CHICAGO - The Chicago city council's Finance Committee yesterday approved the issuance of up to $110 million of refunding revenue bonds to pay off holders of defaulted bonds issued in the 1950s to build the Chicago-Calumet Skyway.

The refunding would retire all of the $90.2 million of outstanding skyway revenue bonds that are scheduled to mature on Jan. 1, 1995, according to Walter Knorr, Chicago's comptroller. The remaining proceeds from the bond issue would cover issuance costs, he said.

If Chicago does not come up with the funds by the bonds' January call date, the city will face an interest rate penalty of 5% above the 3 3/8% and 4 3/8% rates on the bonds, Knorr said. In addition, control of the tollroad would be transferred to the bond-holders' trustee, which would have the authority to set skyway toll rates.

The 30-year refunding bonds would be paid off solely with skyway revenues and would not tap any city revenues, Knorr said.

The bonds could be issued as early as mid-May if the city council approves the measure at its May 4 meeting, Knorr said.

If the refunding is approved, Paine Webber Inc. and Dean Witter Reynolds Inc. would be co-senior managers on the deal.

Paying off bondholders with the refunded bonds would "preserve a city asset that has had an upturn" in revenues in recent years, Knorr said. Skyway revenues have increased about 5% annually in the last five years, he said.

The city expects traffic to increase on the skyway in future years, Knorr said. The skyway connects the southeast side of Chicago with the northwest corner of Indiana. To assure the credit community, Knorr said the city determined that debt service on the refunded bonds can be met with conservative increases in revenue.

Knorr said that any increased traffic related to the anticipated construction of casinos in northwest Indiana would increase revenues beyond the city's estimates.

Once the bondholders are paid, the city would embark on a $150 million capital improvement program that would be financed primarily with Skyway revenues, Knorr said. About $15 million of the repairs would be financed with another bond issue that would probably be sold in about seven years, he said.

The city has received indications from Standard & Poor's Corp. and Fitch Investors Service that it would receive an investment-grade rating on the proposed refunding issue, city officials said, and discussions are pending with Moody's Investors Service.

Once armed with investment-grade ratings, the city would then begin discussions with insurers about the possibility, through insurance, of garnering a triple-A rating for the bonds, Knorr said.

Knorr said that he believes the refunding bond issue would make moot a bondholders' lawsuit against the city.

Bondholders have been in court since the 1970s in an attempt to get their money back on the defaulted bonds. The latest claim, pending in federal district court in Chicago, is that the city breached its fiduciary duty by depositing skyway revenues into non-interest bearing accounts.

Ken Purcell, attorney for the bondholders, did not return phone calls. However, one bondholder welcomed the news.

"That's great," said Bob Derrey, president of Barr Brothers. "It's something that should have been done a long time ago."

If the city does not pay off the defaulted bonds Jan. 1, the bonds would go into default, which could have a negative impact on the city's credit standing in the investment community, Knorr said.

Some aldermen opposed the proposed refunding issue, saying that the skyway is more of a liability than an asset to the city.

Alderman John Buchanan said that his opposition of the Skyway has not changed since he was a community activist in the 1950s.

"The skyway is a seven-mile trip that was a boondoggle then, and it is now," Buchanan said.

The lack of sufficient traffic caused a default in 1963 on $101 million of revenue bonds sold by Chicago in 1955 and 1957 to build the skyway. In 1989, the city paid all the past due interest on the bonds. Two years later, the city redeemed $10.8 million of the bonds through a tender offer, but has failed to make deposits into the bond sinking fund that would trigger another tender.

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