DALLAS — Bondholders who own about $40 million of unrated Austin-Bergstrom Landhost Enterprises Inc. debt from Texas received interest payments this month amounting to only 65% of the expected amount.
According to a material event notice released April 3, the corporation owed just over $1.3 million in interest payments on April 1, but only had $1.271 million in its revenue fund. The indenture agreement for the issue does allow the majority bondholders to approve the transfer of the rest of the funds needed to make full interest payment on the bonds from the senior debt service reserve fund, but they declined to do so.
The tax-exempt bonds were issued in 1999 to finance conversion of the former military headquarters at Bergstrom Air Force Base into a 265-room Hilton hotel. Bergstrom AFB was closed in 1995 as part of federal efforts to streamline the expense of stateside military operations.
Austin was given the base property, which it converted into the Austin-Bergstrom International Airport, a facility southeast of the city center with more traffic capacity than the former landlocked Mueller Municipal Airport on the city’s north side. Austin-Bergstrom Landhost Enterprises is a conduit issuer created by the city for the purpose of issuing debt for the new airport hotel.
That debt included a tranche of senior lien bonds totaling $38.75 million. The bonds, which carried a single maturity in 2027, were originally priced to yield 6.75%, but bonds from the series traded as late as March 21 with yields in the low to mid-8% range.
Among the owners of the senior lien debt are several funds operated by New York-based Deutsche Investment Management Americas Inc. — the DWS High Yield Tax-Free Fund, the DWS Managed Municipal Bond Fund, and the Scudder Strategic Municipal Income Trust.
Two funds managed by Illinois-based Van Kampen Funds — the Van Kampen High Yield Municipal Fund and the Van Kampen Strategic Municipal Income Fund — own the bonds. The Smith Barney Municipal High Income Portfolio managed by California-based Western Asset Management Co. also owns the bonds.
The deal included $3.73 million of subordinate bonds. No institutional owners are listed for that tranche of debt, which carries a single maturity in 2016. The bonds were originally priced with a coupon of 10.5%, but no trades have been noted for the series.
According to the April 3 material event notice, the indenture agreement for the debt was amended in December to change the trustee’s application of monthly payments from the project.
Under the amendment, payments are made first to the hotel manager for operating and maintenance expenses, then to a rebate fund, then to an administrative fee fund that pays fees owed to the city of Austin.
After that, the trustee pays funds of up to 4% of that month’s revenue to a renewal and replacement fund, then to the debt service fund to pay up to 65% of interest coming due and 100% of principal and mandatory sinking fund payments coming due.
Following that, the trustee applies monthly payments to a lease payment fund that directs money to the city, and then, if there is available revenue, a second payment to the debt service reserve fund.
The bonds first fell into technical default in 2003 after the corporation was found not to have complied with bond covenants requiring an annual audit, certain insurance provisions, and coverage obligations.
The original manager of the hotel, Landmark Hospitality LP, agreed to forgo payments of its management fee that year to ensure that debt service obligations were met.
However, the issuer had to make an unscheduled draw on its reserves in 2004 to meet debt service obligations, another technical default for the issue. A monetary default also occurred in 2004 when the corporation missed an interest payment.
In 2005, a scheduled debt service payment on the 1999 bonds for $1.3 million was not made in full. Instead, bondholders agreed to defer $621,000 of that payment. However, the issuer’s partial payment included $33,240 from the debt service reserve fund.
Just as they did this year, the owners of the senior bonds in 2004 and 2005 voluntarily deferred a portion of interest payments rather than drain the debt service reserve fund. However, those payments are not forgiven; instead, they will continue to be ongoing obligations of the corporation, according to the material event notice.
Representatives from Wells Fargo Bank, the trustee for the deal, and Greenberg Traurig LLP, counsel to the majority bondholders, did not return phone calls about the issue by press time yesterday.
