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HomeMy WebLinkAboutStandard & Poor's Corp. KUTAK ROCK & HUIE 700 PILLSBURY CENTER ATLANTA MINNEAPOLIS, MINNESOTA 55402 OMAHA 1200 STANDARD FEDERAl.. SAVINGS BUIl..DING ATLANTA,GEORGIA 30303 (404)622-8700 (612) 338-7008 THE OMAHA BUlL.DING 1650 FARNAM STREET OMAHA, NEBRASKA sel02 (402)346.8000 WASHINGTON DENVER 1330 COLORADO NATIONAL BUILDING DENVER, COl..ORADO 80202 (303) 534-1330 August 5, 1981 1101 CONNECTICUT AVENUE,N,W. WASHINGTON, D. c. 20036 (a02) 828-2400 Standard & Poor's Corporation 25 Broadway New York, New York 10004 $6,000,000 City of Columbia Heights, Minnesota Commercial Development Revenue Bonds (Evenson Office Building Project) Series 1981 Gentlemen: This firm has acted as counsel to the underwriter in connection with the issuance and sale by the City of Columbia Heights, Minnesota (the "City") of the above referenced bonds (the "Bonds"). The Bonds are bei ng issued pursuant to an Indenture of Trust dated as of July 1, 1981 (the "Indenture") between the City and First Trust Company of Saint Paul, St. Paul, Minnesota (the "Trustee"). The Bonds are being issued to provide funds for the con- struction of a commercial office building (the "Project"), which Project will be owned by 'rerry Evenson, an individual residing in New Brighton, Minnesota (the "Obligor"). Pur- suant to a Loan Agreement dated as of July 1, 1981 (the "Agreement") between the City and the Obligor, the City will loan the proceeds of the Bonds to the Obligor for the purpose of constructing the Project. The Bonds will be payable from and secured by a pledge of certain payments and other amounts to be received by the Ci ty pursuant to the Agreement. Such payments are designed to be sufficient to pay, when due, the principal of, premium, if any, and interest on the Bonds. The payment of the principal of the secured by an irrevocable Letter of Credit First National Bank of Saint Paul (the "Bank") Bonds will be issued by The in the amount KUTAK ROCK <& HUIE Standard & Poor's Corporation August 5, 1981 Page Two of $6,000,000, an amount equal to the aggregate principal amount of the Bonds (the "rJetter of Credit"). Pursuant to a Letter of Credit Agreement dated as of July 1, 1981 (the "Letter of Credit Agreement") among the Bank, the Obligor and the Trustee, the Obligor will authorize the Bank to advance against the Obligor's Demand Promissory Note (the "Promissory Note") in an amount of up to and including $6,000,000 to pay any draft drawn under the Letter of Credit. Pursuant to a Mortgage dated as of July 1, 1981 (the "First Mortgage") between the Obligor and the Trustee, the payment of the principal of, premium, if. any, and interest on the Bonds will be secured by a mortgage on and security interest in the Project. In order to secure its obligations under the Promissory Note and the Letter of Credit Agreement, the Obligor will grant a mortgage on and security interest in the Project to the Bank pursuant to a Statutory Mortgage, Assignment of Leases and Rents, Security Agreement and Fix- ture Financing Statement dated as of July 1, 1981 (the "Second Mortgage") between the Obligor and the Bank. The Second Mortgage will be subordinate to the First Mortgage. Pursuant to a Securi ty Agreement dated as of July 1, 1981 (the "Security Agreement") among the Obligor, the Trustee and the Bank, the obligations of the Obligor under the Agreement will be secured by a security interest in cer- tain cash and marketable securities and other instruments owned by the Obligor (the "Securities"). In addition, the Security Agreement will provide that the payments advanced by the Bank against the Promissory Note and the Obligor's obli- gations under the Letter of Credit Agreement will be secured by a security interest in the Securities, which security interest will be on parity with the security interest of the Trustee. The payment of the Obligor's obligations under the Agreement, the payment of sums advanced by the Bank against the Promissory Note and the Obligor's obligations under the Letter of Credit Agreement will be secured by an Assignment of Life Insurance dated as of July 1, 1981 (the "Assignment") from the Obligor to the Trustee and the Bank. Under the Assignment, the Obligor will grant to the Trustee and the Bank separate but equal and coordinate security interests in 45 percent of the Obligor's right, title and interest in a life insurance policy on the life of the Obligor in the amount of $1,000,000. KUTAK ROCK & HUIE Standard & Poor's Corporation August 5, 1981 Page Three Pursuant to the Letter of Cred i t Agreement, the Trustee will agree to release any and all collateral pledged or mort- gaged to it (except rights to payment under the Agreement, its security interest in the Construction Fund and the Bond Fund created by the Indenture, and the Letter of Credit) upon the written request of the Obligor and the Bank so long as, a t or pr ior to the time of such request, the Bank releases its security interest or lien on the same collateral. The Bank will waive any right to set off any deposits or assets of the Obligor or the City held by the Bank or indebt- edness owed by the Bank to the Obligor or the Ci ty against the obligation of the Obligor to make repayments under the Letter of Credit Agreement. The Bonds will have a term of three years (maturing July 1, 1984), with interest only payable prior to maturity (on July 1 and January 1, commencing July 1, 1982). A por- tion of the bond proceeds will be used to fund interest on the Bonds for a period of 18 months and to establish' an interest reserve subaccount which will be funded from the proceeds of the Bonds in an amount equal to six months of interest on the Bonds. To provide for the payment of the interest on the Bonds, the Agreement requires that the Obligor pay, on or before September 15 and March 15 of each year, commencing March 15, 1982, an amount which, together with any moneys then on deposit in the Bond Fund established under the Indenture and available for such purpose, will equal the interest to become due on the Bonds on the next succeeding