CHICAGO - Standard & Poor's Corp. on Friday downgraded the St. Paul Port Authority's $320 million of outstanding 876 resolution revenue bonds to CCC, the agency's lowest non-investment rating before default.
The downgrade from BB reflects the "continued absence of a viable workout plan" and the anticipated default of the bonds in 2000, according to a report issued by the agency.
The Port Authority announced a plan to restructure its resolution 876 bond fund to avoid an anticipated default by 2000 10 days ago.
Richard Larkin, a managing director at Standard & Poor's. said yesterday the restructuring plan is a "forced exchange offer" that would enable the "Port Authority to dig itself out" by requiring affected bondholders to exchange the bonds for new debt with reduced payments.
Kenneth R. Johnson, president of the authority, in a written statement said the authority was "astounded" by Standard & Poor's' "inaccurate assertion" that the Port Authority does not have a "viable workout plan. "
He added that the authority believes it is "both premature and confusing to the marketplace to change the rating at this time before a final court decision" is rendered by a Ramsey County District Court judge, who must determine whether an independent trustee can implement the restructuring.
Johnson added that "it is the [authority's] counseled opinion that if and when the Ramsey County District Court issues an implementation order, the credit quality of the 876 bonds would be immediately strengthened and enhanced."
In its report, Standard & Poor's said that if the restructuring plan is implemented, the agency will "decline to rate the new bonds and will review the CCC rating on the outstanding debt for maintaining, changing, or possibly withdrawing the rating in light of what would be a default for all practical purposes."
The restructuring plan, released on Oct. 13, would affect holders of $258 million of bonds that mature after Dec. 31 1999. About $63.9 million of bonds that mature before 2000 would not be affected.
Holders of the bonds could choose one of three options that are listed in the plan: a 45% reduction in interest on the bonds, a 25% reduction in principal on the bonds, or a combined principal reduction of 15.5% and interest rate reduction of 20%.
Under the restructuring plan that would be effective No. 1, the authority would be able to issue new bonds, reflecting the chosen reduction, to each of the affected bondholders.
The Port Authority, which has issued bonds under the resolution since the 1960s, has used proceeds to help finance 168 different commercial projects in St. Paul. But a sluggish real estate market has led to a number of defaults in recent years on lease payments. The bonds had originally been rated A by Standard & Poor's. according to Mike Strand, a spokesman for the authority.
The bonds were secured by loan repayments and reserves in an industrial development pool. In January, Springsted Inc., a St. Paul financial advisory firm, concluded that the authority would exhaust its debt reserves by 2000.
Standard & Poor's now has downgraded the authority's debt five times since April 1989.
In September 1991, the agency downgraded the bonds to BB with a negative outlook from BBB. At that time, the agency pointed out that an increasing number of loan defaults, totaling 36 with a principal amount of $115.7 million as of Aug. 31 of that year, continued to "diminish portfolio quality."
The majority of the defaulted loans were made to developers of retail and commercial properties.
Six months earlier, the resolution 876 bonds were downgraded to the BBB level from BBB-plus due to a decrease in authority revenues caused by a cash-flow agreement default at Meritor Tower, a downtown St. Paul office building built in 1983 with $22 million of tax-exempt industrial revenue bonds issued by the authority.
Bondholders will have the opportunity to comment on the proposed restructuring plan at a Nov. 23 hearing in Ramsey County District Court. After the hearing, a judge will decide whether to confirm First Trust National Association of St. Paul as the trustee for the bondholders as part of its plan. The judge also will decide on whether to authorize the restructuring.
The Port Authority was created in 1932 by Minnesota to promote economic development in St. Paul. Members of the authority are appointed by St. Paul's mayor and city council, but the downgraded revenue bond debt carries neither the city's nor the authority's general or moral obligation pledge or repayment.