BRADENTON, Fla. — Investors holding term bonds exchanged last year as part of the Connector 2000 Association bankruptcy must exchange them a second time after the bonds they received proved to be untradeable for technical reasons.
The term bonds were part of the restructuring plan in the South Carolina Southern Connector toll road’s Chapter 9 confirmation plan, approved last April.
The private nonprofit organization filed for bankruptcy on June 24, 2010.
The case is still under the jurisdiction of the U.S. Bankruptcy Court for the District of South Carolina.
Bankruptcy Judge David Duncan approved the bond restructuring last year, reducing the outstanding debt to $150 million from $329 million.
Bondholders were required to exchange their 1998 current-interest and zero-coupon bonds for 2011 zero-coupon serial and term bonds, extending final maturities by 12 years.
Of the $150 million exchanged for new CUSIPs last year, $113.5 million were term bonds structured with a pro-rata redemption feature to provide investors with an equal share of the cash flow.
A “material technical issue” arose when registering the term bonds with Depository Trust Co., according to a notice from the trustee, U.S. Bank NA.
“We attempted to register the bonds with DTC and we were advised that a pro-rata distribution of redemption proceeds was not consistent with DTC operational arrangements, which was unforeseen,” said John Van Duys, shareholder with Haynsworth Sinker Boyd PA, bond counsel to the Connector 2000 Association.
“It’s a detail that surprised us, and we’re not alone,” he added.
The 2011 bonds were registered under DTC’s “pro-rata pay-down” program which permitted DTC to distribute bond payments to the beneficial owners on a pro-rata basis.
After the distribution of the 2011 bonds, however, bondholders advised the Connector that the bonds did not conform to broker’s trading platforms and were effectively untradeable.
The Connector agreed to initiate the exchange after receiving a request from a majority of 2011 term bondholders.
Van Duys said at least one other client wanted to restructure bonds using the pro-rata feature but he advised against doing so to avoid the registration problems faced by the Connector.
Though the Connector’s Series 2011A serial bonds, maturing from 2012 through 2022, were also structured with pro-rata redemption features, they are not subject to redemption, do not need to be exchanged, and will remain outstanding under the indenture as originally issued.
Term bonds subject to mandatory sinking-fund redemption could not be registered at maturity value as currently structured “because such registration does not conform” with arrangements approved by the Securities and Exchange Commission, according to the trustee.
The trustee worked for months to resolve this issue with DTC and the association, U.S. Bank’s notice said. Using by-lot redemptions will allow the term bonds to be registered by DTC at maturity value and allow “the term bonds to be entered into the broker’s trading and pricing systems and facilitating trading.”
The trustee plans to seek approval from the bankruptcy court to amend the indenture and exchange existing term bonds for new bonds providing for redemption payments by lot.
While the exchange is characterized as mandatory, bondholders will have the right to keep their current bonds with pro-rata payments if the plan is approved by the judge.
Such bondholders must opt out of the exchange. The opt-out is “all or none,” meaning that the pro-rata redemption feature would apply to all of an owner’s bonds.
In addition, once approved by the judge, the exchange will be “now or never” because a by-lot conversion will not be offered again.
The exchanged bonds will have new CUSIPs, while holders choosing to retain pro-rata redemption bonds will retain current CUSIPs.
Bondholders have until April 3 to object in court to the plan. Duncan will be asked to approve the exchange at an April 10 hearing.
The judge also will be asked to approve the payment of $583,463 of fees related to work done by the Connector and trustee structuring the exchange program, and costs of issuing the new bonds.
The Connector Association sold $66.2 million of Series A senior current-interest bonds, $87.4 million of Series B senior capital-appreciation bonds, and $46.6 million of Series C subordinate capital-appreciation bonds in 1998 to build the 16-mile Southern Connector startup toll road near Greenville.
The toll road opened eight months early in March 2001 but never came close to meeting traffic and revenue projections.
The association defaulted on the bonds in January 2010 and filed for bankruptcy about six months later.
According to Standard & Poor’s, debt service on the 1998 bonds had been paid as scheduled through July 1, 2009, though the payments came largely from the debt-service reserve fund that had not been replenished.
When the debt was sold in 1998, Standard & Poor’s rated the senior bonds BBB-minus.
The agency lowered its rating to D from C in January 2010, when the association defaulted. The 2011 bonds are not rated.
According to Van Duys, the Connector met projections last year, and all 2011 bond payments were made on time.
A toll rate increase went into effect Jan. 1 as part of the restructuring plan.
In a related matter, a number of bondholders who purchased insurance for their original Connector bonds in the secondary market to protect against payment defaults continue to pursue lawsuits against ACA Financial Guaranty Corp.
James E. Davis filed a class action suit in July in the Northern District of Mississippi Northern Division. Francois Kohlmann of Palm Beach County, Fla., later joined the Mississippi suit as a plaintiff. OppenheimerFunds filed a similar suit in New York State Supreme Court on Nov. 28.
In both cases, ACA has argued it no longer has payment liability because the original insured bonds were canceled and exchanged for new bonds with different maturities, payment terms, and CUSIPs.ACA is seeking to dismiss both cases.