DALLAS -- The trustee of a $9 million lease revenue bond issue today will ask a state judge to appoint a receiver to run the Ellicott, Colo., School Building Authority in an attempt to remedy the state's firstever default by a school issuer.
The threat of losing control could prompt the authority to preempt this afternoon's hearing in El Paso County District Court by seeking federal bankruptcy court protection, two officials speculated.
"We think they could file for bankruptcy before the hearing," said a spokesman for Central Bank Denver, the trustee, who asked not to be identified.
A lawyer working for both the district and the authority said a Chapter 9 filing could be done, noting that the board was expected to meet today before the hearing at 2 p.m., mountain standard time.
"That's still a possibility," said the lawyer, Ronald Lehmann of Holland & Hart in Colorado Springs.
If a receiver is appointed, the trustee and bondholders could bypass the authority that issued the conduit financing and instead negotiate directly with the Ellicott School District.
The district, whose lease is the sole security for debt service, triggered a technical default when it missed a June 1 lease payment.
The hearing comes after the authority learned Monday night that 99% of bondholders who responded to a voluntary poll had rejected a proposed debt restructuring that would have given investors some 27% of their original investment.
Only one investor who held a $5,000 first mortgage revenue bond voted for the plan. Mr. Lehmann said that only a minority of serial and zero coupon bondholders responded to the poll.
"What the [vote] tells me is that it's time to sit down and discuss reality," said Mr. Lehmann, who also represents the 500-student district in rural El Paso County. "I would expect them to continue to negotiate."
At a joint meeting of the Ellicott School District board and the three-member authority on Monday night, neither group decided how to proceed.
Mr. Lehmann said the overwhelming rejection by bondholders sharply contrasts with a decision last December by local taxpayers not to convert the lease revenue to tax-backed general obligation debt.
"The lines in the sand have been drawn," he said. "They are very far apart."
The decision apparently did not surprise board members or Kemper Securities Corp., whose Denver-based Boettcher & Co. division was the original underwriter of the bonds in 1985 and of a refunding in 1988.
Kemper had written to bondholders encouraging them to reject the plan, advising that investors could do better. Mr. Lehmann credited the letter with the strong rejection of the authority's plan.
In its eight-page letter, the underwriter said the authority's plan would cut interest in half and essentially reduce the outstanding principal on term bonds due through 1997 and zeros due in 1998 to $1.5 million from approximately $5.63 million in principal now outstanding.
The bonds defaulted after a reserve account had to supply the interest payment of about $79,000 that was supposed to come from the school district's missed leased payment.
The bank official said the trustee demanded that the school district reimburse the $400,000 reserve fund before July 3. When the district did not, the official said, the issue was declared in technical default.
Even if the district does not seek bankruptcy this week, observers expect the district to do so by late this year. They note that under the lease agreement, the school district has until Nov. 15 to decide whether it will renew its calendar year lease.
Mr. Lehmann confirmed that a Chapter 9 filing would allow the district to remain in the leased school building until the authority was discharged from bankruptcy court.
"Right now, the bondholders are not in a very good spot," said a Denver investment banker familiar with the default. "They only come out well if the district decides it wants to keep the building because there isn't much of a market for that kind of empty space in southern Colorado."