Harvey, Illinois, closing in on exchange offer for defaulted bonds

Harvey, Illinois' long-planned exchange offer for its defaulted general obligation bonds could get underway later this month with receipt of an overdue audit the last hurdle to overcome, city officials told a Cook County judge.

The Chicago suburb's city council has cleared the path for the exchange offer to proceed and is expected to approve minutes from that meeting later this month before the victors of Tuesday's mayoral and council contest take office in May.

The proposed exchange — which extends the final maturity date by two decades but offers features like a tax levy with a direct intercept and trust estate — is the cornerstone of the consent agreement the city struck with a group of 2007 bondholders.

The agreement set a June 2022 deadline for a debt restructuring but it's been an arduous process for the long fiscally troubled suburb that has faced past litigation from its pension funds and Chicago over delinquent water payments as well as past Securities and Exchange Commission sanctions.

"We are awfully close. This has been a long road," Harvey attorney Bob Fioretti, of Roth Fioretti LLC, told Cook County Circuit Court Judge Michael T. Mullen at a status hearing Friday.

The next court hearing is set for April 14th.

"We may very well have a good news" that the bond documents have been finalized and the exchange offer "will be issued shortly thereafter," said Brent Vincent, a partner at Bryan Cave Leighton Paisner who represents the 2007 holders who sued: Invesco Oppenheimer Rochester High Yield Municipal Fund, Invesco Oppenheimer Rochester AMT-Free Municipal Fund and Susquehanna Government Products.

The holders sued to enforce a tax diversion provision built into the bond indenture that allows for tax collections to go directly to bond repayment.

The investors who sued hold about $16.9 million of the city's $30 million GO debt from 2002 and 2007 issues. About $5 million of the overall GO debt portfolio was overdue as of last April 30th due to defaults but Harvey has since made some payments.

The city is also incorporating 2002 bondholders into the restructuring. The authorizing ordinance allows the city to issue up to $36.5 million of new tax-exempt and taxable GO bonds that stretch out the final maturity to 2052 maturity from the current 2032 end date.

Under the 2020 settlement agreement with bondholders, until the restructuring is complete, Harvey keeps 90% of pledged tax revenues and bondholders receive 10%.

The city and its advisors have been working to identify all bondholders and the main hurdle remains obtaining the audited fiscal 2021 and 2022 results from a private firm.

The city began laying the groundwork for the transaction over the last two years, filing a series of long overdue audited financial statements and putting out financial updates in the absence of the most current audited results. The City filed its annual financial statements for 2016, 2017 and 2018 in March 2021, with the 2019 audit published in April 2021 and the 2020 audit in October 2021.  

The city filed default notices after years of leaving investors in the dark about its battered financed financial condition and status of its debts. The city also began making some debt payments while putting an experienced financing team in place.

Harvey hired financial advisory firm Meristem Advisors LLC in 2020 and then hired investment banking firm Loop Capital Markets LLC to shape a restructuring that would follow through on the consent agreement. Loop is the underwriter/dealer agent. Ice Miller LLP is bond/disclosure counsel and Ballard Spahr is underwriters' counsel. Globic Advisors Inc. is the exchange agent.

The extended repayment period is aimed at providing breathing room for Harvey to manage its mountain of bond, pension and water debts while also working to rebuild a beleaguered tax base hurt by outmigration, shuttered businesses, and an aging population. The city also has weak tax collection rates that pose a drag on its budgets.

The city is aiming for full participation in the exchange, banking on institutional and retail holders looking favorably on the benefits of shedding defaulted bonds.

"The bond exchange would take these bonds out of default and put the city on a sustainable track to repay the bonds," Fioretti said.

The city first sought general bondholders' input in a notice posted on the Municipal Securities Rulemaking Board's EMMA disclosure website in January that laid out the terms of a "possible proposal" for a bond exchange.

Under those "possible" terms, the city would levy a direct annual tax from 2022 to 2052 of up to $4.5 million to repay the bonds. The pledged taxes would flow directly to bondholders under a tax intercept escrow agreement between the Cook County collector, city, and trustee.

The city proposed bondholders exchange their holdings for a 2022A series of tax-exempts and 2022B series of taxables at "an aggregate par value equal to 100% of outstanding par and past due accrued interest." The bonds tentatively would be offered in terms maturing in 2027, 2036, and 2053.

The city currently owes $1.9 million on its remaining 2002B bonds that mature in 2023 and pay a rate of 5.25% to 5.6%. The city owes $22 million on its 2007A bonds that mature in 2032 and pay rates of 5.5% to 5.6%. The city owes $6 million on its 2007B taxable bonds that mature in 2024 and pay rates of 7.25% to 7.75%. A 2002C series for $1 million was defeased under an insurance policy from Assured Guaranty Municipal Corp., which is seeking repayment from Harvey.

Finalized terms are not yet publicly available.

In a February notice posted on EMMA, the city reported that it was still waiting on audited financial statements and that "once completed, the city expects that it will be able to proceed with the exchange offer."

The city reported an error in past due interest payments to holders of record as of the payment due date rather than holders of record as of the payment date Dec. 1, 2022. The city said DTC was working to reverse the prior payments and redistribute to record holders as of the payment date.

The city operates on a $31 million general fund budget and expects to close the fiscal year April 30th with a modest $341,000 balance — its first positive balance in years after closing out 2021 and 2022 with negative $4.7 million balances in each year. Overall fund balances remained deep in the red at a negative $60 million according to the fiscal 2020 audited financials.

In addition to $30 million of GO debt, the city has $3 million of hotel-motel revenue-backed bonds outstanding and remains current on those payments that mature in 2028.

The city would have liked to wrap other debts into a larger debt restructuring, including overdue water payments owed to Chicago but litigation over Harvey's water relationship with Chicago remains unresolved. Bondholders are also participants in the water litigation as they vie with Chicago for Harvey's funds. Chicago is seeking $28 million to bring Harvey into good standing. Harvey contends the number is closer to $14 million.

In 2018, Harvey settled a dispute with its public safety pension funds that sought to garnish tax revenues to make up for overdue contributions.

The city would have faced a tougher road if wrapping other debts into a restructuring because it's unclear how a public offering would fare, market participants said.

The city also needs to tread cautiously with the restructuring so as to not run afoul of the Securities and Exchange Commission. Harvey's past fiscal mismanagement led to 2014 SEC sanctions on a 2008 bond sale and the bond and water payment defaults.

The SEC renewed its scrutiny and a federal judge in January 2021 ordered Harvey to rehire a consultant and prove the status of management reforms the city agreed to in a 2014 consent judgment. The city and SEC resolved the latest compliance dispute at the end of January 2022.