WASHINGTON — The South Carolina-based issuer of $322.5 million of toll road revenue bonds that are in default appears to be preparing to file for bankruptcy, according to a disclosure document.
In a material event notice filed with the Electronic Municipal Market Access system, U.S. Bank NA, the trustee for the bonds used to finance the 16-mile toll road in Greenville County, said the board of the Connector 2000 Association Inc. authorized it to file for Chapter 9 or Chapter 11 bankruptcy.
The bankruptcy would be part of a restructuring plan between the association, its bondholders, and the South Carolina Department of Transportation that would cut the required senior and subordinate bond principal amounts by about 50%. The accreted value of the Connector’s senior bonds was $231.5 million and it was $90.9 million for the subordinate bonds as of Jan. 1, when U.S. Bank stopped making debt-service payments and the bonds went into default.
As of Friday afternoon, the association had not filed for bankruptcy. Peter Femia, the Connector’s manager, could not be reached for comment. The decision of whether to file for bankruptcy is to be made by the Connector’s management, U.S. Bank said in the material event notice. The restructuring is still a proposal and would need to be approved by SCDOT commissioners.
The restructuring proposal calls for a 33% haircut to existing senior bond principal. New bonds would be issued for the remaining 67% of principal amount. The plan would defer for seven years all senior current interest bond amortizations and senior capital appreciation bond principal maturities. During those seven years, toll road revenue will be used to replenish the resurfacing and replacement of the road costs to the SCDOT.
The Connector would issue “paid-in-kind” notes to senior bondholders for the remaining 33% of the original principal amount, according to a summary of the proposal filed with the notice.
Subordinate bondholders could receive “any excess cash flows” until the license agreement expires, assuming that the senior bondholders are fully paid, the summary said.
The restructuring would extend the license agreement between the Connector and the SCDOT by 35 years to Dec. 31, 2084.
The license agreement extension was put in doubt earlier this month when South Carolina representatives voted against legislation that would have clarified the SCDOT’s ability to continue to collect toll revenue on Connector road beyond the current 50-year agreement.
“If the legislation fails, it is possible that no acceptable consensual [restructuring] plan will be achieved,” U.S. Bank wrote in the material event notice.
The bank was referring to an amendment to a broad transportation bill that was voted down but could be reoffered at some point in its current or a modified form. The representatives who voted against the amendment said they were unsure about the legislation’s effect and unwilling to approve any more state responsibility for the toll road.
Rep. Rex F. Rice, R-Easley, said in an interview Friday that he is not “exactly sure what the amendment does,” and wants state taxpayers to avoid taking responsibility for the toll road.
“I want assurance that this is not another bailout for a program gone south,” Rice said. He said he would support legislation that aids restructuring, but that poses no liability to taxpayers. So far that has not been guaranteed, he said, and SCDOT is already owed about $750,000 for maintenance work on the toll road.
Rice said he expects lawmakers to reconsider the issue later this month. Rep. Alan Clemmons, R-Myrtle Beach, who sponsored the amendment, could not be reached for comment.
The parties involved in the restructuring sought the legislation following an October meeting. U.S. Bank had announced that month it would not make debt-service payments on Jan. 1, 2010. Under the proposed plan, the legislation must be approved for bondholders to be able to vote on any pre-arranged bankruptcy filing.
The Connector may need flexibility to file as either a Chapter 9 or Chapter 11 entity because of its “hybrid” status, said Jack Colombo, an editor of the Distressed Debt Securities Newsletter in Miami Lakes, Fla., who has followed the Connector. Chapter 9 bankruptcy provides municipal governments with the ability to reorganize and Chapter 11 provides bankruptcy reorganization for a corporation or partnership, he said. The Connector is part municipality and part private, he noted.
However, the project is not considered a public-private partnership, said David Horner, an attorney with Allen & Overy LLP. He said the Connector’s design-build contract might have been considered a public-private agreement when it was built, but it would not be a P3 today.
The fact that the Connector has the authority to petition for bankruptcy as a Chapter 9 or Chapter 11 entity shows that it is not a private business, according to Horner. “This was a muni deal to fund a design-build contact,” he said.
