CHICAGO -- The St. Paul Port Authority yesterday unveiled a plan that will improve the cash flows of its Common Revenue Resolution 876 bond fund, but may not avert a default of the bonds.
Mike Strand, vice president of communications for the port authority, said the plan is intended to head off an anticipated default in 2000 of most of the $322 million of bonds issued under the resolution. He said the authority has not determined a new anticipated default date for the bonds if the cash-flow plan is implemented. He added that the plan requires bondholder approval.
"The [default] line will be moved," Strand said. "But assuming that bondholders approve the [cash-flow] plan, we still feel that to fully avert the likelihood of a default, a full restructuring is necessary."
Strand said the plan was drafted after a group of institutional bondholders expressed their unwillingness to approve a plan that the authority proposed in October 1992 to restructure the entire 876 portfolio to avoid a default in 2000.
The Resolution 876 bonds were issued for commercial developments in St. Paul and were backed by lease payments. Defaults on the payments due to a lackluster real estate market in the city led to problems in the 876 portfolio.
The cash-flow plan would:
* Create a property management fund financed with existing program revenues to pay for capital and tenant improvements on repossessed properties to enhance their marketability. The amount of money allocated to that fund would be capped at $1 million per year.
* Allow the use of loan prepayments in a dutch auction to allow individual bondholders to voluntarily sell their bonds to the authority at a price set by the bondholder and accepted by the authority.
* Give the authority greater flexibility to negotiate workouts and restructurings of nonperforming loans with the original borrower as an alternative to repossessing property.
The cash-flow plan was formulated as a result of joint negotiations recently concluded between the authority and institutional bondholders over restructuring $322 million of outstanding debt in the Resolution 876 program, according to a press release from the authority. During a recent negotiating session, the bondholders, representing about $100 million of outstanding 876 bonds, "informally supported" the plan, the release said.
Ken Johnson, the port authority's president, said in the release that he believes that the proposed changes unveiled yesterday will provide for higher income and sales revenues from repossessed properties and will reduce debt service by permitting the voluntary purchase by the authority of 876 bonds at a discount.
"In our minds, these changes will maximize the 876 fund's opportunities to effect beneficial change absent a total financial restructuring," Johnson said.
However, Johnson said the authority believes that a "full restructuring" is in the best interests of the all bondholders.
Johnson said that proposed changes to the 876 program would not have an impact on any of the authority's other bond programs.
The authority will send the proposed plan and ballots to all known 876 bondholders during the first week of December. A deadline for returning the ballots to the authority has not been set, Strand said.
One institutional bondholder said that the cash-flow plan "doesn't say much of anything." He said the only thing in the plan that eases cash flow is the dutch auction provision. However, he said there is no assurance that any of the bonds will be retired early.
The institutional bondholder said some bondholders may not be interested in redeeming their bonds because they may be able to get a better deal by trading them. He said that the 876 bonds have been trading in the low 11s.
One investment banking official familiar with the 876 bond program said the creation of the property management fund is a "positive step." However, he said that he was "skeptical" of the provision until he knows the amount of money that will be used to fill the fund. He said that the fund would be financed with money that would otherwise be slated for reserves or for bondholders.
The official said that he "has no problem" with the other two provisions. He said that the workout provision would be helpful because it would give the authority more flexibility. Presently, the authority must repossess property from owners that cannot make their loan payments.
Negotiations that led to the formation of the three-point cash flow proposal began last March when institutional bondholders refused to go along with a debt restructuring plan proposed by the authority.
The plan would have affected holders of $258 million of bonds that mature after Dec. 31, 1999. About $63.9 million of bonds that mature before then would not be affected.
Under the plan, which surfaced in October 1992, affected bondholders were asked to accept one of three options: a $45 million reduction in principal, a 25% reduction in principal, or a principal reduction of 15.5% and interest rate reduction of 20%.
