ALAMEDA, Calif. — Las Vegas Monorail Co. bondholder Eaton Vance has broken with other large holders of the bankrupt project’s debt to challenge the settlement that trustee Wells Fargo Bank NA negotiated with Wisconsin state regulators to commute the monorail’s bond insurance policy.
The nonprofit monorail operator and the parent of insurer Ambac Assurance both filed for Chapter 11 bankruptcy during 2010, leaving holders of the bonds with debt that isn’t being serviced and insurance that isn’t paying claims. Ambac wrapped the $451 million first-tier revenue bonds, for which the Nevada Department of Business and Industry was conduit issuer.
With Ambac unravelling under the weight of decayed credit quality in the structured finance policies it wrapped, its regulator, the Wisconsin insurance commissioner’s office, in March 2010 placed into a walled-off account about 700 of its most troubled policies covering a net par outstanding amount of around $50 billion.
The Las Vegas Monorail policy is the municipal bond anomaly in the segregated account, which is dominated by student loan securities, mortgage-backed securities, and the like.
Eaton Vance and the other large holders, dominated by Nuveen Asset Management — which reports holding more than half the monorail’s first-tier debt in 22 Nuveen funds — appear to have split on the issue of whether to accept an up-front payment to commute the policy.
In January, the Wisconsin insurance regulator received court approval for its overall rehabilitation plan for the segregated account.
Under that plan, policy holders would be paid 25% in cash for claims, with the balance in surplus notes maturing in 2020, presuming Ambac’s successful rehabilitation, with payments made as claims arise on the schedule of the original insured debt.
The three largest holders, not including Eaton Vance, and Wells Fargo, agreed to a separate settlement to commute the Ambac policy for an up-front payment of $111 million in cash to the holders of the $451 million first-tier monorail bonds, plus surplus notes at a nominal par of $90 million.
Eaton Vance was part of the negotiating group, but parted ways with the other institutional holders in November because it disagreed with the settlement, the firm said in court filings.
Eaton Vance is now trying to block Wells Fargo from what it describes as an unprecedented attempt to impose the settlement on all the other bondholders.
“The trustee seeks court approval of a novel proposition: to force the terms of the private settlement of all the bondholders and bind all bondholders to the terms of the settlement agreement with no opt-out provision,” Eaton Vance’s attorneys wrote in a motion filed to the latest legal front in the bankruptcy case, the federal district court in Minnesota.
Wells Fargo asked a state probate court in Minneapolis, where its main corporate trust office is located, to sign off on its plan to settle on behalf of all the bondholders.
Eaton Vance filed to remove the case to the federal court system citing, among other grounds, diversity of jurisdiction, as the firm is based in Massachusetts.
Wells Fargo replied with a petition to remand the case to the Minnesota state court system, and asked for an expedited hearing. Not date has been set to hear that expedition request.
Through a spokesperson, Wells Fargo declined to comment. An Eaton Vance spokesperson did not return a request for comment.
“The trustee … merely wishes to be instructed with respect to how to proceed, and is availing itself of a statute designed for that process,” Wells Fargo wrote in its argument to remand the case to state court.
The bondholders appear to have different views about how to achieve the best recovery: the certainty of a diminished up-front cash settlement now, versus waiting out the rehabilitation proceeding in the belief it will successfully conserve enough resources for Ambac to meet its future claims obligations.
That dilemma is acknowledged by the Wisconsin insurance regulator in its petition to have the state’s district court approve the settlement.
“As a percentage of the total projected losses, the amount of cash and notes to be paid under the settlement agreement is less than the amounts I presently expect the segregated account would otherwise have to pay,” Roger Peterson, special deputy commissioner for the Ambac rehabilitation, wrote in an affidavit.
“I believe that the reduction of uncertainties through the settlement is in the best interest of all parties,” he wrote.
In addition to Nuveen, the settling bondholders include two distressed-debt hedge funds, Restoration Capital Management LLC, and Stone Lion Capital Partners LP.
Eaton Vance argues that Wells Fargo’s request for an urgent hearing is unnecessary.
Though the settlement agreement expires in August, it contains a backup plan under which, if Wells Fargo cannot bind all the bondholders, those who wish to settle can sell their Ambac policy rights for the same amount of cash as proposed in the primary settlement, but 10% fewer surplus notes.
Meanwhile, the fate of the monorail debt continues to be discussed in other venues. In Wisconsin, monorail bondholders have appealed the decision to single out the monorail as the only municipal bond policy placed in the segregated account.
“Wisconsin’s segregated account statute is plainly intended to permit only segregation of lines of business, not individual 'troubled’ policies,” the appeal argues.
The monorail’s Chapter 11 bankruptcy filing in the U.S. Bankruptcy Court for Nevada remains unresolved.