CHICAGO - The Illinois Development Finance Authority is considering for the first time selling refunding bonds to restructure the outstanding debt of an unofficially distressed town to head off a possible ecfault on $900,000 of the town's bonds.
Maywood, a cash-strapped Chicago suburb. is scheduled to pay off the general obligation bonds on Dec. 1. But because the town ran into budget problems and a proposed refunding issue collapsed, Maywood faces a potential default on the bank-held bonds.
If the authority sells the bonds, public finance and state officials involved in the deal said, it would be the first time the state agency would have helped a municipality that does not fit the state's definition of a financially distressed city.
In 1990, the Illinois General Assembly passed the Distressed Cities Act to bail out East St. Louis, which had a high debt burden and not enough money to pay for some essential services. The act left the door open to state assistance for other municipalities if their tax rate is in the highest 5% and their per capita tax yield is in the lowest 5% compared with other state municipalities.
Bill Morris, a senior vice president at George K. Baum & Co., the senior manager on the deal, said, that although Maywood does not meet that definition, the authority was willing to step in and help the town regain its financial footing.
While the final amount of the issue has not yet been determined, the authority board will be asked to authorize the issuance of up to $11 million of bonds for Maywood, Morris said.
Ron Bean, the authority's executive director, said last week he will present a plan to his board tomorrow to do a bond issue for Maywood that would enable the town to refund some of its $8 million of outstanding debt, restructure its debt service, and acquire new money for cash-flow purposes.
He said the town is close to defaulting on the $900,000 of debt.
Part of the authority's issue would refund the $900,000 of bonds the town sold in 1991 to the Chicago-based Harris Bank.
However, Morris said, Harris late last week agreed to purchase a new Maywood bond issue that will extend the $900,000 debt's maturity to November 1993. He said the extension will give Maywood and the authority time to structure the larger refunding and avoid a default.
He added that a bond ordinance the Maywood board was expected to approve late yesterday will include a provision to pay off the new bonds held by Harris. According to the ordinance, the payoff would occur after the authority has closed the Maywood deal.
A spokeswoman for Harris declined to comment on the new bond issue.
Initially, the bank bought Maywood bonds for its own portfoloo to help improve its standing under the federal Community Reinvestment Act, which requires banks to service low-income communities, according to sources familiar with the transaction.
Another spokeswoman for Harris Bank said that was not the entire reason it entered into the transaction, but declined to comment further on the matter.
Maywood, located 11 miles west of Chicago has a population of about 27,000 and a per capita income that lags those of both the state and the Chicago region.
The town in 1974 lost its major employer and taxpayer, the American Can Co., and has done little until recently to attract new economic development, according to Maywood Mayor Donald Williams. He added that the unemployment rate in his town is currently about 14%.
Following the cash-flow borrowing, the town had retained Harris' underwriting services to put together a refinancing of some of its outstanding debt, including the $900,000. It also hired Chicago-based Speer Financial Inc. and Cleveland-based Brooks Securities as co-financial advisers for the deal.
Maywood officials said the purpose of the refinancing was to come up with the money to pay off the bonds held by Harris by Dec.1 and lower the town's payments on its outstanding debt. In addition, they hoped to give the town, which has been running a nearly $1 million budget deficit over the last two years, a needed infusion of cash.
However, the lack of a completed fiscal 1991 audit, a lack of confidence on the part of town officials over the proposed bond issue, and turnover in the village manager position resulted in killing the deal, according to the mayor.
Williams added that the village then sought the help of George K. Baum, which is helping to structure the current deal through the Development Finance Authority.
Morris said Maywood approached the authority after the village's auditor was unable to express an opinion on the town's fiscal 1991 financial statements because of deficiencies in Maywood's accounting system.
Further, stories had begun to appear in local publications about the town facing a default on the $900,000 of bonds and the presence of a federal investigation into Maywood's financial dealings.
Len Chabala, Maywood's interim village manager, acknowledged the receipt last month of a grand jury subpoena for documents he said were related to contracts for village services. He added that, contrary to media reports, the information requested did not appear to involve the village's financial situation. No outstanding bond issue appeared to be the subject of the investigation, he said.
A spokeswoman for the U.S. attorney's office in Chicago would neither confirm nor deny the existence of an investigation.
Morris said those events "rendered the Maywood bonds unmarketable."
Under the proposed refinancing plan, the authority will refund about $6 million of the town's callable and noncallable outstanding GO debt, Morris explained. And it will sell from $1.5 million to $3.1 million of new debt for the town's cash-flow purposes, he added.
He said for security purposes, the authority will take advantage of a rarely used state law that allows it to intercept state aid payments to local governments.
Under the intercept mechanism, the authority would have access to the approximately $4 million a year Maywood receives from the state to cover debt service not only on the refinanced and new debt, Morris said, but on all of the town's outstanding debt. He added that coverage on all of the debt would equal two times debt service.
The Maywood Village Board last week agreed to the intercept mechanism and several other conditions required by the authority for the bond issue. Those include the hiring of a qualified village manager and the subsequent adoption of a financial plan for achieving a balanced budget by fiscal 1995. The conditions also require the town to submit regular financial reports to the authority.
Williams said he welcomed the conditions, adding that they should help his town "attain a sound financial posture." The town has recently increased its property tax rate by 10% and made budget cuts.
Bean said he anticipates that the authority board will approve the issue. He said the Maywood bond issue would mark the first undertaking of its kind for the agency.
If approved, Morris said, the 15-year bonds may be sold early next year.
He said the time is needed for talks with the rating agencies and credit enhancement providers. Maywood, which issued its outstanding debt either with insurance, through the authority, or on an unrated basts, currently does not have an unenhanced GO rating.