Harvey, Illinois, hires Loop Capital in step toward debt restructuring

Harvey, Illinois, hired Loop Capital Markets LLC as it pursues a debt restructuring that’s the cornerstone of a consent agreement with a group of its 2007 bondholders who had sued to intercept city revenue in order to resolve defaults.

The Chicago-based firm is acting in an investment banking capacity to “guide us through any offering, exchange or other possibilities and alternatives” the city is exploring to restructure debts to help stabilize its finances, said Bob Fioretti of Roth Fioretti LLC, which represents the city in the bondholder lawsuit.

The city interviewed several firms and Loop offered an “aggressive proposal,” Fioretti said.

Mayor Christopher Clark, who inherited a deep fiscal mess when he took office in 2019, and the City Council last year approved the hiring of Meristem Advisors LLC as financial advisor as the city explored its restructuring options. Meristem was founded in 2018 by veteran Chicago-based public finance banker James Rachlin.

No decisions have been made on the restructuring route — whether to conduct it through a bond exchange, direct placement, or public offering -— but the city still hopes to get the debt overhaul done by the end of the year, Fioretti said.

Once it settles on a plan, the city must get bondholder approval.

The goal remains to wrap other debts into the financing in addition to the 2007 bonds subject to a court-approved consent decree. That would include overdue water payments owed to Chicago and defaulted debt service payments owed to 2002 bondholders.

The consent decree struck with 2007 bondholders in June 2020 gives the city two years to complete a restructuring with holders having a say in the process. Under the agreement, Harvey gets to keep 90% of pledged tax revenues and bondholders will 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 towards a debt restructuring.

Bondholders must also sign off on the underwriter selection and the bonds 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 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.

The dwindling tax base of the impoverished south Chicago suburb can’t support its pension liabilities and bond debts. At the time of the pact, the city owed $4.5 million in defaulted debt service that was due in December 2018, June and December 2019 and June 2020 on a $31 million 2007 issue.

The lawsuit dates to 2018 when investors who hold $16.9 million of the bonds filed suit against the city and various Cook County officials whose offices manage ad valorem tax collections and distribution seeking to enforce a tax diversion provision built into the bond indenture.

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 city has been mired in litigation with a series of creditors in addition to bondholders. 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 recently sued Harvey to stake a claim to the city's American Rescue Plan Act aid, arguing it is subject to the 10% claim on city tax and aid funds that are sent directly to the pension fund under the 2018 settlement. A Cook County judge in June shot down the lawsuit after concluding the ARPA dollars aren’t subject to the intercept and that U.S. Treasury guidance bars pension deposits.

And SEC has renewed its scrutiny. A federal judge in January ordered Harvey to rehire a consultant and prove the status of management reforms the city agreed to in a 2014 consent judgment that settled charges the Chicago suburb fraudulently used bond proceeds.

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 last December when a judge ended a water receivership order but the city still has debts owed to Chicago to settle which help pave the way for the future debt restructuring.