Harvey, Illinois, believes it can meet a June bondholder settlement deadline to restructure defaulted debt even as work continues to resolve litigation its long been mired in with Chicago over its water supply.
The fiscally struggling Chicago suburb hired the advisory firm Meristem Advisors LLC last year and in
The city has worked this year to lay the groundwork for the restructuring by posting
The city had long left investors in the dark on its battered financed financial condition and status of its debts, adding to the city's market taint.
The
All options remain on the table including use of a private placement, debt exchange, and public offering. The consent agreement struck in June 2020 gave the city two years to come up with a plan that requires bondholder approval. The city had hoped to finalize a plan by the end of this year.
“We are still in discussions and negotiations with the bondholders on a restructuring of the bond debt in a way that is manageable and within Harvey’s budget and acceptable to the bondholders,” said Bob Fioretti of Roth Fioretti LLC, which represents the city in the bondholder lawsuit and in the city’s ongoing litigation over past due payments to Chicago for treated Lake Michigan water.
“We plan to meet that court deadline on the restructuring if not before. Harvey needs to get on stable footing and attract new businesses,” Fioretti said Monday. The city, led by Mayor Christopher Clark, who inherited a deep fiscal mess when he took office in 2019, is banking on the restructuring to get back on its feet.
Under the 2020 agreement, Harvey gets to keep 90% of pledged tax revenues and bondholders receive 10%. The pact runs to June 2, 2022, as long as the city honors terms of the agreement that call for it to continue negotiations and move toward a debt restructuring.
The city put out an official notice of its intentions October 15 posting a voluntary notice on the Municipal Securities Rulemaking Board’s EMMA site.
The city “has been having discussions with certain holders of its” 2002 and 2007 bondholders “regarding possible structures and strategies for a potential bond exchange offer to the owners of the bonds,” reads the notice signed by City Administrator Timothy Williams.
The city would like to potentially wrap other debts like the defaulted 2002 bonds into a financing including the overdue water payments owed to Chicago, but litigation over Harvey’s water relationship with Chicago remains unresolved and faces a new wrinkle. Bondholders are also participants in the water litigation as they vie with Chicago for Harvey’s funds.
Water woes
Chicago took Harvey to court after the city fell behind on payments for Chicago-treated water from Lake Michigan. The two cities agreed to a consent decree in 2015, but Harvey violated it and the court stripped Harvey of control over its water operations in 2017.
Harvey regained control of the water operations
Chicago is seeking $28 million to bring Harvey into good standing. Harvey contends the number is closer to $14 million.
Another suburb’s delinquent payments to Harvey for water also has been dragged into the litigation, complicating a resolution. Dixmoor, which purchases water from Harvey, is behind by several million. “If Dixmoor isn’t paying then Harvey can’t pay Chicago,” Fioretti said.
Harvey is asking the court for a partial suspension of its obligations to Chicago based on Dixmoor’s overdue payments.
Harvey contends its consent agreement with Chicago permits relief when Harvey’s downstream municipal water customers fail to cover their bills in a timely fashion for more than 60 days, allowing for a suspension of 15% in interest being accrued.
Chicago has objected to the relief saying Harvey needs to do more to show it’s tried to collect on Dixmoor’s debt and look for other ways to make good on the payment.
Dixmoor has long struggled to make its payments and aging infrastructure has caused leaks and outsized bills. A water main break in October that resulted in a boil order and lack of water pressure highlighted the impoverished suburb’s need for upgrades that it can’t afford on its own. President Biden’s infrastructure package earmarks billions for water infrastructure but few believe Illinois’ $1.7 billion share to replace old lead lines will solve the region’s struggles.
The parties return to the courtroom for a hearing on the litigation Thursday.
Disclosures
The city last Friday reported its failure to “make a timely mandatory sinking fund payment and interest payment” due Nov. 1, 2021 on its 2002 bonds and on the 2007 bonds it reported also on Dec. 10 it failed “to make a timely mandatory sinking fund payment and interest payment on the Bonds due on December 1, 2021.”
In October, the city provided notifications of principal and interest delinquencies. One provides notice of a missed sinking fund payment for December 2020 on the 2007 bonds and the failure to make timely interest payments due between December 2016 and June 2021.
Separate notices report the city’s failure to make timely principal payments on its 2002 bonds due on Feb. 1 of each year and interest payments due Feb. 1 and August 1 of each year beginning in 2018 and continuing through Feb. 1, 2020.
In March, the city posted annual financial statements for 2016, 2017, and 2018 and in April followed with its 2019 results. Audited results for 2020 posted in late October and basic financial information and data for fiscal 2021 posted Nov. 26 as the audited results are not yet available.
About $3.4 million remains outstanding on the city’s $6 million 2008 hotel-motel tax bonds that mature in 2028.
All of its $22.3 million of the 2007A issue remains outstanding with $565,000 pay due on the series that matures in 2032. About $5.2 million of the $9 million 2007B issues remains outstanding with $1.4 million overdue on the series that matures in 2024.
About $1.9 million remains outstanding from a 2002B series for $2.5 million with a final maturity in 2022 and delinquencies of $1.1 million. A 2002C series for $1 million was defeased under an insurance policy from Assured Guaranty which is to be repaid $1.2 million by a separate agreement, according to the 2021 financial data.
The 2021 report underscores the city’s deep fiscal strains and inability of the weakened tax base to support its debt. The city’s equalized assessed value rose in 2020 to $222 million from $198 million. The city last year collected $10 million of property tax payments due representing just 50% of what’s owed.
The city collected $22.5 million of revenues and spend $24.5 million in the 2020 budget driving up an accumulated deficit to a negative $60 million. Audited results for fiscal 2021 which ended April 30 were not yet available but the fiscal 2022 budget anticipates closing out the year next April with an additional $4.7 million deficit.
Restructuring
Any restructuring plan must include a pledge of all legally available funds, a dedicated property tax levy for the purpose of repayment of some or all of the principal and interest on the new general obligation bond series.
The investors who sued the city include Invesco Oppenheimer Rochester High Yield Municipal Fund, Invesco Oppenheimer Rochester AMT-Free Municipal Fund and Susquehanna Government Products. They are represented by Bryan Cave LLP partner Brent Vincent.
Several local municipal bond market participants say any future issuance would be met be with skepticism given Harvey’s long history of budgetary struggles and past record of corruption and defaults. A sturdy, lockbox security would be needed and the city’s best option might be a direct placement. Whether bondholders would agree to an exchange is unclear given they’d like to shed the debt.
The lawsuit
Harvey’s past fiscal mismanagement led to 2014
In 2018 it settled a dispute with its public safety pension funds that sought to garnish tax revenues to make up for overdue contributions. The firefighters’ fund earlier this year
A Cook County judge in June
