SAN FRANCISCO - Copia: The American Center for Wine, Food, and the Arts - a bankrupt Napa, Calif., nonprofit with about $77 million of outstanding tax-exempt bonds - has abandoned its attempt to secure debtor-in-possession financing, signaling that the so-called wine shrine has closed its doors for good.
Without DIP financing, Copia's main asset, an 80,000-square-foot museum and cultural center on 12 acres overlooking the Napa River, will probably be turned over to ACA Financial Guaranty Corp., insurer of its debt.
It is unclear how much the insurer - itself in a runoff as part of a settlement negotiated by the Maryland Insurance Administration - will be able to recover from a sale of the property, but former employees say the claim is likely to reduce its remaining capital.
Copia spent $55 million to build the museum in 1999, but earlier this month it sought to sell the building for $28 million and to reorganize with a $2 million line of credit from Charter Oak Bank, according to its bankruptcy filings.
The plan fell through when ACA objected and said it would seek to foreclose on the property.
"Given the amount and nature of the secured claims in this case, the debtor has no prospects for reorganization," ACA said earlier this month in a filing by bankruptcy lawyers Louis Cisz 3d and Matthew Richards of Nixon Peabody LLP. "The debtor does not have any equity in the Napa property and is hemorrhaging at least $150,000 a month."
The obligation to pay off the Copia debt could cost ACA, which reached its settlement with its structured finance counterparties in August. Factoring in the cost of the settlement, ACA policyholders' surplus - admitted assets minus liabilities - fell to $101.6 million as of Sept. 30 from $229.1 million at the end of last year. ACA had statutory capital - policyholders' surplus plus contingency reserves - of $173.1 million as of Sept. 30, according to regulatory filings.
Although ACA may be able to use contingency reserves to set up a case-based reserve, it's likely that most of the cost will be allocated from policyholders' surplus, said Thomas Hoens, ACA's former chief financial officer, who has been critical of the restructuring plan. Depending on the price it can get for the building and land - Copia's only substantial remaining asset - paying off the obligation could take a chunk out of ACA's remaining capital.
An order signed by Maryland Insurance Administration commissioner Ralph Tyler in August required ACA to maintain the capital and surplus levels to conduct insurance business in every state. But payments to fulfill the Copia obligations could put ACA in danger of breaching some states' capital requirements, Hoens said.
"Things are going to get fairly ugly, fairly quickly," said Hoens, now with consultant HRF Associates. "What is striking to me is the amount of time it took between [Copia's bankruptcy] and having a settlement that had several pieces happen that were causing us to question the settlement."
A spokeswoman for the Maryland Insurance Administration said the agency would not comment on any specific claim, citing the company's proprietary information. The administration said in August that ACA had enough assets to fulfill its remaining obligations.
Copia's poor operating results suggest regulators should have been aware of its risk of default. The issue could end up being one of timing, depending on when ACA might have originally modeled any losses compared to when they actually occur.
ACA would not comment on any specifics beyond a statement posted on its Web site that called the events "unfortunate" for both ACA and Copia. ACA will "endeavor to resolve this matter for the benefit of all concerned parties in an equitable and expeditious manner," chief executive officer Raymond Brooks said in a statement.
"Regardless of the outcome at Copia, ACA's financial guaranty insurance policy is an unconditional and irrevocable guarantee of the timely payment of principle of and interest on each claim when due," Brooks said.
Lawyers for Copia were unavailable to comment before the holiday, while lawyers for ACA refused to comment. Chief executive officer Garry K. McGuire Jr., who was hired to turn the museum around in March, resigned Dec. 15, and the nonprofit's phones have been disconnected.
Copia, founded by Robert Mondavi and other vintners in the late 1990s, sold $70 million of bonds in 1999 to finance construction. The nonprofit hoped to attract a half million visitors a year to wine tastings, cooking classes, art exhibits, films, concerts, and two high-end restaurants.
But in a region filled with renowned wineries and haute cuisine restaurants, Copia never drew even half the audience it expected. It lost at least $5 million every year since opening in 2001, posting a $12.7 million loss in 2006. It refinanced its debt last year in a $77 million deal sold via the California Infrastructure and Economic Development Bank and backed by ACA.
Despite disclosing "sustained recurring losses" and "substantial doubt regarding Copia's ability to continue as a going concern" in bold type on its official statement, JPMorgan was able to sell the deal because it carried insurance from ACA.
ACA, formed by industry veteran H. Russell Fraser to back lower-rated credits ignored by bigger insurers, had an A rating from Standard & Poor's at the time of the sale. But soon after the Copia issue, ACA was overrun by losses on structured products it insured, including subprime mortgage-backed securities. In December 2007, Standard & Poor's downgraded the insurer to CCC.
After signing a number of forbearance agreements, ACA agreed to settle its structured product obligations and to enter into runoff in August. Standard & Poor's earlier this month upgraded ACA to B from CCC, noting its margin of safety of 0.5 times to 0.7 times severe stress case losses, which is consistent with its speculative-grade rating. Standard & Poor's withdrew the rating at ACA's request, leaving the insurer without any ratings.
Most of the credit remaining in ACA's $7 billion portfolio is rated BBB or BB, and concentrated in the health care and higher education sectors, according to Standard & Poor's. Higher education bonds made up more than 24% of the primary market issues ACA insures, while hospitals made up about another 12%, according to a Bond Buyer analysis of data on ACA's Web site.
