CHICAGO - An Appleton, Minn., prison does not have sufficient revenues to make a past-due debt service payment Nov. 1, on $28.4 million of defaulted bonds, according to the bondholders' trustee.
First Trust National Association said in a letter to bondholders last week that the Appleton Prison Corporation, which issued the bonds in 1990, is not expected to make debt service payments on Nov. 1 because revenues from the prison have been less than anticipated and expenses have exceeded projections.
The nonprofit corporation, created by the city of Appleton to issue the bonds for the Prairie Correctional Facility, defaulted on its February and August debt service payments, totaling $2.97 million. But the corporation agreed in July to remedy the defaulted payments on Nov. 1.
First Trust also said in the letter that it is impossible now to determine when the prison's operations may generate sufficient revenues to pay bondholders, whether the bond debt service in arrears can be repaid, and whether bond debt service in the future can be paid.
Officials from the city of Appleton and from the corporation referred all questions regarding debt service to First Trust. First Trust officials did not return phone calls.
In the letter dated Sept. 28, First Trust said that in addition to having promised to pay the $2.97 million in defaulted debt service payments on Nov. 1, the corporation also agreed to resume the timely payment of debt service after that date.
In exchange, First Trust had agreed to hold off legal action against the corporation until Jan. 1, 1995, to give the Prairie Correctional Facility time to develop its operations. The letter does not indicate whether the trustee will now take action.
The corporation has defaulted on its debt service payments because of substantial delays in contracting for inmates, according to First Trust.
Though the prison was completed in May 1992, the corporation had difficulties in securing inmates until March of this year, when it finalized a contract for 516 inmates with the Commonwealth of Puerto Rico.
In the letter, First Trust said that the corporation had expected to house the 516 Puerto Rican inmates at the prison by Aug. 15, 1993. But delays in licensing the facility at full capacity have prevented the increase of inmates above the current population of 350.
"The corporation has indicated that completion of program, service and facility development necessary to receive its full capacity license will occur no sooner than mid-October, and may take as long as year end," First Trust said.
Mike Kennedy, a spokesman for IDS Financial Services Inc. of Minneapolis, the holder of the largest share of Appleton prison bonds, said the firm expects the prison to be filled to capacity by the beginning of next year.
"There is a solid contract with the Commonwealth of Puerto Rico," Kennedy said. He said that the prison when full "should provide sufficient revenues for the facility to make debt payments eventually."
Since its completion, the prison has been tapping bond reserve funds to pay for operational costs. In July, the trustee said that a majority of bondholders had approved the transfer of $1.1 million from the bond reserve fund to help finance $1.5 million of the prison's start-up costs.
Appleton, located in rural southwestern Minnesota, created the corporation in 1990 to issue $26.9 million of unrated tax-exempt revenue bonds and $1.5 million of unrated taxable bonds to build the prison. City officials had hoped to capitalize on nationwide prison overcrowding to help revitalize the city's sagging economy.