Defaulted Oregon Coast Aquarium Offers to Repay Debt ... Eventually

SAN FRANCISCO — Holders of defaulted Oregon Coast Aquarium bonds are deciding on a workout plan created by aquarium managers that offers them 100% recovery of their principal — if they are willing to wait.

The aquarium fell into default in 2002 following a series of events that included the departure of its star attraction and criminal actions by a former president to disguise massive cost overruns on a new exhibit.

The aquarium issued $14.1 million in revenue bonds in 1998 through the Oregon Health, Housing, Educational and Cultural Facilities Authority, partly to finance construction of a feature exhibit to follow the scheduled departure of Keiko, the orca whale star of the film “Free Willy.”

Keiko drew enormous crowds until his two-year stay at the facility in Newport, Ore. ended in 1998. Keiko eventually was released into the wild and died in a fjord in Norway in 2003.

The aquarium’s then-president, Phyllis Bell, hid the cost overruns on the “Passages of the Deep” exhibit from the nonprofit’s board of directors, to the extent of taking on $2 million in loans without the board’s knowledge, said Al Gleason, a vice chairman on the board.

“In late ’01 and early ’02, we noticed that our finances were not where we thought they were,” said Gleason. “We were getting calls to individual directors from vendors.”

That board’s ensuing inquiry led to Bell’s removal from office and, subsequently, her guilty plea on misdemeanor and felony forgery charges.

The remaining leaders of the aquarium were left to pick up the pieces, Gleason said.

“I have worked about two of the last three years full time and part-time the last year basically restructuring the debt of the aquarium,” said Gleason, a former chief executive of PacifiCorp who retired to the Oregon coast, where he joined the aquarium’s volunteer board of directors.

The uninsured bonds carried a BBB-minus rating from Standard & Poor’s when they were issued in 1998. The rating dropped to BB-minus in December 1999 and has since fallen to D because of the default.

There are about $12.97 million in bonds outstanding.

Gleason said the bond default is the last piece of the debt-restructuring puzzle — and the most critical.

The aquarium has missed principal payments since 2002 and interest payments since 2004. The proposed workout would allow investors to recover 100% of their principal in an exchange of the old bonds for new debt, Gleason said, but only about half the past-due interest. Deadline on the tender offer is May 3.“But it means lengthening the maturity of the bonds to match the cash flow,” he said.

Most maturities would be extended 12 years, though the longest maturities — due in 2011 and 2016 — would be pushed back 15 years each.

Most of the bonds have been thinly traded since the default, according to trade reports on the trade data supplied by the Municipal Securities Rulemaking Board and published by The Bond Market Association on its Web site. Several of blocks of $10,000 of the 2002 and 2004 bonds traded at 13.25 in October and some 2016 term bonds traded at 12.01 and 13.01 in early January. The 2016 bonds have 5.25% coupons and originally were sold at 98.

Interest rates on the new debt would be increased by 10 basis points, Gleason said. The new bonds would be unrated.

They would be issued through the same conduit as the 1998 bonds, since renamed the Oregon Facilities Authority.

Gleason said the tender offer is the result of negotiations with the institutions that hold about half the outstanding debt. But there are in the neighborhood of 150 bondholders in total, he said, and every last one must agree.

If the tender offer fails, there is no viable backup plan and Chapter 11 bankruptcy is a real possibility, Gleason said.

That could result “in a far less favorable restructuring arrangement for bondholders,” according to a question-and-answer sheet provided with the tender offer documents distributed by U.S. Bank, the trustee.

“There is no money to buy out dissidents,” Gleason said. “We have an enormous challenge.”

The aquarium has received a $1 million challenge grant, he said, which it is close to matching, but it is conditioned on the success of the tender offer.

While aquarium attendance, which surpassed 1 million annually during Keiko’s stay, has fallen to about 425,000, Gleason said the numbers appear to have stabilized and that the aquarium is financially viable at those levels.

“We have positive cash flow. We’re not a failing institution,” he said.

Gleason said the tender offer is a good faith effort to do the best for the bondholders.

He believes bondholders would fare worse in a bankruptcy filing, whereas the tender offer would secure the aquarium’s future.

“The bonds have no claim on any assets,” Gleason said. “The aquarium sits on land leased from the city of Newport and the port of Newport.”

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