Distressed Chicago suburb eyes future restructuring bond deal

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As Harvey, Illinois, works to resolve legal disputes with bondholders and Chicago over delinquent water bills, the fiscally distressed city envisions the eventual restructuring of its debts in a new bond deal.

The idea and the structural form of the new deal including whether it would conducted as a bond exchange, publicly offered or privately placed is in its infancy and requires the city to hammer out settlements on claims being pursued by its 2002 and 2007 bondholders and Chicago, said Robert Fioretti, of Roth Fioretti LLC, which is representing Harvey.

“We could probably in good faith create a bond issue in the next 18 months that will take everybody out of the picture,” Fioretti said after a status hearing Friday in a lawsuit filed by holders of Harvey’s $32 million 2007 general obligation bond issue. “It is our intent to try to resolve all” the major claims weighing on the city’s battered balance sheet.

“We are still looking into a crystal ball on how this would be structured but we would have to get everyone in line” on settlements first, Fioretti said.

“We could probably in good faith create a bond issue in the next 18 months that will take everybody out of the picture,” Harvey's attorney Robert Fioretti said after a status hearing Friday in a lawsuit filed by bondholders.

Some form of a bond exchange represents the best long-term option for bondholders and the city, said one lawyer following the case. A restructuring could limit payments to interest only in the first seven to 10 years, giving the city breathing room, and at the same time would restore much-needed liquidity to the bonds so current holders could sell, the lawyer said. The ability to sell the bonds may be preferred because of concerns that Harvey's ongoing distress could interfere with future payments over the long term.

The city received some breathing room Friday as work on various settlements progresses. Cook County Circuit Court Judge Michael T. Mullen at the Friday hearing approved Harvey’s interim agreement with the 2007 holders that frees up $301,000 of property tax revenue currently held in escrow — per a December order that sided with bondholders.

The interim agreement that expires March 20 — when the next hearing is scheduled — directs 20% of those funds to bondholders and allows the city to pocket the other 80%. Freeing up the funds “allows the city to go forward with their day-to-day operations,” Fioretti said.

The December order granting bondholders summary judgment had directed Cook County to segregate Harvey’s tax revenues needed to cover debt service payments in an escrow before sending tax dollars to the city, as permitted under an escrow agreement that’s part of the original bond deal. Harvey and bondholders agreed to delay any release of the funds until the Jan. 31 and then extended the timeline to the Feb. 28 hearing as work on a larger settlement continued.

The 2007 holders tired of ongoing defaults and partial payments filed the lawsuit in 2018.

A new wrinkle in the case surfaced earlier this year when Assured Guaranty Municipal Corp., which insures a 2002 Harvey issue, entered the fray. Assured filed a petition to intervene and is seeking inclusion in any workout. The judge said he would decide on the request at the March 20 hearing.

The city of about 25,000 is opposed to the late-in-the-game introduction of the 2002 bondholders into the case, but Fioretti told the judge the city intends “to envelope in” the 2002 bondholders into any global settlement.

Assured, formerly Financial Security Assurance Inc., reports being the owner of $1.16 million in principal and insurer of $565,000 bonds maturing February 2020. The filing argues that the 2002 bonds also benefit from the same tax escrow agreement as the 2007 bonds.

Harvey’s fiscal woes run deep due to a dwindling tax base, population and job losses, and past fiscal mismanagement that led to Securities and Exchange Commission sanctions on the 2008 bond sale and the bond and water payment defaults.

The 2007 bondholders who filed the 2018 lawsuit, led by Invesco Oppenheimer Rochester High Yield Municipal Fund and Susquehanna Government Products LLP, are willing to give Harvey some time in part because the city is working to regain some control over its water operations and dealing with Chicago. At the time of the lawsuit’s filing, OppenheimerFunds held $11 million of the bonds and Susquehanna held $5.8 million. Bondholders are represented by Bryan Cave LLP partner Brent Vincent.

Chicago took Harvey to court after Harvey fell in the arrears on payments for Chicago-treated water from Lake Michigan. The two cities agreed to a consent decree in 2015, but Harvey violated it and the court stripped Harvey of control over its water operations in 2017.

The 2007 bondholders intervened in the Chicago case at the same time they filed the 2018 litigation against Harvey and county officials. Bondholders and Harvey believe revenue being diverted by a receiver appointed in the ongoing litigation can be freed up for other use.

Harvey, now led by a new mayor, Christopher Clark, is seeking to regain control. Harvey has argued the receivership has failed to accomplish the goal of bringing the city up-to-date on water payments while extracting fees for its services and withholding needed revenues while also overstepping its management powers. Discussions are ongoing on the role of the receivership going forward.

The bondholders argue they are entitled to a portion of water rents and rates because about $5 million of the 2007 bonds financed water system improvements. They also want to prevent the court receiver from siphoning off to the water fund general funds the bondholders believe should go to repay their holdings.

The 2007 issue, which carried a BBB-minus rating from Fitch Ratings when it was issued, included $9 million of B series taxable bonds with a $3.2 million 2017 maturity paying a yield of 7.25% and a $5.8 million 2024 maturity yielding 7.75%. The $22 million tax-exempt A piece included a 2027 maturity for $9 million that paid a yield of 5.14% and a 2032 maturity for $12.8 million that paid a yield of 5.22%.

The city bears responsibility for investor disclosure. U.S. Bank NA serves as the paying agent, but there is no trustee. Fitch Ratings later dropped its ratings on the 2007 bonds to a low of B but withdrew its rating in 2010 "due to insufficient information."

Harvey has been mired in litigation with various creditors. In 2018 it settled a dispute with its public safety pension funds that sought to garnish tax revenues to make up for overdue contributions. Illinois lacks a general Chapter 9 statute to allow municipalities to file for bankruptcy.

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