CHICAGO — Monticello, Minn., will borrow $6.5 million next week to fund a settlement with holders of $26.4 million of defaulted telecommunication revenue bonds, as the city seeks to move on from a deal that prompted investor accusations of fraud.
The city will take competitive bids Monday on the general obligation bonds. Northland Securities Inc. is financial advisor and Kennedy & Graven is bond counsel.
The majority of proceeds will cover the city's cash payment of $5.75 million under a court-approved settlement. It resolves a dispute between the city and holder of its unrated 2008 bonds that financed a high speed fiber optics broadband network.
"The settlement allows the city to close an unfortunate chapter for FiberNet Monticello and allows the city to operate the utility without the further distraction caused by the class action lawsuit," said Monticello Finance Director Wayne Oberg.
Minnesota statutes authorize municipalities to issue bonds to fund legal judgments.
The upcoming GO bonds, which mature through 2030, have an extraordinary redemption provision. They can be redeemed, in whole or in part, at a price equal to par plus accrued interest, should the city decide to sell or lease the fiber optics system to a private entity. Interest on the bonds could lose their tax-exemption under such a move, the offering statement says.
The special redemption feature is "estimated to have an interest rate impact of one-tenth of 1% or about $65,000 over the life of the bonds," according to a
"We are planning to continue operating the system as is and will continually assess the environment we operate in" with respect to the city's continued ownership of the utility, Oberg said.
About $500,000 from the sale will finance equipment purchases, including a fire truck and plow.
Ahead of the sale, Moody's Investors Service affirmed its A2 rating on the city's GOs, which will total $26 million after the sale. The city's nearly $1 million of lease-backed debt is rated A3.
The GO rating reflects the city's concentrated tax base with a nuclear power plant making up 49% of the city's assessed valuation; favorable socio-economic indices; ample general fund reserves despite recent declines; elevated debt levels; and manageable pension obligations.
"The A2 rating also incorporates the city's ongoing support" for its telecommunications utility, Moody's wrote. On Sept. 12, the federal court approved the settlement of the class action suit brought by holders of the telecommunications bonds. The appeal period closed Oct. 14, according to the offering statement.
Investors will receive the city's cash settlement and another $2 million held in trust will be distributed.
The court "finds that the settlement, the settlement agreement, the benefits to the Class Members, the Plan of Allocation, and all other parts of the settlement are, in all respects, fair, reasonable, and adequate, and in the best interest of the class," said the order from U.S. District Court Judge Donovan W. Frank, which was included in a
The settlement was struck last year and advanced earlier this year with the filing of the class action bondholder lawsuit — done to establish class claims -- by Shiff Hardin LLP and Oppenheimer Wolff & Donnelly LLP in the U.S. District Court for the District of Minnesota.
It outlined bondholder assertions that the city violated state and federal securities rules by allegedly making fraudulent material misrepresentations and omissions regarding the feasibility of the project.
The lawsuit accused the city of failing to disclose ahead of the sale in 2008 the likelihood that ongoing litigation filed by a telephone company could negatively impact construction of the system and cut into project revenues needed to repay the debt.
The settlement resolves all claims related to the offering and sale of the bonds issued by the city, lawyers for the bondholders said.
The city issued the special, limited obligations bonds in 2008. Principal and interest was payable solely from the system's operating revenues after operational and maintenance expenses. The bonds did not benefit from a mortgage or security interest in the project assets.
While the city was not under obligation to repay the bonds from any source other than the system's revenue, the indenture did require it to establish rates and charges from its users to cover debt repayment.
Proceeds financed the city's costs of acquiring and construction a fiber optics broadband communications network to provide cable television, internet access, and telephone services to businesses and residents. The city owns and operates the system under the name FiberNet Monticello.
The unrated revenue bonds were structured as term bonds due in 2023 and 2031 and carried original yields of 6.5% and 6.75%, respectively.
Oppenheimer was underwriter and Faegre & Benson LLP as bond counsel on the issue.
The city's fiber optic broadband communications network for cable television, internet access, and telephone services was once envisioned as a model for other local governments.
The system — aimed at enhancing the city of Monticello's growth and appeal in attracting businesses and residents — faced stiff competition from private competitors that lowered their prices to keep customers.
The fiber optic system failed to generate enough revenue to service the bonds. With revenues falling short, the trustee drew from various bond reserves to cover debt service payments. Between July 2011 and June 2012, the city supplemented debt service by loaning the project money generated by its liquor sales operations.
Under no obligation to make up the shortfalls, Monticello, a city of about 12,700 residents just north of the Twin Cities, in 2012 informed the trustee of its intention to halt its subsidies as it sought a restructuring.
The city's decision to stop supplementing debt service prompted the trustee to seek out instruction from the Hennepin County District Probate Court on making future debt service payments from reserves.
Bondholders threatened litigation if no settlement could be reached. Though the city denied the claims, the parties entered negotiations with both sides seeking to avoid potentially expensive and lengthy litigation.
For investors, the Monticello case presented a stark message, market participants have said in past interviews. The default served as reminder of the risks associated with a non-standard security pledge, considerations over the essentiality of a project, and the burden of honoring a pledge.
The city initially looked at establishing its own broadband network after complaints from businesses looking for improved and more affordable service, and initially hired a consultant to study its viability. The subject was put to referendum in 2007 and it passed with a 74% majority in favor of the system.
Critics countered that broadband is not a core municipal service. The project hit its first major hurdle when Bridgewater Telephone Co., a subsidiary of TDS Telecom, filed a lawsuit seeking to have the bond issue voided.
Bridgewater, which was building its own fiber-optic network in Monticello, argued that the city had no authority under state law to issue bonds to fund a business that would provide Internet, cable television, and telephone services. The company also argued that the use of an operating reserve fund to pay for current expenses violated state law. The courts dismissed the lawsuit.
