Bond Trustee Blues In Michigan Deal Gone Bad

PHOENIX - The default of some unrated nonprofit project bonds in Michigan and subsequent struggle to recover funds highlights the frustration bondholders sometimes feel in working with trustees, who are tasked with acting as the agents of the investors in distressed and default situations.

The heart of the matter is $4.1 million of unrated bonds issued by The Economic Development Corporation of the Charter Township of Holland and dated Nov. 21, 2013. The bonds carried a 7% coupon and were sold to support the local operations of Kandu Inc., a 501(c)3 organization providing skills training to the developmentally disabled. The Holland Township location subsequently closed its doors as financial losses triggered a fraud investigation by local authorities, and the bonds went into default late last year. U.S. Bank, which serves as trustee on the issuance, filed notice on EMMA just days ago that it had successfully sold the Kandu assets and would be able to repay bondholders at least 83 cents on the dollar.

Scott VanderWerp, a Grand Rapids, Mich., finance professional, described a nightmarish and inefficient process that he blamed for failing to make bondholders whole. VanderWerp, who held some of the bonds before transferring them back to Kandu and whose parents owned about $80,000 of the debt, said he repeatedly requested information from U.S. Bank and its attorneys, and even brought potential buyers to their attention, only to be ignored or told he had no right to the information he sought.

"It's been a nightmare," VanderWerp said. "They basically just wear you out so you go away."

A previous Bond Buyer report that included interviews with executives at leading trustee banks, including U.S. Bank, revealed that trustees frequently find themselves a marginalized member of the deal team and sometimes encounter displeased bondholders who expect them to be more powerful in default situations than they actually are. The trustee is supposed to act as an agent for the bondholders, enforcing their rights under the indenture and attempting to get them their money. U.S. Bank, which declined to comment for this report, said at that time that its trustee division has a separate group of professionals to handle defaults.

Emails obtained by the Bond Buyer show that VanderWerp was communicating with a U.S. Bank employee and attorneys regularly from the start of the default, expressing concern that bondholders had not received a list of Kandu's assets and that he had personally witnessed what appeared to be items being removed from the Kandu facility. The emails show that attorneys involved did eventually respond when VanderWerp helped to line up a potential buyer in October 2015, but VanderWerp said he was given the run-around. EMMA disclosures show that U.S. Bank closed the sale of the facility this month and received about $3.4 million after costs.

VanderWerp said the trustee was unreceptive to other efforts he made to assist, and the emails show he personally contacted Kandu chief executive officer Thomas Vreeman to obtain minutes of the Kandu Board of Directors. VanderWerp said he felt the trustee wasted time and money as bondholders continued to lose out on interest payments.

"It's a huge issue," he said. "They have to do a better job."

U.S. Bank said in the disclosure that it will make an initial payment to bondholders of about $3.3 million dollars on Sept. 1, and believes it may get more money from the bond counsel as a result of a mortgage recording mistake that cost some $94,000 back when the bonds were first issued.

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