DENVER - This is not a story about Castle Pines North, the infamous Colorado bond default that pitted home owners against bondholders, victims against victims.
But this could have been a sequel to the Castle Pines saga if not for the determination of bondholders and local officials involved with the Aurora CentreTech Metropolitan District and its upcoming $12.3 million workout.
"Castle Pines North was the cautionary tale," said Jim Holden, the bankruptcy attorney for the Aurora district, which joined the long list of defaulted Colorado special districts last year when it failed to meet debt service requirements on about $7.4 million of outstanding bonds.
A similar default at Castle Pines brought development there to a halt. Holden, the Aurora district, and bondholders did everything they could to avoid the stagnation that plagued Castle Pines North, where bondholders have spent three years and more than $2 million in legal fees to reach a preliminary agreement.
Aurora CentreTech is a commercial and industrial metropolitan district located in the city of Aurora. The district, which was formed in 1984, has issued nearly $8 million in debt to build roads and water, sewer, and parks facilities. In May and June of last year, portions of a 1987 refunding of $6.7 million of old debt and a new $700,000 issue via the former Kirchner Moore & Co. went into default.
Since then, a bondholders committee, representatives from IDS High Yield Tax-Exempt Fund, which owns 40% of the bonds, and district officials have reached a workout agreement that will culminate in the planned sale of $12.3 million of exchange bonds to be issued June 15.
"It's been a model Chapter 9 case. It was done quickly," Holden said, adding that all sides took their share of "castor oil."
"We were fortunate all the people came together," said Judith Harvey, an analyst for the $6 billion IDS fund. "Nobody wants to go to court. That's a last-resort type of situation.
"We feel pretty positive about it. Everybody worked hard on it. It was difficult but a fair compromise. We all had to give," Harvey said.
Between the time the 310-acre district was formed by Canadian developer Dueck Industries Ltd. in 1984 and the bonds were refinanced in 1987, property values increased from $700,000 to about $10 million, a $3 million clip per year. The valuation growth continued until 1989, when values reached $15.3 million.
Then two events doomed the bonds, said Alex Brown, a member of the bondholders committee, a holder of the bonds himself, and the Colorado manager for George K. Baum & Co., which is the former Kirchner Moore.
The first is that real estate values "started going the other way" because of the Colorado real estate bust of the late 1980s, Brown said. The other, he said, was the controversial tenure of Arapahoe County appraiser James Reaves. Elected in 1990, Reaves set about significantly lowering county commercial land values, including those of buildings he owned. Reaves' term expires at year-end and he has said he will not run again.
Even though bond documents show the underwriters projected a conservative $2 million in growth per year when growth had been $3 million per year for the previous seven years, the bonds could not withstand the lower valuations. Assessed valuation dropped to $10 million in 1991-1992 and to $9 million in 1993.
"We saw 60% to 70% of what we thought would be the appraised value knocked out," Brown said.
About 10% of the acreage was sold to public, tax-exempt entities, compounding the taxing problem.
The workout uses capital appreciation bonds to stave off some of the cash interest payments due in the earlier maturities. Capital appreciation bonds were part of the original issue, but are featured more prominently in the workout.
The district issued five series of bonds in financing from 1986 to 1989. All of the following values, including principal and interest, are stated as accrued at Dec. 1, 1993, the base case used by negotiators:
* 1986 Series B, $1.16 million, defaulted May 1, 1993.
* 1987 Series A, $2.96 million, CAB bonds maturing December, 1994-97.
* 1987 Series B, $6.87 million, defaulted June 1, 1993.
* 1989 Series A, $638,160, defaulted June 1, 1993.
* 1989 Series B, $670,142, capital appreciation bonds maturing December, 1998-2008.
Under terms of the workout, the old bonds will be redeemed for two series of exchange bonds that include interest payments from Dec. 1, 1993, until June.
The 1987-A and 1989-B, or capital appreciation bonds, will be exchanged for 1993-A, also capital appreciation bonds, and cash. The 1987-A holders will receive 7% cash in June and another 67% on Dec. 1, with the rest of the principal paid through exchange bonds. The new bonds will mature at later dates, ranging to 15 years out.
The current yield bonds, whose coupons range from 7.75% to 11.25%, will be exchanged for bonds that pay an average 9.15% coupon, but only 6% of that will be on a current yield basis. The other 3.15% will be deferred until 2023. As with the capital appreciation bonds, the current yield bandholders will receive a small amount of cash up front.
To make the cash payments, the district is imposing an immediate levy, 300 mills for the first year and afterwards a scale starting in the 50s. Further development would keep the mill increases to a moderate level.
Some of the current yield or coupon bonds will carry mandatory redemptions starting in 2008 and ending in 2023. But they will be called at random based on a lottery. Holden said this feature was requested by bondholders who believe the lottery will cause the bonds to trade a little stronger than they would have.