CHICAGO A Minnesota city and a group of investors holding $26.4 million of defaulted revenue bonds issued to build a broadband communications network have finalized a settlement that calls for investors to take a haircut but avoids potentially costly litigation for both sides.
Court approval is still needed.
The final settlement terms were signed earlier this month by representatives of the city of Monticello and bond trustee Wells Fargo NA,
The City Council approved the initial proposed terms in June. Approval is still needed from the federal court and a Hennepin County District Court judge and bondholders will have the chance to opt of the class settlement during the court proceedings. Holders of 90% of the principal amount must approve the settlement or it is “null and void.”
Under the settlement, the city will pay bondholders $5.75 million to end “all claims against the city and the discharge of the city’s obligations under the Indenture, including its pledge of net revenues from its broadband communications system,” the notice reads. The city denies the claims as part of the settlement.
Additional funds held by the trustee will also be distributed to bondholders. If approved by the courts, the settlement would be distributed by a court-assigned agent.
All trustee legal and other costs will come from those remaining bond funds on hand before distribution to investors. The trustee had previously reported holding two reserves with $25,000 and $2.6 million and another $635,700 in a surplus account. City officials said earlier this year the funds held about $2.6 million.
The city has not made debt service payments on the bonds since June 2012. Bondholders threatened litigation early this year if no settlement could be reached. They had been prepared to argue that the bonds were misrepresented to investors and that federal and state securities violations had occurred.
Though the city denied the claims, the parties entered negotiations with both sides seeking to avoid potentially expensive and lengthy litigation.
“In the interest of compromise, it is the desire of the settling parties to settle any and all allegations, claims, charges and causes of action that have been raised or could have been raised by the holders of the bonds,” the settlement read.
The city’s fiber optic broadband communications network, which provides cable television, internet access, and telephone services, was once envisioned as a potential model for other local governments to follow. However, the system failed to generate enough revenue to service the tax-exempt revenue bonds issued in 2008 and the city last year stopped subsidizing debt service, leading to a default.
The settlement would free the system of its debt and allow it to better compete with other providers. The city owns and operates the system under the name FiberNet Monticello. Private companies lowered their prices in response to the new competition, hurting the city’s ability to lure and keep customers.
With the system’s revenues falling short, the trustee had previously drawn from various bond reserves to cover debt service payments. Between July 2011 and June 2012, the city supplemented debt service by loaning the project money generated by its liquor sales operations.
The bonds are special, limited obligations of the city with principal and interest payable solely from the system’s operating revenues after operational and maintenance expenses. Under no obligation to make up the shortfalls, Monticello, a city of about 12,700 residents just north of the Twin Cities, informed the trustee of its intention to halt that practice last June as it sought a restructuring.
The unrated revenue bonds were structured as term bonds due in 2023 and 2031 and carried original yields of 6.5% and 6.75%, respectively. They most recently were trading at between 10 and 14 cents on the dollar in trades recorded this month, according to data posted on the Municipal Securities Rulemaking Board’s EMMA disclosure website. Oppenheimer served as underwriter and Faegre & Benson LLP as bond counsel on the issue.
