More Arizona agency conduit debt lands in bankruptcy court

Another bankruptcy involving bonds issued through the Arizona Industrial Development Authority was filed Tuesday along with a pre-packaged exit plan that would result in bondholder ownership of a reorganized company.

Restoration Forest Products Group, which brought the Chapter 11 case in U.S. Bankruptcy Court in Delaware, sold $112.8 million of taxable Series A senior and $86.8 million of taxable Series B subordinate sustainability-linked revenue bonds through the authority in 2022 under its former name NewLife Forest Restoration.

The filing comes as Legacy Cares' 2023 bankruptcy case, which involved $284 million of defaulted debt sold through AZIDA in 2020 and 2021 for a participant sports venue in Mesa, is winding down in Arizona federal court. A bondholder sued project officials, the underwriter, and bond counsel in November over alleged bond sale misrepresentations and omissions.

Abode Stock

In the wake of Legacy Cares and other troubled bond issuances by the conduit debt-issuing authority, Arizona Gov. Katie Hobbs last year directed it to disclose details about borrowers, including past projects and experience, existing financings, past defaults, debt-to-income ratio over the past 12 months, and business plans.

Dirk Swift, AZIDA's executive director, said a policy adopted last year by the agency and the application form for conduit bonds reflect the governor's directives.

Restoration Forest, an Arizona-based sustainable forestry and wood products manufacturer, said in court documents its inability to secure a contract with the U.S. Forest Service while it was building a sawmill financed with bond proceeds, along with problems caused by harsh winter weather in 2022 and an operational shutdown in 2020 due to the COVID-19 pandemic, led to the bankruptcy.

"In the end, the funding raised from the issuance of the 2022 bonds was not enough to cover the already over-budget cost of completing the Bellemont Facility, which is now scheduled to be completed in May 2024." the company's disclosure statement said. 

Last May, the company, majority senior bondholder Invesco Senior Secured Management, and the bond trustee entered into a limited duration forbearance agreement, according to a disclosure on the Municipal Securities Rulemaking Board's EMMA website. By September, the company defaulted on the bonds and on a June bridge loan credit agreement with Invesco, whose affiliates own the Series A bonds, the court filing said.

Under a proposed plan of reorganization, recoveries for Series A bondholders would be 20% to 35% and an unspecified percentage for Series B bonds, which were bought by affiliates of Lateral Investment Management. If the plan receives court approval, Invesco would become the majority owner of the reorganized company in partnership with Lateral.

Updated with comment from AZIDA's executive director.