DALLAS - The Big Oaks, Tex., Municipal Utility District plans to file for Chapter 9 bankruptcy protection so it can reorganize $2.55 million of defaulted unrated debt and lower its tax rate, now believed to be one of the highest in the state.

Ray Hutchison, senior partner at Hutchison Boyle Brooks & Fisher in Dallas and bond lawyer to the district, said the issuer will ask the Texas Water Commission by Sept. 1 for state approval to file for bankruptcy. Chapter 9 is the section of federal bankruptcy law under which municipalities may file for protection from creditors.

The commission, which has already approved three water district bankruptcy filings this year, is expected to act on the petition within 60 days. "Once they approve it, we would file immediately," Mr. Hutchison said.

In a recent notice to bondholders, the district proposed exchanging new debt for the waterworks and sewer system's unlimited tax and revenue bonds sold in 1986 for the district. The notice also proposes capping the district's tax rate at $1.25 per $100 of assessed valuation.

Although the debt adjustment plan involves no cash payout to bondholders, Mr. Hutchison said the district expects a full repayment to investors.

"There's a very real possibility they'll get 100% back," he said on Friday. "The feedback we've had from bondholders is that they are impressed with the prospect, and they have reason to be."

Mr. Hutchison said the district has at least 160 bondholders from across the nation. So far, no institutions have yet been identified, and the largest individual investor holds $50,000 of bonds.

Already, negotiations have begun with a Houston developer to buy the district's land in Fort Bend County and start its development, which never happened as planned because of the collapse of Houston's real estate market in the late 1980s.

The default was triggered after the district failed to make a $201,205 principal and interest payment to bondholders on Aug. 1. The debt was originally underwritten by E.F. Hutton & Co.

After building on the 203-acre district stalled, developers and the institutions backing them failed. In the absence of a growing tax base, the unlimited tax pledge backing the bonds forced the district's levy to $34.85 per $100 of assessed valuation this year.

The rate is now believed to be one of the highest for a taxing authority in Texas, with a levy of $29.90 per $100 of assessed valuation for debt service and another $4.95 for operations and maintenance in the district.

In the notice to bondholders, the district noted that the average tax rate for utility districts range from $1.25 to $1.75.

Under the proposed plan of reorganization, the district would exchange new unrated securities on a dollar-for-dollar basis. The refunding bonds would mature on Feb. 1, 2015, and carry an 8% coupon, but would be subject to mandatory prepayment and early redemption.

The bonds would be secured and payable from any district land-sale proceeds and a constant tax levy that would not exceed $1.25 per $100 of assessed valuation. The district would reserve the right to reduce the rate to $1 if it made the development more marketable.

Mr. Hutchison said the refunding bonds could be retired in the first few years, depending on the sale price of the land, which is nearly all owned by the district.

On July 16, the district reached an agreement that it would buy from the Resolution Trust Corp. a majority of the acreage for $100. Resolution Trust became a major landowner after the original developer's bank failed. Negotiations are continuing to buy the remaining land from a separate landowner who currently owes the district unpaid back taxes.

Once the district controls all the land, it could be sold at a price greater than the total debt outstanding, according to an appraiser.

"If that happens, the bondholders would be paid off immediately," Mr. Hutchison said.

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