CHICAGO — A federal judge in Indiana last week gave final approval to Menasha, Wis.'s $17.5 million settlement with bondholders that resolves litigation over the city's default on $23 million of appropriation-backed notes for its failed steam plant.
The court approved the cash settlement and attorney fees of $1.2 million, triggering a 30-day appeal period. Bondholders can expect distribution of the settlement funds early next year if no appeal is filed, according to bondholder attorney Mark Alson of Ice Miller LLP.
The court's action marks one of the final steps in settling an issue that strained city finances, damaged its credit standing, and hurt its related issuers' ability to access the market.
Menasha defaulted on the notes in September 2009. The notes include $12 million sold in 2005 to convert Menasha Utilities' power plant to coal-fired steam operations and $11 million issued in 2006 to cover the project's growing costs. The city's appropriation pledge backed up the revenue pledge that repays the notes. The plant was shuttered in the fall of 2009.
A group of bondholders — led by American Bank, Lafayette Life Insurance Co. and Mercy Ridge Inc. — filed a federal complaint after the default alleging that Menasha and its utilities division misrepresented the coal-fired plant's business prospects and the true costs of converting it to steam operations. Ice Miller lawyers and the city reached the settlement earlier this year.
"It's a satisfactory result. We wish we could have recovered the full amount but the settlement is satisfactory," Alson said.
The noteholders alleged Menasha violated federal and state laws by misrepresenting the prospects of the steam plant and providing misleading information about the plant's final costs, completion date, and prospects.
The city had countered that the bond offering statements offered only an "estimated" cost and an "expected" completion date. It also cautioned that the plant had four "potential" users, but offered no guarantee all would use the plant.
The city also asserted that at the time of the offering it fully intended to convert the notes to long-term bonds when they came due and only the plant's failure prevented them from doing so.
In April, Menasha closed on the sale of its electric utility assets to WPPI Energy — a regional wholesale supplier of power to 51 member, including Menasha — in an $18 million sale-leaseback transaction that provided the bulk of funds needed to cover the settlement.
RBC Capital Markets, underwriter of the notes and a defendant in the bondholder lawsuit, also contributed to the settlement.
Menasha voters last year signed off on the sale. The city is leasing the assets back under a 20-year deal. The sale will force a rate increase, but it staved off the need to steeply raise property taxes to repay the debt as the city continues to face the burden of paying off general obligation debt tied to the project.
The defaulted debt led to its loss of the city's investment-grade general obligation rating. With its eye on preserving its economic base, Menasha decided in 2004 to convert a portion of its electric generation plant to produce industrial steam to support area paper mills.
The mills were interested in purchasing steam from a central plant that used coal as its primary fuel in an effort to save money.
But the coal-fired plant — burdened with growing construction costs, unfavorable regulatory rulings and pricing disputes — failed to generate sufficient revenue to cover both operations and debt service.
The plant conversion was originally supposed to cost just $13 million but the price tag rose to $41 million. Given the plant's losses and dim prospects, the city could not refinance the notes into long-term debt as originally intended.
Moody's Investors Service in 2009 downgraded the city's $29 million of general obligation debt to B1 with a negative outlook, four notches below investment grade.