Fri 07/30/2021 11:24 AM
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Relevant Documents:
Consent Decree
Complaint
Annual Financial Report (Fiscal 2019)
Continuing Disclosure (Fiscal 2019)

The city of Harvey, Ill., and creditors are working in “good faith” toward a debt restructuring agreement that should be completed “soon,” attorney Bob Fioretti, of Roth & Fioretti, who represents the city in litigation brought by bondholders, told Reorg in a telephone interview on Wednesday. Continue reading below as our Americas Municipals team provides an update on the Harvey, Illinois restructuring situation and click here to request a trial for access to the relevant documents below as well as our analysis and reporting on hundreds of other stressed, distressed and performing credits.

The debt restructuring negotiations were called for in an August 2020 interim consent decree that stayed proceedings until further order in the bondholder lawsuit filed in September 2018, after the city defaulted on general obligation payments due in December 2017 and June 2018, according to court papers. The consent decree is intended to provide time for parties to resolve their claims through consensual agreement and sets a June 2022 status conference hearing. Fioretti said the parties want to wrap up talks “way before then.”

Fioretti said the city is aiming to restructure as much of its debt as it can right now, but he acknowledged that some of the city’s debt might have to be dealt with separately. The city reported that as of March 30, 2020, it had total bond indebtedness of $35.6 million, including $31.13 million of outstanding direct general obligation debt, with $3.135 million listed as past due, according to a fiscal 2019 continuing disclosure statement, which includes select 2020 updates.

The breakdown of outstanding debt is as follows:

Fioretti acknowledged that the Covid-19 pandemic’s impact on city finances and tax collections has created additional challenges to the restructuring talks, but added that parties are “acting in good faith” and “taking every proposal seriously.” James Rachlin, of Meristem Advisors LLC, serves as financial advisor to the city, a retention that needed bondholder approval. Loop Capital Markets was recently hired by the city to support debt restructuring efforts, Fioretti added.

“Discussions have been open and transparent between the parties, and we will reach some sort of resolution soon,” the attorney added.

At the time of the consent decree in the bondholder litigation, Harvey was $4.5 million in arrears on its series 2007 A and B GO bonds after missing payments on Dec. 1, 2018, June 1, 2019, Dec. 1, 2019, and June 1, 2020. The payments stem from a $31 million GO issuance on July 31, 2007.

In its fiscal year 2019 (ending April 30, 2019) annual audited financial report, Harvey reported a net pension liability of $20.64 million related to its police pension fund and net pension liability of $49.76 million related to its firefighters fund.

The city recently settled contribution disputes with its police and firefighter pension funds as well as a 2014 Securities and Exchange Commission complaint related to alleged misuse of bond proceeds, according to a contingent liabilities note to the fiscal 2019 statements. In October 2018, the SEC filed a motion to enforce the consent judgment, which required the city to hire an independent consultant to make recommendations to strengthen the city’s internal controls.

In January, the U.S. District Court for the Northern District of Illinois ordered Harvey to fulfill its obligations under the consent judgment, finding that the city had failed to implement the recommendations of independent consultant ICL in violation of the consent judgment. In a subsequent report filed on March 1, ICL indicated that it signed a subsequent independent consulting agreement with Harvey and will, among other things, complete its review and file an updated report of the city’s internal controls and whether they now comply with the March 29, 2019, report’s recommendations by Sept. 30. A further status hearing in the district court is scheduled for Nov. 1 at 10 a.m. ET.

Harvey also aims to restructure its water system debt with Chicago, which totals approximately $27.63 million, according to the city’s 2019 financial statements. The debt stems from a payment dispute that wound up being litigated, but Fioretti indicated that the lifting of a court-ordered receivership of Harvey’s water system at the end of 2020 should expedite efforts to restructure this debt.

2018 Bondholder Litigation and Consent Decree

Plaintiffs Invesco Oppenheimer Rochester High Yield and Rochester AMT-free municipal funds and Susquehanna Government Products LLP fund held $16.9 million of the bonds at the time the 2018 lawsuit was filed. The lawsuit asserts that bond agreements require that 100% of annual ad valorem property tax collections be deposited with the escrow agent until the amount sufficient to pay the scheduled principal and interest payments for that year is collected. These amounts must be collected before any amount is remitted to Harvey to "ensure timely repayment of the series 2007AB bonds."

The complaint says Cook County had been remitting to the escrow agent only the ad valorem property tax collections from the series 2007 A and B dedicated bond levy, which was created under the statute authorizing the bond issuance but not Harvey’s general corporate levy. The complaint sought judgment for past due amounts and a declaratory judgment interpreting bond documents as requiring county tax collector to remit 100% of ad valorem property tax collections to the escrow agent, including from the city’s general corporate levy.

The court entered a Dec. 23, 2019, order in favor of plaintiffs on Count IV of the complaint requiring the county collector to remit to escrow agent the entire amount for each year of all ad valorem property tax collections from general corporate and series 2007 A and B bond levies that would otherwise be remitted to Harvey until there is deposited into the tax escrow account the amount equal to the "amount to be segregated and paid to tax escrow agent."

The parties entered into the consent decree, with plaintiffs agreeing not to seek enforcement of the court’s order. The consent decree memorialized an interim agreement related to the order and other claims between the parties "while negotiating a full and final resolution to their disputes.” The consent decree provides for 90% of corporate levy proceeds going to Harvey and 10% to the escrow agent, and parties agree to discuss increasing the percentage to "accelerate the payment of the arrearages on the 2007AB bonds during the term of the consent decree.”

The accord also calls for the establishment of a subaccount within the tax escrow account by the escrow agent for payment of the 2007 bonds. Under the agreement, Harvey covenants it will not allow any judgment or judicial order to be entered that will reduce amounts into the tax escrow account and the series 2007 A and B bond subaccount.

The consent decree states Harvey would be considered in default in a variety of scenarios, including if the city fails to either timely provide and deliver to the clerk its general corporate levy or its series 2007 A and B bond levy or it fails to levy the required amounts for the series 2007 A and B bonds. Additional actions that would trigger a default include any attempt by the city to reduce the general corporate levy to an amount below its 2018 levy or direct the escrow agent to distribute funds in the series 2007 A and B escrow accounts for debt service funding to another party. Harvey would be considered in default under the consent decree if it files a bankruptcy petition or is the subject of an involuntary bankruptcy petition. The consent decree also includes similar default language if the city were to seek judicial, legislative or administrative protection from creditors or is placed into receivership or declared insolvent.

The city was also required within 60 days of the order to commence negotiations toward a final resolution of the litigation, retain a financial advisor acceptable to plaintiffs and exercise best efforts toward a restructuring or refunding of the series 2007 A and B bonds or other final resolution of the litigation.
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