Pending sale of IDR bond-financed project would settle defaulted bonds

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The pending sale of a bond-financed manufacturing facility in Minnesota to a commercial modular-construction company would fully pay off bondholders first hit with defaults in 2011.

The payoff would retire bonds that have fluctuated in price based on the project’s fortunes, hitting lows of 30 cents on the dollar as the lease changed hands, leading to defaults and a court dispute. The bonds traded earlier this year at full value.

Owatonna, in southeastern Minnesota, issued $5 million of industrial revenue bonds in 1997 for Slidell Inc., a maker and distributor of automated industrial packaging systems, to acquire, construct and equip an office and manufacturing facility.

As Slidell struggled it sold the facility to Lemond Properties LLC in 2005, with Lemond assuming all obligations under the original indenture and loan agreement. When Lemond’s five-year lease with a manufacturing company using the facility ended, Lemond failed to make lease payments as it searched for a new tenant and bond payment defaults began in 2011.

Late in 2011, Lemond entered into a lease agreement Chart Industries Inc. and monthly payments under the lease, which are paid directly to the trustee, picked up and partial debt service distributions were made, although the trustee warned that it did not expect payments would be “sufficient to pay principal and interest on the bonds, in full, for some time.”

The original offering statement warned of the risks that the company’s ability to make payments under the loan agreement would “depend on the financial condition of the company at the time such payments are due.”

Chart then moved in 2017 to get out from under the lease early by notifying it was exercising its right to terminate the lease early. Lemond and the trustee U.S. Bank NA believed the termination notice came too late and Lemond sued Chart in the U.S. District Court for the District of Minnesota seeking a declaratory judgment to block the termination.

In early 2018, the court granted Lemond’s motion for summary judgment agreeing that notice was not sent in a timely fashion and the lease could not be terminated.

Lease payments continued to fall short of what was needed sufficient to fully pay principal and interest on the bonds and as required under the Indenture but good news came earlier this year with the pending sale of the property to Minnesota Modular Inc. for $9.5 million.

With $3.9 million of principal still due on the bonds that mature in 2027 “if the proposed transaction closes, the consideration should be more than sufficient to satisfy the remaining bond obligations,” U.S. Bank wrote in a notice last month.

The unrated, tax-exempt bonds paid interest rates from 5.25% on the short end to 7.75% on the long end.

The deal is not yet final as the company has the right to pull out during an inspection period that ends later this month. The trustee’s notice cited a recent Minneapolis/St. Paul Business Journal article that reported the company is a startup with plans to spend $20 million on the facility to build modular apartments and hotels on-site with plans to open the facility by the end of the year.

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Bond defaults Bonds: Industrial development Minnesota