Harvey, Illinois, floats bond restructuring that pushes out repayment

Harvey, Illinois, is seeking investor input as it gauges interest in a bond exchange that would extend repayment of its general obligation paper to provide breathing room to manage its mountain of debt.

The notice posted on the Municipal Securities Rulemaking Board’s EMMA site lays out the terms of a “possible proposal” for a bond exchange that is for “discussion purposes only” and “subject to change.” The initial terms, far from final, call for pushing off the final maturity by two decades.

The city hired financial advisory firm Meristem Advisors LLC in 2020 and investment banking firm Loop Capital Markets LLC last year to look at restructuring options as it seeks to meet a June bondholder settlement deadline to restructure GOs that have seen numerous defaults over the years.

The exchange offer remains a work a progress. The city faces further negotiations with key bondholders involved in litigation, but the city decided to post initial terms so all holders would have the opportunity to weigh in.

“In our view it's a solid and responsible proposal that gives the city breathing room and provides bondholders with more long-term security that they will be repaid,” said Bob Fioretti of Roth Fioretti LLC, who represents Harvey in current and past litigation with bondholders, Chicago over water payment delinquencies, and the city’s public safety pension funds.

The proposal would extend repayment at lower interest rates but pledges a tax levy with a direct intercept and trust estate to the new bonds.

Some form of refinancing is the cornerstone of the consent agreement with a group of 2007 bondholders holding $16.9 million. They sued to enforce a tax diversion provision built into the bond indenture that allows for tax collections to go directly to bond repayment. The city also wants to incorporate 2002 bondholders into the restructuring.

Bondholders involved in the litigation had initially aimed to shed their holdings in any restructuring so their view about an exchange is unclear and their approval is required to move forward with any new financing.

The investors who sued the city are 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, who declined to comment on the preliminary exchange terms.

Under the preliminary exchange offer, the city is asking bondholders to 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 interest rate offered is 4.5% on the A series and 5% on the B series.
The proposal says the first maturity would be Dec. 1, 2022, and on the next line also says the bonds would be structured as term bonds due Dec. 1, 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%. Bonds have recently traded at 80 cents on the dollar.

A 2002C series for $1 million was defeased under an insurance policy from Assured Guaranty Municipal Corp. which is seeking repayment from Harvey.

The terms would allocate levy collections in excess of a current year’s interest and principal requirements could be used to redeem additional principal on December 1 of each year or used as security for other bonds of the city. Holders of the new bonds would not have acceleration rights.

The security estate for the new bonds would be administered by a bank trustee pursuant to a trust agreement secured by an annual irrevocable property tax levy for the new bonds of $4 million plus a 5% loss in collection allowance for a total extension of $4.22 million calculated to be sufficient to repay the bonds assuming a 50% collection rate.

“All levy collections will be intercepted by the Cook County Clerk and wired directly to the New Bond Trustee,” the notice reports. “Outstanding bond holders who do not exchange for new bonds will not benefit from this proportionate increase in the levy or participate in the trust estate.”

Under the 2020 settlement agreement with bondholders, Harvey gets to keep 90% of pledged tax revenues and bondholders receive 10%. The pact runs to June 2, when a restructuring is due.

The city began laying the groundwork last year for the restructuring by posting financial results and notices on defaulted principal and interest payments and other in addition to a public notice on the potential refinancing. 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 city’s latest financial posting Nov. 26 reports total debts of $62 million including bonded debts of $34 million and payment delinquencies of $4.3 million. 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.

The city last year collected $10 million of property tax payments due representing just 50% of what’s owed. The fiscal 2022 budget anticipates closing out the year next April with a $4.7 million deficit.

The city would have liked to wrap other debts including the 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.

The city received some leeway from the court earlier this month when a judge granted Harvey’s request for a partial suspension of its obligations to Chicago based on overdue payments owed to Harvey by another nearby suburb, Dixmoor.

Chicago took Harvey to court after the city fell behind on payments for Chicago-treated water from Lake Michigan. Chicago is seeking $28 million to bring Harvey into good standing. Harvey contends the number is closer to $14 million.

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

Harvey’s past fiscal mismanagement led to 2014 Securities and Exchange Commission sanctions on a 2008 bond sale and the bond and water payment defaults. The SEC renewed its scrutiny and a federal judge last January ordered Harvey to rehire a consultant and prove the status of management reforms the city agreed to in a 2014 consent judgment.