Harvey, Illinois, gets two years to refinance defaulted bonds
Harvey, Illinois, gets a roughly two-year window to restructure debt under a court-approved consent decree with a group of bondholders that allows the city to keep 90% of pledged tax revenues.
Under the agreement, Harvey gets to keep 90% of pledged tax revenues and bondholders will receive 10%. The pact runs to June 2, 2022 as long as the city honors terms of the agreement that call for it to continue negotiations and move towards a debt restructuring.
“The city agrees to further negotiations toward a final resolution of the litigation, including by way of a restructuring or refunding of the Series 2007AB Bonds as a new general obligation bond issue in a manner acceptable to plaintiffs within 60 days and to use best efforts to reach such an agreement,” reads the pact approved by the court last week. The case is dismissed subject to terms of the decree.
The dwindling tax base of the impoverished south Chicago suburb can’t support its pension and bond debts. The city currently owes $4.5 million in defaulted debt service that was due in December 2018, June and December 2019 and June 2020 on the $31 million 2007 issue.
Negotiations between the city, which is represented by attorney Robert Fioretti of Roth Fioretti LLC and bondholders led to the agreement in the litigation was filed in September 2018, when investors who hold $16.9 million of the bonds filed suit against the city and various Cook County officials whose offices manage ad valorem tax collections and distribution.
“This gives us two years to get everything refinanced,” said Fioretti said. “Harvey is obligated to find a financial adviser in next 60 days as we attempt to refinance the bonds. As we refinance the bonds, we’d like to refinance other debts. If we can do this it will be a new day for Harvey.”
The city will try to wrap other debts into the restructuring, including money owed to Chicago for overdue water payments that is the subject of separate litigation in Cook County Circuit Court, and defaulted debt service payments owed to 2002 bondholders who attempted to join the litigation.
A new mayor and other leaders are trying to revitalize the tax base but it will be a long road for the city that in the past collected less than half of owed taxes. Fioretti said that figure has been on the rise, though it could be impacted by the pandemic.
Without the ability to keep the majority of its tax revenues Fioretti said he couldn’t “even predict what the situation would have been for Harvey,” especially given the added strains of the COVID-19 pandemic and its impact on sales, motor fuel and other tax revenues.
Fioretti said he’s hopeful of the city’s ability to borrow and hopes to get the refinancing done in the next six to 12 months but acknowledges it’s a tough sell for the market.
A direct placement with a high-yield buyer provides the best route for the city, said Brian Battle, director of trading at Chicago-based Performance Trust Capital Partners.
“It’s going to be hard for Harvey because they have a long history of questionable management and corruption, a lack of accounting and some misdeeds,” Battle said. “They have to establish that there is a plan that will fix the problems and that they can prove they can do that. They are going to be a penalty rate unless they use a lockbox where they have legal opinions.”
The state, at Chicago’s behest, approved in 2017 such a lockbox structure for revenues that flow through the state like a portion of sales and motor fuel and shared income taxes.
“Because of their history and potential skepticism, I believe the bonds are going to have to be privately placed. It’s going to take a good amount of negotiations and a huge leap of good faith not just that they have an actionable plan but that they can execute it. It’s an injured credit and a complicated transaction,” Battle said.
Court filings laid bare the deep fiscal woes for the city of 25,000 with many living below federal poverty levels. The city has suffered multimillion-dollar operating losses dating back well over 10 years with operating deficits ranging from $1.7 million to $3.1 million over the last three fiscal years and it holds no reserves.
“Harvey is already in a very precarious position and scarcely able to meet its current obligations for payroll and other basic expenditures necessary to run the city and to provide its citizens with essential services,” its court filings said.
Under the consent agreement, the county collector must remit 10% of all ad valorem property tax collections collected in connection with the general corporate levy directly to an escrow agent that manages a tax escrow account for bondholders with the other 90% going directly to the city.
“The parties agree to discuss increasing the percentage of ad valorem property tax collections collected in connection with the general corporate levy that shall be remitted to the tax escrow account to accelerate the payment of the arrearages on the series 2007AB bonds during the term of the consent decree,” the agreement says.
The investors include Invesco Oppenheimer Rochester High Yield Municipal Fund, Invesco Oppenheimer Rochester AMT-Free Municipal Fund and Susquehanna Government Products. They are represented by Bryan Cave LLP partner Brent Vincent who could not be reached to comment. During past hearings, Vincent said bondholders were trying to strike a balance in both recouping their investment while not forcing the city to cancel critical services to repay debts.
The bondholders plan to keep a close eye on the city with a say in the direction as it seeks to restructure the debt.
“Plaintiffs and Harvey agree that as part of Harvey’s good-faith obligations and efforts any new general obligation bond issue for the restructuring or refunding of the Series 2007AB bonds” will require retainer of qualified advisory and legal individuals to assist in the deal, both acceptable to plaintiffs, according to the agreement.
The bondholders also must sign off on any underwriting selection and trustee and the bonds must include a pledge of all legally available funds, a dedicated property tax levy for the purpose of repayment of some or all of the principal and interest on the new general obligation bond series, reads the agreement.
Harvey gets 30 days to cure a default on most terms or the consent agreement or it is terminated.
Triggers include a failure to timely approve and deliver to the county clerk a corporate levy on the 2007 bonds, if the city fails to levy the amounts needed, reduces the levy to less than the 2018 level, takes any steps that directs or causes the escrow agent to an unauthorized party, or seeks bankruptcy or is involuntarily placed in bankruptcy or declared insolvent, although Illinois law does not allow for Chapter 9 municipal bankruptcy filings.
The lawsuit originally demanded that the city forward pledged tax collections to cure defaults and that the county send all 100% of the revenue directly to an escrow account as bondholders argued was required under bond indenture documents.
Cook County Circuit Court Judge Michael T. Mullen in December sided with bondholders and ordered the county to segregate tax funds and bypass the city sending directly to an escrow agent. 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. They agreed to a split as negotiations continued on a consent decree.
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 city agreed to work to reinstate a tax levy for the bonds and the aim is to fold the debt into any restructuring. Assured, successor to original insurer Financial Security Assurance Inc., reports being the owner of $1.16 million in principal and insurer of $565,000 bonds maturing February 2020.
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 a 2008 bond sale and the bond and water payment defaults.
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 in 2018, when they filed the lawsuit. Bondholders and Harvey believe revenue being diverted by a receiver appointed in the ongoing litigation can be freed up for other uses.
Harvey, now led by a new mayor, Christopher Clark, is seeking to regain control of the water operations. 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. A hearing is set for this week.
The 2007 issue carried a BBB-minus rating from Fitch Ratings when it was issued. Fitch 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. Harvey remains in negotiation to resolve a dispute over some of its contributions still in arrears, Fioretti said.