CHICAGO — The St. Paul Port Authority will start anew in its efforts to resolve its faltering 876 Bond Fund in a way that benefits all bondholders. This follows a court decision earlier this month that formally killed its plan to liquidate the fund and distribute proceeds to investors holding the remaining $51 million of debt.
The fund's reserves were drained in 2004 and principal and interest payments have fallen short since then. The authority devised the liquidation plan in 2006 to provide partial benefits for all bondholders and won court approval in 2007 to proceed. The bonds mature in 2022 and the authority believes investors with $35 million of later maturing bonds will never receive any principal if no action is taken.
A group of objecting bondholders who hold about $18 million of the debt challenged the liquidation plan and the district court's refusal to appoint a receiver to manage any liquidation. The appellate court upheld the district court's decision, but the Minnesota Supreme Court last September voided lower court rulings.
The high court found the district court lacked jurisdictional authority to approve the liquidation plan in part because it altered the original bond contract. The original 876 resolution allows the Port Authority to change the original terms of the fund without bondholder consent only if the changes do not hurt any bondholders.
The court sent the case back to Ramsey Court Judge Teresa Warner to consider whether the objecting bondholders had filed in a timely fashion objections to the authority's 2002 and 2004 tender offers. In her ruling earlier this month, available at www.876fund.org, Warner sided with the objecting bondholders and vacated the 2002 and 2004 orders.
"This is a setback. We now start all over again," said authority spokesman Tom Collins. "We had hoped Judge Warner would have also ruled on the merits of the case, verified our management of the fund, and agreed that the fund would never pay off for bondholders, and that our plan to liquidate the distressed fund and distribute the assets in a way that maximized the benefits for all 2,600 bondholders was the most fair and equitable."
Collins stressed that the agency has lost court rulings solely on technical grounds that do not address the merits of its plan. The authority could seek to revise its liquidation proposal or the Port Authority could hold additional tenders. The failed liquidation would have paid at least 62 cents on the dollar and provided a tax loss benefit. The fund's assets generated only enough to cover 56% or $1.4 million of the $2.47 million interest payment on June 1.
Meanwhile, the objecting bondholders have filed a new complaint at the district court level, seeking appointment of a receiver, a full accounting of the authority's use of 876 bond fund asset revenues, and damages. The group contends the port has breached its contract in its management of the fund.
"We clearly have claims against the port for breaching the contract for diverting revenues that were pledged for use only for principal and interest on the bonds," said the group's attorney, Keith Broady of Lommen, Abdo, Cole, King & Stageberg.
The authority established the fund in 1974 to support revenue-producing projects and issued $428.8 million of commercial development revenue bonds backed by project revenues between 1974 and 1991.
Many of the projects failed and pledged project revenues have failed to cover debt service since 1991. Reserves were tapped until their depletion in 2004. Principal payments have been withheld since 2006 as restructuring efforts have failed.