CHICAGO — The St. Paul Port Authority and a group of investors holding a portion of $51.7 million of defaulted industrial revenue bonds will ask a judge Thursday to preliminarily approve a proposed class-action settlement that could end five years of litigation over the fate of the long-troubled 876 Bond Fund.
If it receives preliminary approval, a formal notice would go to all bondholders who have a right to object ahead of court hearing expected during late October, when the authority and bondholder lawyers will seek final approval.
If the court agrees to the settlement, it could mark an end to the authority’s long struggle to find an equitable means to compensate investors.
“This settlement is good for the more than 2,600 bondholders and for the citizens of St. Paul,” said the port’s president, Louis Jambois.
“For us, litigation with no end in sight is a distraction from our mission at the Port Authority to create quality job opportunities, expand the tax base, and advance sustainable development.”
“It’s a compromise, but it accomplishes my goal, which was to get a better return for bondholders on the whole,” said investor attorney Keith Broady of Lommen, Abdo, Cole, King & Stageberg.
“Back in 2006, they wanted to liquidate the fund and we stopped that,” he said. “Both the short-term and long-term returns on 876 bonds will be substantially better for the bondholders than if the Port Authority had cashed out all 876 bonds in 2006.”
Under terms of the proposed pact, the authority would make a one-time contribution of $1.5 million to the fund and release $22 million held in escrow. About $11 million of the revenue would go to bring all interest payments up to date through Dec. 1.
Several million dollars would go to fund legal fees.
The authority, whose board approved the settlement at a meeting Monday, would use $10 million to hold a Dutch auction during which bondholders could tender their bonds for a discounted principal amount.
Remaining investors would receive payments through 2032, 10 years past the current 2022 final maturity on the bonds.
Debt service is funded by lease payments and property sales of pledged assets and other revenue from riverfront property leases, tonnage, and fleeting fees. The settlement defines what revenues and assets would continue to be pledged to the fund. The size of future payments will depend on the revenues available from pledged assets.
The Port Authority would continue to deposit one-half of the fleeting and tonnage revenue into a maintenance fund to “ensure that river shippers can move their products in an efficient manner, which, in turn, stabilizes the revenue stream to bondholders,” the agency said in a statement. Its use of those funds was a point of contention by the bondholders earlier in the litigation.
An independent trustee also will be retained to perform the duties of a paying agent, a move long sought by the objecting bondholders.
“The settlement is a fair and reasonable solution of the contentious issues among the parties and provides clarity and certainty to all interested parties,” according to the court filing, which also seeks class status.
The dispute between the authority and the group of investors who hold about $20 million of the bonds began in 2006, as the agency thought it had devised an equitable solution in a plan to liquidate the fund and distribute proceeds.
The authority won district court approval in 2007, but the group of bondholders represented by Broady appealed.
The appellate court upheld the lower court’s decision but the Minnesota Supreme Court last year voided the lower court rulings on a technical jurisdictional issue without ruling on the merits of the plan and sent it back to the lower courts.
The objecting investors last year leveled a separate complaint alleging the authority had misused assets pledged to the bond fund and the agency filed a counterclaim asking the court to free up the $22 million in escrow to get caught up on interest and then proceed with a tender.
The Port Authority issued $428.8 million of revenue bonds between 1974 and 1991 under the Basic Resolution 876. The proceeds funded a total of 139 projects in and around St. Paul.
Many of the projects failed and pledged project revenues have failed to cover debt service since 1991.
The authority held three tender offers that retired $124 million and it sought out ways to equitably compensate bondholders, but officials failed to garner sufficient bondholder support due to the opposing interest of investors depending on their holdings.
The fund’s reserves were drained in 2004 and the bonds fell into default. Principal payments were halted in 2006 while partial interest payments have continued. The authority had revenues to pay bondholders $700,000 on June 1, about 28% of the interest payment then due.
The authority had long warned that investors with $35 million of later-maturing bonds would never receive any principal repayment if they did not take any action.
Under the proposed settlement, it remains difficult to assess how much principal remaining investors will recoup, as it depends on the number of bonds tendered at the Dutch auction and the ongoing financial performance of the assets that generate revenues for the 876 fund.
Under the resolution, bondholders are allowed to pursue claims on behalf of all investors if they hold at least 20% of the debt.
