CHICAGO – The trustee for $27 million of defaulted lease revenue bonds backed by a Minnesota city to finance a sports complex now wants to unload the facility but it doesn’t expect to make bondholders whole through the sale.
US Bank NA notified bondholders of the move in a filing dated July 12 and will hold a teleconference call to update investors on the status of the facility on Aug. 13., according to the notice at http://emma.msrb.org/EA548204-EA427109-EA823982.pdf
The city of Vadnais Heights in 2010 sold the bonds through its economic development authority to finance construction of the Vadnais Sports Complex. The city of 12,000 is located outside St. Paul.
The bonds were supported by a lease agreement and repaid with those payments under the pact. As the complex struggled, the city subsidized debt service. The council decided last year it could no longer afford the assistance and cancelled its lease and financial support. The city has argued it was simply exercising its legal rights under the lease agreement.
The decision to renege on the lease, which led to a February 2013 default on debt service, prompted Moody’s Investors Service and Standard & Poor’s to strip the city of its investment grade general obligation ratings.
The trustee, acting as mortgagee, earlier this month hired Marcus & Millichap Real Estate Investment Brokerage Co. to market and sell the facility. “Engagement of the broker will help to ensure an orderly process for negotiating a sale of the facility and maximizing the proceeds of such a sale,” the notice read. It added that some third parties have already expressed an interest in the facility.
The trustee reported its intention to soon file what’s known as a trust instruction petition with the courts allowing it to proceed. “Even if a sale of the facility is consummated, at this time the trustee does not anticipate that sufficient proceeds from such sale will be available to repay all principal and interest outstanding on the bonds, in addition to the other amounts required to be paid pursuant to the Indenture.”
Bondholders would receive the net proceeds after various fees and expenses are paid in addition to the broker’s commission. The teleconference to update bondholders is set for 1 p.m. Central Time on Aug. 13. Various tranches of the bonds have traded most recently in the 26 cents to 28 cents range.
In 2011, the facility generated $300,000 toward $1.6 million of annual debt service on the bonds that mature in 2041. The city provided $500,000 to fully cover an August 2012 debt service payment. Under its master lease agreement, Vadnais Heights is able to decide annually whether to cancel the lease.
The project failed to generate sufficient revenues to cover the full principal payment owed on the bonds in February of this year or to cover interest due on $2 million of unrated subordinated series D bonds.
The trustee tapped reserves to make the full interest payment due Feb. 1 of $581,826 on three parity series of bonds totaling $25 million from funds on deposit. Previously, events of default had been triggered, but the Feb. 1 principal default marked the first payment default.
The complex transaction in April 2010 differed from most lease-backed deals in the state. The city agreed in 2010 to a conduit-like financing in which the Vadnais Heights EDA issued the taxable and tax-exempt bonds on behalf of a nonprofit, CFP Vadnais Heights LLC.
The proceeds were used to acquire 10 acres of land and build the center, a 100,000-square-foot domed multi-sport facility with a two-rink ice arena. The city served as the tenant, leasing the facility for a rental payment equal to the its annual operating budget, which includes debt-service costs. The project also included three commercial lots that were eventually to be sold.
City officials were promised at the time by the developer that the facility would generate enough revenues to repay the bonds. Loan payments by the company to the EDA secure the bonds. The trustee also holds a first-mortgage lien on the project and has a claim to the three commercial lots.