CHICAGO — Principal and interest on $14.5 million of bonds issued in 2002 for a Joliet Junior College housing project in Illinois is now due, after bondholders frustrated with the project’s failure to make timely interest payments since 2005 triggered the payment-acceleration provision in the bond indenture last week.
The trustee, Wells Fargo Bank NA, said it continues to work with holders of a majority of the bonds to consider what, if any, remedial actions might be taken to either improve the project’s performance or to recover payment.
Though a majority of bondholders have not yet decided what action to take, the trustee confirmed that the obligated group, Foundation Housing LLC, is in default on its loan agreement and triggered the acceleration clause in the agreement “in order to be in a position to take remedial steps in the future,” according to a bondholder notice filed last week.
The move followed the obligated group’s default on its March 1 interest payment of $484,700. The last payment of $87,000 was made in September but it was applied to interest still owed on a March 2007 payment.
A total of $3.16 million is still owed in past due interest payments. The project first defaulted in 2005 but later caught up on interest payments owed through 2006.
Fitch Ratings initially rated the bonds BBB-minus, its lowest investment-grade level, but dropped the bonds into junk territory in 2003 due to the project’s low occupancy rates and budget problems at the housing facility, known as Centennial Commons.
The facility is privately managed and was deemed unique when first constructed because of the school’s status as a junior college. Located 50 miles southwest of Chicago, Joliet anticipated strong growth and sought to expand its ability to attract students outside its direct service area in 2002 when it approved the project.
Joliet Junior College and its fundraising foundation are not obligated to make debt-service payments. Foundation Housing, the sole member of which is the Joliet Junior College Foundation, owns the project and the structure is one that is typical of off-balance-sheet student housing transactions. A 2001 report from CDS Market Research in Houston said demand existed to support the facility.
Established in 1901, Joliet Junior is the oldest community college in the country. It lacked the power to own or construct its own housing under existing Illinois statutes that govern community colleges so it turned to a nonprofit arm. The college is not liable for the bonds.
Bondholders in 2005 agreed not to foreclose on the property for at least three years to give a new management team time to improve operations, though changes have failed to generate sufficient revenue to support debt service.
In addition to interest payments, $1.17 million in principal on tax-exempt bonds is due in 2013, $3.98 million is due in 2023, and $8.8 million is due in 2023. The bonds carried yields between 6.37% and 7%. A $490,000 principal payment on taxable bonds with a 7.75% interest rate was due last September.
The facility includes 96 two-bedroom units, 20 four-bedroom units, and 12 efficiency units. George K. Baum & Co. was underwriter on the transaction, which sold through Will County.
The college remains on solid financial footing. Standard & Poor’s assigned a first-time AA general obligation rating in 2008, citing a long trend of robust economic growth, upgraded management practices, and stable financial operations.