WASHINGTON — The South Carolina Department of Transportation is challenging the Connector 2000 Association Inc.’s Chapter 9 bankruptcy filing, delaying efforts to restructure $369 million of the agency’s toll road bonds that went into default at the beginning of the year.
The SCDOT filed a motion with the U.S. bankruptcy court in South Carolina on July 30 that urged the court to deny the Connector’s request to enter into Chapter 9 bankruptcy. The motion claims that the toll road does not meet the requirements for Chapter 9 bankruptcy because it is not a municipality.
The senior trustee bank, U.S. Bank NA, which is representing senior bondholders who are claiming $278.1 million of the Connector debt, responded last week, telling the court that the DOT’s objection to a Chapter 9 filing is a “delay tactic” and “a thinly veiled grasp for more political cover.”
“The only impediment to a consensual restructuring of the association’s obligations has been SCDOT,” U.S. Bank wrote in its Aug. 10 filing with the court. The department’s “repeated refusal to meaningfully engage in constructive negotiations with the bondholders is regrettable.”
Discovery proceedings for the Chapter 9 bankruptcy filing must be completed by Oct. 29 and a trial has been scheduled to begin Dec. 6, the court announced last week.
The association filed for Chapter 9 bankruptcy in June. It had missed a debt-service payment and defaulted on its bonds on Jan. 1, following years of insufficient traffic along the 16-mile road around Greenville, S.C. The toll road continues to operate, and it will need about $61 million for repairs and maintenance over the next 41 years, according to the state DOT.
An attorney representing U.S. Bank NA referred questions to the bank. The SCDOT and its attorneys could not be reached for comment.
The fight between bondholders and the state was brewing before the Connector filed for bankruptcy. The SCDOT has not accepted a debt adjustment plan offered by the Connector and the senior trustee. Under the plan, bondholders would reduce their claims by about $120 million and would provide the department with funds for maintenance costs, according to court documents.
The SCDOT has a subordinate claim to the Connector’s toll revenues below the bondholders and is not expected to receive any funds under the current payment schedule. The SCDOT claims it is currently owed about $8.3 million, according to court documents.
But the motion to deny the Connector’s Chapter 9 filing goes beyond monetary reparations, sources said. The state wants to squelch any notion that the Connector is a municipality and that the state might be responsible for its future liabilities, according to people familiar with this case.
Dennis J. Drebsky, an attorney with Nixon Peabody LLP representing HSBC Bank USA NA, the trustee bank for subordinate bondholders which have claims of $90.9 million, said the SCDOT is resisting a Chapter 9 filing because it poses “a political hot potato” to the state, he said.
“The state does not want to concede that [the Connector] is an instrumentality” and that “somehow taxpayers are going to be on the hook, which is not the case,” Drebsky said. There is an additional fear that a bankruptcy could raise borrowing costs for other credits in the state, he said.
By rejecting the Chapter 9 bankruptcy and the restructuring plan, the SCDOT could be sacrificing monetary claims if it loses out in a potential Chapter 11 bankruptcy, sources said.
A Chapter 9 bankruptcy filing is only available to municipalities, so the court must decide if the Connector fits the definition of a municipality, said James Spiotto, a partner with Chapman and Cutler who specializes in municipal bankruptcies.
To determine the Connector’s Chapter 9 case, the court will be looking at the legislative history and “whether or not it was intended in that legislation that they be a public agency or instrumentality of the state,” Spiotto said. An alternative view would be that the Connector was providing “a more tangential public support of a non-for-profit entity,” like a hospital, he said.