CHICAGO - On the heels of the sale of a financially troubled borrower to a for-profit buyer, the Cleveland-Cuyahoga County Port Authority is dipping into its reserves and taking out a short-term bank loan in order to redeem $5.7 million in tax-exempt bonds issued on behalf of the borrower.
The bond redemption comes after a for-profit group last week purchased Myers University, a formerly nonprofit school located in downtown Cleveland. The debt-ridden university almost closed its doors last December, and narrowly avoided defaulting on the $5.7 million loan from the port authority at the time.
The Cuyahoga County courts took over the university last December, and last week sold the school to a for-profit Florida company. The sale nullified the tax-exempt status of the bonds, requiring the Port Authority to call the bonds or default on the debt.
Port authority chief financial officer Brent Leslie said the move is good for the agency's 11-year-old bond fund program.
"I view this as a positive development," Leslie said. "Removing Myers from the portfolio should strengthen the portfolio and our reserves remain intact."
The authority plans to call the bonds Sept. 23.
The agency originally issued $5.72 million in tax-exempt bonds in 2004 to finance a loan to Myers University to renovate a building. The bonds were secured by bond fund program reserves as well as a first mortgage lien on the 40,000 square-foot building.
The Port Authority's bond fund program has about $86 million in outstanding debt and 23 borrowers. Myers is the fourth-largest borrower in the program, representing 6.6% of the total portfolio. As the university's financial struggles deepened over the last two years, Fitch Ratings - the only agency to rate the authority's bond fund program - revised its outlook on the program's debt to negative earlier this year. Analysts said the move stemmed from Myers' precarious financial situation, which could threaten the program's future financial flexibility.
Fitch rates the authority's bond fund program BBB-plus. Analyst Adrienne Booker declined to comment yesterday. Port Authority officials were to meet with analysts late yesterday, said Leslie.
The new owners paid $5.25 million for the university, which included cash and a $2.52 million note from a mortgage on the school's building.
The authority will tap into several sources to repay the debt. The biggest chunk, $2.25 million, will come from a short-term loan from Charter OneBank, which will be repaid within two years when Myers' new owners pay off the mortgage note, Leslie said.
In addition, the authority will use $1.4 million from an auxiliary reserve fund, mostly depleting that fund. The board earlier this year agreed to pledge that auxiliary fund to the bond fund program in anticipation of Myers' financial problems, said Leslie.
Another $1.26 million will come from the port authority's general fund, and $872,500 will come from the bond fund's primary reserve. The $872,500 is money that Myers gave to the trustee upon closing of the loan transaction in 2004, in accordance to program rules that require borrowers to post about 10% of their loan in a reserve.
Authority officials expect to receive at least a portion of the general fund money back when the proceeds of the sale - estimated to be around $1.75 million - are divided up among creditors.
"I hate to speculate, but I certainly expect we'll get something," Leslie said.
The repayment structure largely leaves the bond fund's reserves intact, said Leslie. The program currently has about $23 million in reserves, about 27% of its total $86 million debt outstanding, he said. The authority must maintain a reserve equal to at least 20% of outstanding loans, according to Fitch.
"This doesn't have any long term impact on our ability to continue to be a municipal debt issuer," Leslie said. "We've issued over $1.5 billion in principal, both in the bond fund and outside of it, and we're very comfortable in our track record given the financial markets over the last year."
