% and Colorado Business Bank at just
under 9%.

The bond issuance agreement stipulates that Centerra is to deposit all "
reserve funds" into an account with
Compass (subsidiary of Spanish BBVA) while also providing Compass oversight of the rate swap agreement with
BBVA apparently on behalf of the other banks investing in Centerra bonds.  In other words, Compass (the subsidiary
of Spanish BBVA) will determine if the terms and conditions set forth by its own parent company's interest swap
rate agreement properly protect the interest of Compass and the other investors.

"BBVA Interest Rate Exchange Agreement. The Borrower shall have entered into the BBVA Interest Rate
Exchange Agreement with BBVA in the notional amount equal to $10,000,000, for a term which extends to and
including the Maturity Date of the Loan, and the form, content and terms of such agreement shall be acceptable
to Compass."

According to the 2011 Annual Financial Report of Centerra Metro Districts 1-5 provided to the City of Loveland, the
Centerra Metro Districts
"entered into swap agreements....for the purpose of creating a synthetic fixed interest
rate of 3.4600% per annum on $110,920,000 and 3.5560% per annum on $10,000,000."
 Both the Centerra
variable rate bonds and "interest rate swap" agreement rely on the LIBOR index to determine current interest

In the event interest rates do rise above 3.5560%, than the Centerra Metro Districts holding the bond debt will
expect the holder of their "swap agreement" to pay the increasing cost of the borrowed money so their payments
remain equal as if the debt were on a fixed interest rate.  If the holder of the swap agreement fails to cover
Centerra's increasing payment obligation it will likely force Centerra into default on its bond obligations thus hurting
the City of Loveland.  If BBVA does pay the higher rates at least some portion will go towards its own investment
return in the Centerra variable rate bonds via its subsidiary company Compass bank.

Interest rates lower than 3.4% between now and 2016 means Compass BBVA bet poorly and will get lower
repayments on the bonds than they would have received were the interest rate fixed and not variable.  Any savings
from lower rates would not be realized by the Centerra Metro Districts but instead go to BBVA directly since the
synthetic interest rate swap agreement it has with Centerra allows the bank to benefit from lower rates (thus the
hedging).  Another possibility is BBVA may assign its obligations under the swap agreement to its U.S. Subsidiary
bank Compass BBVA or such an arrangement has already been made.  

Are Loveland Taxpayer's At Risk?

Historically, the City of Loveland has claimed that provisions of the 2004 Master Financing Agreement (MFA) signed
between McWhinney and the City of Loveland establishing Centerra contains provisions that mandate the City of
Loveland not be held liable for any financial default of the Centerra Metro Districts which operate as "quasi-judicial
corporations" supervised by the City of Loveland.

The lending agreements for the Centerra bonds assign all Centerra assets and revenues to the lender in the event
of a default.  Any amounts owed to the City of Loveland or collected as part of the various fees (TIF, PIF etc..) and
mill levies created by the Centerra Metro Districts would be paid directly the bond holders and not the City of
Loveland or other debtors or local governmental agencies constitutionally obligated to provide local services.  
Among the few public services that Loveland would need to pick-up from a failed Centerra would be the ongoing
installation of
"financing for the acquisition, construction and installation of street and roadway enhancements;
enhanced street landscaping, signage, monuments, and lighting; safety protection; park and recreation
improvements; and sanitation and storm drainage; and to provide the operation and maintenance of these

Another and much larger potential liability for the City of Loveland could result from its oversight obligations of the
Centerra bonds.  This could allow holders of defaulted bonds to sue the City of Loveland to recover damages if the
city can be found negligent in its role to supervise the districts.  However, such liability is purely speculative as it
would require a party with damages to bring a lawsuit against the City of Loveland following the default of the
Centerra public bonds.
Centerra's Bond Repayment
Relies On Troubled Spanish Bank Guarantee
(BBVA: Banco Bilbao Vizcaya Argentaria S.A)
2011 Accountant's Report

The following is included in the cover
letter by Peggy Dowswell, CPA, of the
Pinnacle Consulting Group, INC. for
the Centerra Metro District financials
submitted to the City of Loveland
year ending 2011.

"Management has elected to omit
substantially all of the disclosures
required by accounting principles
generally accepted in the United
States of America. If the omitted
disclosures were included in the
financial statements, they might
influence the user's conclusions
about the company's financial
position, results of operations, and
cash flows.

Accordingly, the financial statements
are not designed for those who are
not informed about such matters.

I am not independent with respect to
Centerra Metropolitan District No. 1.

Peggy Dowswell, CPA
January 30, 2012

LovelandPolitics has requested from
the City of Loveland both the audited
financial statements for Centerra
year ending 2011 along with the
auditor's opinion letter regarding
those financial statements
Protesters in Barcelona, Spain gather at
the doors of a local BBVA branch

"BBVA" means Banco Bilbao Vizcaya
Argentaria S.A. the Spanish bank

BBVA/Compass Entity" means
BBVA, Compass Bank, Compass
Mortgage Corporation and any
subsidiary or affiliate of BBVA,
Compass Bank and/or Compass
Mortgage Corporation.

(A) on the portion of the unpaid
principal of the Outstanding
Loan Amount that is equal to the
outstanding notional amount in effect
for the relevant calendar year under
the BBVA Interest Rate Exchange
Agreement, as set forth in the
"Notional Schedule" attached thereto
(the "BBVA Hedged Portion"), the
Borrower shall compute interest
coming due on such BBVA Hedged
Portion by assuming that the rate of
interest accruing on the unpaid
principal of such BBVA Hedged
Portion is equal to the Swap Rate in
effect under the BBVA Interest Rate
Exchange Agreement; provided,
however, that for any period during
which an Event of Default has
occurred and is continuing, the
Borrower shall compute interest
coming due on the BBVA Hedged
Portion during that period by
assuming that the rate of interest
accruing on the unpaid principal of the
BBVA Hedged Portion is equal to the
Swap Rate in effect under the BBVA
Interest Rate Exchange Agreement
plus 6,50%; and

At BBB+ rating by Fitch, BBVA is no
longer rated high enough,
according to Moody's, to be
considered for providing municipal
bond interest rate swaps.

Read the Risk #7 excerpt below or
link to Moody's entire report;
Evaluating the Use of Interest Rate
Swaps by
U.S. Public Finance Issuers

"Counterparty Risk Interest rate swaps
expose the issuer to counterparty risk
— the risk that the counterparty will no
longer perform its obligations under
the swap, or that its credit quality will
decline to the point where there is
uncertainty about its ability to perform.

If the counterparty is no longer making
the payments required of it under a
swap that is a hedge against specific
debt, the issuer will lose the hedge and
will be left with unhedged debt.

Moreover, if the counterparty defaults
or is affected by a termination event at
a time when the swap has a market
value that is negative to the issuer, the
issuer could be required to make a
payment in order to terminate or
replace the swap, despite the fact that
the counterparty was the cause of the
termination. The issuer might be able
to arrange for a replacement swap to
replace the hedge and absorb part of
the termination cost.

In assessing counterparty risk, Moody’
s considers the following factors:
Counterparty Ratings
Most of the swaps we review involve
highly rated counterparties — in the Aa
or Aaa range (either directly, or
through a guarantee or similar
arrangement). Moody’s looks for all
municipal issuers to face
counterparties that are rated at
least at investment-grade levels.
general, we consider it good
practice to deal with
counterparties rated in the A range
or higher