CHICAGO – The cash-strapped Chicago suburb of Harvey has stiffed some of its bondholders.
The impoverished city south of Chicago, in local headlines for internal governance turmoil, appears to have initially made debt service payments owed in December on a $37 million new money and refunding general obligation issue from 2007 but then pulled back the payments, according to one investor.
The next payments are scheduled for June 1 on the bonds, for which an ad valorem property tax is pledged.
The city, which was the subject of an unprecedented move by the Securities and Exchange in 2014 to block a bond deal, did later make some payments on the tax-exempt portion of the deal, but not the taxable piece. That's according to a representative of a fixed-income investment management firm that purchased a portion of the taxable bonds for his firm's retail clients.
"They suddenly pulled back the funds and my clients' portfolio has lost value," said the investor, who reported the apparent default to The Bond Buyer but asked not to be identified.
The city, which bears responsibility for investor disclosure, has not reported the status of the payments to the Municipal Securities Rulemaking Board's EMMA site. The notice rescinding an October notice of on a sinking fund redemption payment on the taxable series was posted in January with the word "rescinded" on it. The city has not filed updated financial information since 2014.
City officials did not return calls to comment. U.S. Bank NA serves as the paying agent, but there is no trustee to bear responsibility for notifying bondholders of any default and work for bondholders to recoup their investments.
US Bank declined to comment. An email from the bank to the unnamed investor who had requested information on the status of the payment said: "The city of Harvey did not provide sufficient funds to U.S. Bank, as paying agent, to fund the scheduled mandatory redemption on December 1, 2015 (consisting of principal and interest). If you have any further questions we suggest that you contact the city of Harvey directly."
The investor said repeated calls to the city have gone unreturned.
"We went in with our eyes wide open" with respect to Harvey's fiscal struggles "but now no one will talk," said the investor. "The bonds seem to be caught in the cross-hairs of a mayor and council that are at odds with each other."
Mayor Eric Kellogg and four of six council members have battled over routine governance issues. So far that's led to a delay in passage of Harvey's 2016 property tax levy, which must be submitted to the Cook County Clerk's office. A bloc of members opposed to Kellogg have refused to sign off on the levy until Kellogg provides additional details on city spending.
The two sides have engaged in verbal warfare during council meetings, according to published reports. At an April 25 council meeting confusion ensued over the property tax levy vote and questions arose over whether a sufficient number of members were present and the vote represented a quorum.
The levy vote was 2-2 with the mayor casting a tiebreaking vote. The clerk's office rejected the levy request saying it required a majority, according to the Chicago Tribune.
A special meeting might be called during to decide on the portion of the levy that goes to fund public safety pension and debt payments, according to the Tribune. Local governments face a December deadline to file their levy but the clerk extended Harvey's deadline to May 2. Without the $15 million in tax funds deep cuts and layoffs are expected because the levy accounts for half the city's budget.
The investor holds a portion of the taxable B series that was part of the overall deal. The 2007 issue, which carried a BBB-minus rating from Fitch Ratings when it was issued, included $9 million of 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 bonds traded in March at 52 cents on the dollar, down from 93 cents on the dollar last September, according to data posted on EMMA.
The $22 million tax-exempt 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 2027 maturity traded last November at 80 cents on the dollar and the latter maturity traded in March at 43 cents on the dollar.
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."
A 2002 Harvey GO issue insured by Financial Security Assurance is trading at full value, according to a trade data on EMMA.
The city's $6 million of 2008 motel-hotel and sales tax and conference center bonds, with scheduled February and August interest payments on the 2028 term bond, have not recently traded. The city also has scheduled December and June interest payments on a $6 million 2010 tax-increment financing structured as a term bond due in 2019. Both were related to the city's failed hotel project and were cited in the SEC complaint. There's no recent trade data on those bonds.
The unnamed investor said he feels stymied by the city and legal recourse could be costly in the absence of a trustee.
Federal law requires only corporations to follow trust guidelines on the issuance of securities, and many GO issuers forgo the use of a trustee though use is common, and investor-driven, on revenue bond deals.
"A paying agent is simply an agent to receive the revenue and distribute it" for bond payments and "do not have a responsibility or duty or authority on disclosure", said Jeff Powell, president of Corporate Trust Insights LLC. "The trustee has much more extensive responsibilities."
The city's fiscal woes and its history of corruption are well-documented. The latest trouble that's impacting bondholders comes after city officials had expressed hope about reshaping its image.
Earlier this year Harvey began getting caught up in its submission of financial reports and audits to the state comptroller's office.
It has submitted financials through fiscal 2013, according to Illinois Comptroller Leslie Geissler Munger's office. City officials have said they intend to file the financials for more recent years this year.
Last year, Joseph Letke, the city's former comptroller, was fined and barred from future municipal bond offerings by a federal judge. The court's ruling brought to a close the civil case launched by the SEC against the city and Letke for misleading investors on several bond offerings by diverting bond proceeds from sales in 2008, 2009, and 2010 from their intended use.
The judgment was among the first to bar a former municipal official from participating in future bond offerings. The SEC's complaint marked the first instance in which the agency sought an emergency court order to halt a municipal bond offering. The court granted the temporary injunction when it discovered during the course of an investigation into the city's use of past bond proceeds that Harvey was planning to issue more bonds.
The city settled the case agreeing to cease violating federal securities laws and to hire an independent consultant and audit firm. The city also agreed to a prohibition against issuing municipal bonds for three years unless it uses an independent disclosure counsel for offerings. Letke remains under federal criminal investigation for profiting from city deals and work with other local governments.