CHICAGO -- Officials at a Los Angeles investment banking firm said this week they now have significant bondholder support and have entered into negotiations to restructure $305 million of St. Paul Port Authority bonds that are nearing default.

It is the third attempt to restructure the Port Authority's debt, but the first offered by an independent third party, Houlihan Lokey Howard & Zukin.

The port authority's Resolution 876 Common Revenue Bond Fund has been plagued by financial troubles for years. The bonds were issued for commercial real estate development and backed by lease payments, but ran aground when the real estate market soured and renters started defaulting. The authority has projected that $305 million of bonds will default in 2000 if a debt restructuring plan is not implemented.

Houlihan Lokey began touting a plan in July to exchange $217.98 million of long-term bonds for $207 million of new fixed-rate bonds with a reduced interest rate and $10.9 million of capital appreciation bonds.

Executives at the firm said they are negotiating with port officials and that a majority of bondholders support the restructuring proposal that the firm put forward this summer.

"We've reached the critical mass we needed to go forward with discussions with the port," said J.D. Golden, director of the public finance group at Houlihan Lokey.

Bankers at the firm have stated previously that 90% of the holders of the authority's long-term bonds would have to take part in the restructuring plan for it to be successful in averting the default.

"We're comfortable that percentage of the bondholders will take part," said Golden.

But Port Authority officials, whose two previous efforts to restructure the debt have been spumed by bondholders, cautioned against overconfidence. "We won't know for certain [how investors feel] until we go to market and ask bondholders to vote and put their vote on the line," said Michael Strand, the Port Authority's vice president for communications.

Strand said the Houlihan Lokey plan is "similar in nature and tone" to earlier proposals the Port Authority has presented to bondholders. He said, however, "some alterations, and the fact that a well-regarded third party has presented the plan, seems to have garnered more institutional support than we were able to get."

Under the proposal first introduced by Houlihan Lokey in July, the bond exchange would reduce the amount of money required for Resolution 876 bond reserves, releasing funds that could he used to redeem and/or defease $63.21 million of short-term bonds that mature before June 1, 2005, and $8.68 million of long-term bonds that were not exchanged.

Houlihan Lokey argues that after the redemption or defeasance of those bonds, reduced debt service and reduction of the par amount of existing Resolution 876 bonds would improve the program's cash flows. After debt service payments are established for the exchanged fixed-rate bonds, excess revenues would go into reserve funds.

Once Port Authority staff members complete negotiations with Houlihan Lokey, the authority's board of commissioners would vote on the proposal. If the board approved the plan, it would go to bondholders for a vote, according to Strand.

Golden said the plan has not changed significantly during negotiations, and predicted the final version would be drafted in time for a Nov. 29 board of commissioners meeting.

But Strand said it was unlikely the final draft would be on the November board agenda. "There are elements to it that need to be further discussed and confirmed before the Port Authority will agree to it," he said.

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