Harvey, Illinois, hires advisor for debt restructuring
Harvey, Illinois, hired Meristem Advisors LLC to devise a debt restructuring that’s the cornerstone of a consent agreement with a group of its 2007 bondholders who had sued to intercept city revenue in order to resolve defaults.
“They will help evaluate the city’s financial resources and projections and develop a financial strategy to accommodate a possible refinancing of various city liabilities," Bob Fioretti of Roth Fioretti LLC, which represents the city in the bondholder lawsuit, said Wednesday after the city finalized a contract with Meristem. "It’s the mayor’s vision to get Harvey on good financial footing.”
The advisory firm was founded in April 2018 by veteran Chicago-based public finance banker James Rachlin, who held managing director positions at RBC Capital Markets and BMO Capital Markets and led Griffin Kubik, Stephens & Thompson’s expansion before the firm was acquired by BMO in 2008. He also led public finance at the former Prudential Securities Inc.
Fioretti said Harvey Mayor Christopher Clark, who took office last year, the city’s comptroller and administrator chose Meristem from among four firms interviewed because of Rachlin’s professional experience, recommendations, and familiarity with the south Chicago suburb, having advised its library district.
During his banking career, Rachlin worked on deals for Chicago, its sister agencies, other local governments as well as state deals. City Council approval is not needed. The firm will receive a monthly fee.
Fioretti said the firm will examine city resources and restructuring options with suggestions expected before the end of the year.
The goal is to wrap other debts into the financing in addition to the 2007 bonds subject to the consent decree. That would include overdue water payments owed to Chicago and defaulted debt service payments owed to 2002 bondholders.
“We hope to have a bond deal in 18 months,” Fioretti said.
Chicago took Harvey to court after the city fell behind 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. Harvey is seeking to regain control of the water operations arguing the receiver is diverting an excessive amount of revenue and extracting high fees for its services. A hearing is set for December.
The consent decree struck with 2007 bondholders in June gives the city two years to complete a restructuring with holders having a say in the process.
Under the agreement approved by a Cook County Circuit Court judge, the city 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 dwindling tax base of the impoverished south Chicago suburb can’t support its pension liabilities and bond debts. At the time of the pact, the city owed $4.5 million in defaulted debt service that was due in December 2018, June and December 2019 and June 2020 on a $31 million 2007 issue.
The lawsuit dates to 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 seeking to enforce a tax diversion provision built into the bond indenture.
Several local municipal bond market participants say any future issuance would be met be with skepticism given Harvey’s budgetary struggles and past record of corruption and defaults. A sturdy, lockbox security would be needed and the city’s best option might be a direct placement.
Court filings laid bare the deep fiscal woes for the city of 25,000, many of whom live 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’s fiscal woes run deep due to a dwindling tax base, population and job losses, and past fiscal mismanagement that led to 2014 Securities and Exchange Commission sanctions on a 2008 bond sale and the bond and water payment defaults.
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 the pandemic will set back those efforts.
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. 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.
The city agreed to ongoing negotiations with bondholders who will have a say in any new general obligation bond issue. The bondholders also must sign off on any underwriting selection 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.
The agreement can be terminated if the city fails 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 and reduces the levy to less than the 2018 level.
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 sought inclusion in any workout. Assured reports being the owner of $1.16 million in principal and insurer of $565,000 bonds that matured last February.
The 2007 issue carried a BBB-minus rating from Fitch Ratings when it was issued. Fitch later dropped the rating to a low of B and then withdrew it in 2010 citing 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.