CHICAGO — A Ramsey County, Minn., judge on Thursday gave final approval to a class action settlement between the St. Paul Port Authority and investors holding $51.7 million of defaulted industrial revenue bonds, putting an end to five years of litigation over the long-troubled 876 Bond Fund.
The settlement was reached after mediation sessions over the summer and District Court Judge Robert Awsumb gave preliminary approval to it in September. No bondholder objections were raised at the Thursday hearing, according to Port Authority spokesman Tom Collins.
In addition to ending the litigation brought by a number of bondholders five years ago, the judge’s action also ends SPPA’s long struggle to find an equitable means to compensate more than 2,650 investors.
“I believe that it is, in fact, a fair and appropriate agreement under the circumstances and I think … that it is probably as close to a win-win-win agreement that you could put together, winning for the bondholders, winning for the Port Authority, and I think winning for the community as well,” Awsumb said in court documents.
Under the terms of the pact, the authority would make a one-time contribution of $1.5 million to the fund and release $22 million of pledged revenues set aside and held in escrow during the litigation. About $11 million of the revenue would go to bring all interest payments up to date through Dec. 1. The agency would use $10 million to hold a Dutch auction, during which bondholders could tender their bonds for a discounted principal amount.
Collins said the SPPA hopes to conduct the auction early next year. It has held several past Dutch auctions for the fund, with the last one in 2003 paying about 70 cents on the dollar. Remaining investors would receive debt service payments through 2032, 10 years past the current 2022 final maturity on the bonds.
It’s unclear how much bondholders who hold on to their securities will ultimately recover, as the size of future payments will depend both on how many tender their bonds at auction and on the financial performance of the remaining pledged assets and the revenues they generate.
Debt service is funded by lease payments and property sales of pledged assets, and other revenue from riverfront property leases, tonnage, and fleeting fees.
The settlement defines what revenues and assets would continue to be pledged to the fund. The Port Authority would continue to deposit one-half of the fleeting and tonnage revenue into a maintenance fund to keep assets that support the 876 Fund in good condition. An independent trustee also will be retained to perform the duties of a paying agent, a move long sought by the objecting bondholders.
Final details on that piece of the settlement have not yet been completed. Details have also not been finalized on how the authority will amend the 876 Resolution to reflect the changes under the settlement and a final determination on bondholder lawyer fees of about $2 million is still to be decided by Awsumb. “The settlement is a fair and reasonable solution of the contentious issues among the parties and provides clarity and certainty to all interested parties,” the settlement filing reads.
In past statements, SPPA president Louis Jambois said the litigation was a distraction from the authority’s mission to create job opportunities, expand the city’s tax base and advance sustainable development.
Keith Broady of Lommen, Abdo, Cole, King & Stageberg, who represented bondholders that brought the lawsuit, has called the settlement a compromise, but one that accomplishes his goal, which was to get a better return for bondholders than what the authority had previously proposed.
The dispute between the authority and the group of investors who hold about $20 million of the bonds began in 2006, as the authority thought it had devised an equitable solution in a plan to liquidate the fund and distribute proceeds.
The SPPA won district court approval in 2007, but the group of bondholders represented by Broady appealed.
The appellate court upheld the lower court’s decision, but the Minnesota Supreme Court last year voided the lower court rulings on a technical jurisdictional issue without ruling on the merits of the plan and sent it back to the lower courts.
The objecting investors last year leveled a separate complaint alleging the SPPA had misused assets pledged to the bond fund, and the agency filed a counterclaim asking the court to free up the $22 million in escrow to get caught up on interest and then proceed with a tender.
The Port Authority issued $428.8 million of revenue bonds between 1974 and 1991 under the Basic Resolution 876. The proceeds funded a total of 139 projects in and around St. Paul. Many of the projects failed and pledged project revenues have failed to cover debt service since 1991.
The authority held three tender offers that retired $124 million of the debt and sought ways to equitably compensate bondholders, but officials failed to garner sufficient support due to the opposing interest of investors depending on their holdings.
The fund’s reserves were drained in 2004 and the bonds fell into default.
Principal payments were halted in 2006 while partial interest payments have continued. The authority had revenues to pay bondholders $700,000 on June 1, about 28% of the interest payment then due.
The authority had long warned that investors with $35 million of later-maturing bonds would never receive any principal repayment if they did not take any action.
