WASHINGTON — The trustee for millions of dollars of toll revenue bonds issued in 1998 to finance South Carolina’s first publicly owned and privately built toll road, the Southern Connector Project, is warning investors that the bonds will probably default on Jan. 1, 2010, because of insufficient revenue.
U.S. Bank NA issued the warning in a material event notice recently filed with the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access system that included a one-page form seeking contact information from bondholders.
“A payment default is expected on the bonds as of Jan. 1, 2010, barring unforeseen developments or actions, because insufficient amounts remain in the debt service reserve fund or other funds on hand for the bonds to make the payments due as of Jan. 1, 2010,” the bank said in its five-page Oct. 1 notice. “Unless a restructuring alternative is implemented prior to Jan. 1, 2010, no debt service payments are expected to be made on Jan. 1, 2010.”
The bank said that the Connector 2000 Association Inc., the nonprofit organization that issued the bonds and operates the financially troubled toll road, “cannot identify a larger number of the holders of the Connector bonds” even though “the bonds appear to be widely held.”
U.S. Bank said in its notice that HSBC Bank USA NA is the trustee for some of the bonds and is seeking contact information from bondholders.
Trustee officials would not comment on the amount of bonds expected to default. However, the Connector 2000 Association’s financial statement for the second quarter of this year showed that $304.3 million of bonds needed to be paid at the end of that quarter.
The amount includes the appreciated principal zero-coupon bonds that were issued for the project. A spokesperson for the association confirmed the potential default but would not confirm the outstanding debt.
The bonds were issued in 1998 in three series: $66.2 million of Series A senior current-interest bonds, $87.4 million of Series B senior zero-coupon bonds, and $46.6 million of Series C subordinate capital-appreciation bonds. Two of the three series were rated BBB-minus by Standard & Poor’s at the time they were issued.
Lehman Brothers and Mesirow Financial Inc. were co-underwriters of the bonds. Sinker & Boyd PA, now Haynsworth Sinker Boyd PA, was bond counsel. Kutak Rock LLP was special tax counsel and underwriters’ counsel.
The financial adviser was Southern Municipal Advisors Inc., the former firm of Teressa Cawley, who was sanctioned by the Securities and Exchange Commission for violating the municipal market’s fair-dealing rule by failing to disclose the use of a lobbyist to obtain muni business from Broward County, Fla.
The financial troubles of the 16-mile, four-lane toll road, which connects Interstates 85 and 385 in Greenville County, S.C., and includes four interchanges and 23 bridges, began soon after it opened in 2001.
The traffic estimates for the project proved unrealistic. The road never had enough traffic to generate the revenue it needs to pay debt service, credit analysts and market participants said.
The project was “stillborn from the beginning,” said Richard Lehmann who publishes the Distressed Debt Securities Newsletter in Miami Lakes, Fla. In similar roadway defaults, he said the bonds remain in default “for decades” until the issuers can generate enough funds to catch up on payments and repay bondholders in full.
Some of the bonds were insured in the secondary market by ACA Financial Guaranty Corp., which was A-rated at the time. ACA currently is in run-off and intends to honor all obligations.
Standard & Poor’s has since downgraded the bonds it rated — including those insured by ACA — to CC and CCC. ACA officials could not be reached for comment.
The Connector 2000 Association in May requested that the South Carolina Department of Transportation implement a series of toll increases, based on a revenue study conducted by Stantec Consulting Services Inc. The SCDOT granted the toll increase in August, raising rates 25 cents to $1.25 for two-axle vehicles that pay in cash.
But the toll hikes may be window dressing, according to analysts and market participants. The toll road’s problem has always been generating traffic, they said.
The SCDOT has an obligation to maintain toll rates at a rate that will pay the debt service. “Unfortunately, this is impossible due to the lack of traffic on the road, but SCDOT wants to show good faith to the bondholders by responding to the request to keep tolls at least at their optimally productive rates,” the association said in its second-quarter financial statement.
“Revenues have grown over each year, but it just has not been sufficient relative to the debt service payments,” said Laura Macdonald, Standard & Poor’s lead analyst on ratings for the bonds. She estimated that the association will have $8.3 million of senior debt-service payments in 2010 and $11.5 million in total, including subordinate bonds.
U.S. Bank said it has hired Macquarie Capital, part of Macquarie Group Ltd., to serve as its financial adviser and develop restructuring proposals, which could include a restructuring of the debt, a bankruptcy filing, forbearance, or the appointment of a receiver.
Macquarie will be paid negotiated fees and expenses, including a monthly advisory fee. The fees, which will be paid prior to debt service, will range from a minimum of $750,000 to $4.63 million, the bank said. The adviser fees, like other trustee fees, are paid prior to debt service, the bank said..
Meanwhile, the Financial Industry Regulatory Authority and its predecessor, NASD, has taken enforcement action against several brokers for violating the muni fair-dealing rule by excessively trading the Connector zero-coupon bonds at higher and higher prices.