CHICAGO — The trustee for $8.5 million of revenue bonds issued on behalf of an Illinois meat processing company that went bankrupt has a deal to sell the firm's bond-financed assets at a steep discount.
The bonds were issued in 2005 to finance a wastewater treatment facility to support the Quantum Foods plant in the Chicago suburbs.
Quantum Foods filed for Chapter 11 bankruptcy in February.
Trustee UMB Bank accepted an offer of $3.75 million from West Liberty Foods, LLC to purchase the facility, as recommended by its advisor.
"Scully Capital advised that this offer substantially exceeded any probable alternative use or liquidation value of the borrower's physical assets," the trustee reported in August in a notice posted on the Municipal Securities Rulemaking Board's EMMA website.
The Village of Bolingbrook issued the wastewater facilities revenue bonds for Crossroads Treatment LLC, which was formed solely for the purposes of borrowing funds for the project.
Proceeds financed the construction and equipping of a wastewater treatment facility in the far southwest Chicago suburb of Bolingbrook, to support the operations of Quantum Foods and Quantum Culinary LLC, whose fate as a supplier of meals to the military was tied in part to the United States' presence in the Middle East.
Quantum Foods was required to construct a pre-treatment facility to handle its wastewater because of the waste generated by its business of processing meat.
In addition to the facility owned by the borrower, the bond proceeds financed a pipeline that linked to a wastewater tap in Romeoville.
The unrated, tax-exempt bonds sold in 2005 with a final maturity in 2035 after Bolingbrook's village board approved the borrowing and project.
William Blair & Co. was underwriter. The securities carried a 6.6% interest rate and were payable from revenues under a loan agreement and were also supported by a mortgage and collateral assignment.
The debt had characteristics "which require careful analysis and consideration before a decision to purchase is made," according to the original bond offering documents.
"The series 2005 bonds should only be purchased by investors who have adequate experience to evaluate the merits and the risks of the series 2005 bonds and who are able to bear the risks of loss of all or a portion of their investment in the series 2005 bonds," the offering statement continued.
One market participant said the bonds were especially risky because of their dependence on repayment from one user of the bond-financed facility - Quantum Foods - putting them at the mercy of Quantum's fortunes.
When Quantum Foods filed for bankruptcy in February, it triggered a material violation of its wastewater agreement that supported the bonds, creating an event of default. At that time, Quantum told the previous bond trustee, The Bank of New York Mellon Trust Co. NA, that it intended to reject the wastewater agreement backing the bonds.
UMB replaced Bank of New York Mellon as trustee in May.
Trustee UMB reported in a July disclosure notice that a majority holder of bonds directed it to "explore all options, including new usage agreements for the project and sale or repurposing of the assets" but also reached out to all holders for input.
"It is probable that the closure and subsequent sale of the borrower's assets will lead to a significant impairment of the bonds," UMB warned in the notice.
The trustee hired Scully Capital, LLC to advise it in addition to Greenberg Traurig to serve as legal counsel.
Quantum Foods, which halted production in May, initially sought a buyer and had one offer which was then bettered than one from Raging Bull Acquisition Co. LLC. It called for a $54 million cash payment with$30 million in liabilities being assumed by the buyer. The deal fell through after the buyer questioned Quantum's financial results.
When that deal fell through, Quantum Foods was set for liquidation with the bankruptcy court ordering an auction set for three days in June. Online bidding was accepted for the 220,000-square-foot production facility, an 80,000-square-foot culinary facility, and a 250,000-square-foot cold-storage distribution center.
The auction was cancelled when the company struck the sale agreement with West Liberty Foods LLC.
As part of its efforts, the trustee and its advisors began negotiations with West Liberty which resulted in the $3.75 million offer from the company. Given the consultant's opinion of value, and at the direction of majority holders, the trustee accepted West Liberty's offer," the latest notice said.
The trustee and West Liberty hope to close by Sept. 30, with proceeds going to pay all expenses of the default and sale process and fees before a final distribution is made to bondholders. The notice did not disclose an estimated recovery once all fees and expenses are paid.
West Liberty operates three manufacturing plants, two in Iowa and one in Utah. It produces sliced deli meats and packaged frozen foods.
Quantum Foods was launched 1990 as a hand-cut beef butcher, growing from 15 employees to more than 1,000 producing ready-to-serve meat meals to commercial businesses and overseas military bases, according to a press release from the auction company.
Quantum Foods generated $500 million in gross income in 2012, but income declined by $70 million after military operations in the Middle East were reduced and beef prices increased, according to published reports.
"The recent withdrawal of troops in the Middle East, along with the loss of top retail clients, hurt its business operations, leading the company to file for Chapter 11 bankruptcy on February 18, 2014," the auction company release said.