CHICAGO – Holders of $32 million of Harvey, Illinois’ 2007 general obligation bonds took legal steps this week to force the struggling city and Cook County officials to make good on debt service defaults and protect investor claims to funds also being sought for overdue water payments to Chicago.
Oppenheimer Rochester High Yield Municipal Fund, Oppenheimer Rochester AMT-Free Municipal Fund and Susquehanna Government Products LLP accused Harvey in a lawsuit of breach of contract on debt service defaults that currently total $2.5 million, including $1.2 million owed to the plaintiffs.
Cook County Treasurer Maria Pappas and Cook County Clerk David Orr were also sued for failing to send tax dollars directly into an escrow. Under the ordinance authorizing the 2007 bonds, the city directed Cook County to deposit 100% of collections of all legally available ad valorem property taxes into a designated escrow account in addition to special levy funds, with the city receiving only excess revenues after debt service is paid.
“The county is not implementing the city’s order as written and consequently due to low tax collection rates, there is insufficient sums being deposited in the tax escrow account,” according to the lawsuit filed Tuesday in the Cook County Circuit Court. “Moreover, the city is failing to meet its obligations to make up remaining interest and principal due on the bonds. As a result, there is currently an arrearage due to all holders of the bonds in excess of $2.5 million with that figure likely to exponentially increase with each missed payment and as principal becomes due on the bonds,”
The bondholders want the $2.5 million paid and action taken by the Cook County collectors to ensure timely payments in the future. The Oppenheimer funds hold $11 million of the bonds and Susquehanna holds $5.8 million.
The move was taken in tandem with a lawsuit filed on Aug. 31 by the same funds. It seeks to intervene in a still-pending 2012 lawsuit filed by Chicago against Harvey for shorting Chicago on water payment purchases. The two cities agreed to a consent judgment in 2015 and the case is now managed by a receiver.
The holders argue they are entitled to a portion of water rents and rates because about $5 million of the 2007 bonds financed water system improvements. They also want to prevent the court receiver from siphoning off to the water fund general funds the bondholders believe should go to repay their holdings.
The complaints underscore the deep stress facing the suburb 20 miles south of Chicago. Harvey drew attention over the spring as its police and firefighter pension funds became the first to trigger a newly implemented state law that allows for the diversion of state collected funds to cover overdue pension contributions.
The city cut deeply into its public safety ranks as funds were withheld by the state comptroller. The city challenged the withholding and after a few months of legal wrangling that also involved the city’s revenue bondholders Harvey and its pension funds reached a settlement in late July. The agreement allows the Chicago suburb to keep about 65% of $7 million in state collected funds and protects revenues pledged to bondholders.
BONDHOLDER LAWSUIT
Cook County officials since 2016 have set aside only a portion of the required taxes that should be directed to a special tax escrow before distribution to the city, the lawsuit says. County officials have responded to bondholder demands by saying they can’t honor the request until instructed by Harvey, according to the complaint.
Harvey officials have not responded to bondholder questions and demands including a May 9, 2017 written demand to Mayor Eric Kellogg to cure existing defaults, according to the lawsuit.
The last payment received was to satisfy the June 1, 2017 debt service payment and was made nine months late. Dec. 1, 2017 and June 1, 2018 payments have not been made.
The Bond Buyer first reported Harvey’s GO defaults on the bonds in 2016 from investor sources. The city has not disclosed the defaults in public filings, so the lawsuit provides the most current information to date.
Harvey missed six GO bond debt-service payments in fiscal 2017, up from two a year earlier, Moody’s Investors Service wrote in a report earlier this year on the pension intercept, but added “whether the city currently remains in default is uncertain based on publicly available information.”
The city – which was the subject of an unprecedented 2014 action by the Securities and Exchange Commission to block a bond deal and faced SEC sanctions for misleading bondholders -- bears responsibility for investor disclosure. U.S. Bank NA serves as the paying agent, but there is no trustee.
The 2007 issue, which carried a BBB-minus rating from Fitch Ratings when it was issued, included $9 million of B series taxable bonds with a $3.2 million 2017 maturity paying a yield of 7.25% and a $5.8 million 2024 maturity yielding 7.75%.
The $22 million tax-exempt A piece included a 2027 maturity for $9 million that paid a yield of 5.14% and a 2032 maturity for $12.8 million that paid a yield of 5.22%.
The tax-exempt bonds have traded recently at 45 cents on the dollar and taxable bonds have not traded recently.
Fitch Ratings later dropped its ratings on the 2007 bonds to a low of B but withdrew its rating in 2010 "due to insufficient information." A 2002 Harvey GO issue is insured by Financial Security Assurance.
Federal law requires only corporations to follow trust guidelines on the issuance of securities, and many GO issuers forgo the use of a trustee though use is common, and investor-driven, on revenue bond deals.
INTERVENTION LAWSUIT
The complaint seeking to intervene is currently set for briefing over the next two months.
While the bonds carried a general obligation pledge with a tax levy as the primary source of funds, if that levy fell short principal and interest was to be paid from “any other moneys, revenues, receipts, income, assets or fund of Harvey that are legally available for that purpose,” according to the lawsuit, which cites bond documents. Harvey’s tax collections have long fallen far short of levy amounts.
The Harvey/Chicago consent decree called for the $5 million to be repaid from water funds and state law directs income from water fees to repayment of bonds issued for bond repayment if proceeds funded water projects, bondholders argue.
“The court appointed receiver has made clear that he will not make any debt service payments on the 2007A bonds from the water fund,” the lawsuit says.
“Petitioners have an interest and seek to intervene in this action to compel the receive to make the payments on the series 2007 bonds, which is required to make by statute, the consent decree, and pursuant to the court orders entered in this case which he is obligated to follow as an officer of the court,” the lawsuit says.
The bondholders also want to block the receiver’s effort to force Harvey to transfer more than $30 million from its general fund to the water fund, money the bondholders say is among the pool of “all legally available” funds available for debt repayment.
Oppenheimer declined to comment and the county officials could not immediately be reached to comment.
Harvey’s attorney, Bob Fioretti, said he was reviewing the latest lawsuit but believes in the intervening water case that bondholders do enjoy a first crack at the available revenues. Brent Vincent and Steven Trubac of Bryan Cave Leighton Paisner, who represented revenue bondholders in the intercept case, are representing the plaintiffs.
