CHICAGO -- A Los Angelesbased investment banking firm is seeking bondholder support for a detailed plan it released last week to restructure $305 million of St. Paul Port Authority Resolution 876 Common Revenue bonds to avoid a default.
Drafted by Houlihan Lokey Howard & Zukin, the plan is a more comprehensive version of a preliminary proposal that won the support of a group of bondholders in March. Houlihan Lokey designed the plan after two previous debt restructuring plans put forth by the authority failed to receive support from a majority of bondholders.
In its proposal, Houlihan Lokey said the plan is "the only credible approach to reestablishing the viability of the 876 bond program and maximizing bondholders' recovery."
George L. Schneider, a vice president in Houlihan Lokey's public finance group, said that the firm sent bondholders the detailed plan last week.
Schneider said the plan in order to work effectively would need the support of about 90% of bondholders who own the authority's long-term bonds. That would equal about $218 million of bonds that mature after 2005. So far, holders of about $175 million of mostly long-term bonds have voiced their support for the plan, he said.
He added that the firm hopes to gain the formal acceptance of those bondholders and others needed to implement the plan by Aug. 1. If that occurs, the plan can go into effect in September.
Michael Strand, vice president of communications for the authority, said that the authority's senior management has endorsed the final draft of the plan. However, before the authority formally considers the plan, it will wait to see how major bondholders react to it.
"Clearly, what we want to see is some definitive consensus on the part of bondholders," Strand said.
The Resolution 876 bonds were issued for commercial real estate developments in St. Paul and are backed by lease payments. Defaults on the lease payments due to a sluggish real estate market in the Minnesota city led to problems in the portfolio.
Under the Houlihan Lokey plan, $217.98 million of long-term bonds, which equals 90% of the bonds that mature after June 1, 2005, would be exchanged for $207 million of new fixed-rate bonds with a reduced interest rate and $10.9 million of capital appreciation bonds.
The bond exchange would reduce the amount of money required for Resolution 876 bond reserves, releasing funds that could be 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. After the redemption and/or defeasance of those bonds, the bond program's cash flows would increase as a result of the reduction in debt service and the reduction of the par amount of existing Resolution 876 bonds.
In the aggregate, the current long-term Resolution 876 bonds have a blended interest rate of 9.20%. After the exchange, all remaining long-term bonds in the aggregate would have a 7.88% interest rate, resulting from the combination of remaining unexchanged long-term bonds, the new fixed-rate bonds with a 7.9% rate, and the capital appreciation bonds with the implied 7.48% rate.
While Houlihan Lokey's projections imply a capital appreciation bond rate of 7.48%, the exchange will set an accretion rate to the maximum permitted by law, which under current market conditions could approach 12%. This permits participants in the exchange to capture the maximum net revenue generated by the Resolution 876 program if actual results exceed projections.
After debt service payments are established for the exchanged fixed-rate bonds, excess Resolution 876 revenues would be allocated to build a new $15 million common reserve fund that would cover one year's maximum interest expenses on the exchanged fixed-rate bonds and a $1.5 million supplemental reserve fund that would cover other short-falls in the bond program.
Once the reserve funds are created, all excess Resolution 876 revenues would be devoted to retire the remaining unexchanged bonds by December 1998 and the new exchanged fixed-rate bonds by June 2012. After those bonds are retired, excess Resolution 876 revenues would be used to pay off the capital appreciation bonds, which would be noncallable until June 2012.
Houlihan Lokey said that improved debt service coverage resulting from the bond exchange and establishment of the reserve funds could lead to an investment-grade rating for the new fixed-rate bonds. Standard & Poor's Corp. rates the Resolution 876 bonds CCC, the lowest noninvestment-grade rating before default.
In addition to the financial restructuring plan, Houlihan Lokey also proposed that a new independent manager be appointed to oversee the operation of 876 commercial projects that have been repossessed or fail to meet certain financial criteria. If bondholders approve the plan, Houlihan Lokey would oversee the process of appointing a new management team.
Houlihan Lokey said that if a debt restructuring plan is not implemented, a default of Resolution 876 bonds would occur in 2005 -- five years later than estimated in a 1992 study commissioned by the authority from Springsted Inc., a St. Paul financial advisory firm.
But Schneider said that the five-year extension of the anticipated default is "not to be taken as a positive sign."
Schneider explained that Houlihan Lokey's projected default date is based on anticipated prepayments and sales of two Resolution 876 properties that will extend the authority's ability to pay debt service by five years.
Some institutional investors said that Houlihan Lokey's restructuring plan seems reasonable.
"The basic framework that has been created appears to be something we'd be able to support," said one institutional investor.