interest payment date on the Bonds. To provide for the payment of principal on the Bonds, the Agreement requires the Obligor to pay, on or before March 15, 1984, an amount which, together with any moneys then on deposit in the Bond Fund and available for such purpose, will equal the principal to become due on the Bonds on July 1, 1984. Among following Agreement: other shall events, the Agreement constitute Events of provides Default that under the the 1. if the Obl igor shall fai 1 to make any loan repayment when due and such default shall continue for five days after written notice thereof has been given to the Obligor by the Trustee and for ten days after written notice thereof has been given to the Bank by the KUTAK ROCK & HUIE Standard & Poor's Corporation August 5, 1981 Page Four Trustee (the Trustee is notice of default within default); or required to provide two business days written of such 2. if the Obligor shall fail repayment when due and such failure 15 days after the date on which such due, i rrespecti ve of whether or not such failure shall have been given by Obligor or the Bank; or to make any loan shall continue for loan repayment was written notice of the Trustee to the 3. the filing of a petition in bankruptcy by or against the Obligor under the United States Bankruptcy Code (the "Bankruptcy Code"); or 4. failure to pay the Letter of Credit fee when due, continued for a period of five days after written notice thereof has been given to the Obligor by the Bank or the Trustee. Upon the occurrence of an Event of Default as described above, the Trustee is required to declare the principal amount of the loan and any other indebtedness under the Agreement to be due and payable on the next succeeding interest payment date. Upon acceleration of the loan the Trustee is required to draw such funds pursuant to the Letter of Credit and to use such funds from the interest reserve subaccount as shall be required, taking into account any available proceeds of the Bonds or any funds available on deposit in the Bond Fund and Construction Fund for a period of at least 91 days prior to the expiration of which no petition has been filed under the Bankruptcy Code naming the Obligor as a debtor, to pay the principal of the Bonds and accrued interest thereon, respectively, on the next interest payment date. ,~e have been asked by the underwriter of the Bonds to review the documents described above and to discuss for your purposes in assigning a credit rating to the Bonds the right of the Trustee under the Indenture to recei ve, retain and distribute certain moneys in the event that either the City or the Obligor becomes a debtor under the Bankruptcy Code, in light of the provisions of Section 547(b) of the Bankruptcy Code relating to preferential payments. KUTAK ROCK I), HUIE Standard & Poor's Corporation August 5, 1981 Page Five Section 547(b) of the Bankruptcy Code provides basically that a debtor's trustee in bankruptcy may avoid any transfer (1) of property of the debtor, (2) to or for the benef i t of a credi tor for an antecedent debt owed by the debtor before such transfer was made, (3) made while the debtor was insol- vent, (4) on or within 90 days before the date of the filing of a petition initiating bankruptcy proceedings (except for an "insider" for which the applicable period is one year), (5) that enables such creditor to receive more than it other- wise would receive in a liquidation proceeding under the Bankruptcy Code. Section 1107(a) of the Bankruptcy Code, relating to reorganizations, provides that the debtor in pos- session shall have the powers that a trustee would have in the case. Section 902(4) of the Bankruptcy Code, relating to the adjustment of debts of a municipality, provides that the term "trustee" refers to the debtor itself as applied to Section 547(b), except that under Section 926 a special trustee may be appointed on request of a creditor to pursue such transactions as a preferential payment. Under the provisions of the there are three, and only three, Bonds: documents described above, sources of payments on the 1. proceeds of the Bonds thereon (such as amounts initially Fund and the Construction Fund); and investment income deposited in the Bond 2. funds received from the Bank drawn under the Letter of Credit; and 3. funds paid by the Obligor under the Agreement which pursuant to the Indenture have been held by the Trustee for a period of at least 91 days prior to the expiration of which period no petition has been filed under the Bankruptcy Code, naming the Obligor as a debtor. For the reasons set forth below, in our opinion neither the Obligor's trustee in bankruptcy nor the Ci ty (in a pro- ceeding under Chapter 9 of the Bankruptcy Code or its special trustee under Section 926 of the Bankruptcy Code) could avoid as preferential payments, payments to the Bondholders from the Trustee from any of the three sources described above. KUTAK ROCK & HUIE Standard & Poor's Corporation August 5, 1981 Page Six Bond Proceeds As described above, bond proceeds and investment income are amounts deposited in the funds established under the Indenture from the sale of the Bonds and the income thereon. All such amounts are received from the Bondholders and are held for their benefit by the Trustee. For that reason they should be found by a court not to be property of the City nor to be property of the Obligor and their application to either the indebtedness of the City or that of the Obligor, respec- tively, would involve no transfer of the property of the City or the property of the Obligor and Section 547(b) would not apply. (Element (1) of Section 547(b) would be missing.) If such amounts are considered to be property of either the ObI igor or the Ci ty, the Trustee has a perf ected securi ty interest therein and the application of such moneys to either the indebtedness of the City or of the Obligor, respectively, would not result in the Bondholders receiving more than they would have otherwise received. (Element (5) of Section 547(b) would be missing.) Funds Drawn Under Letter of Credit If funds drawn on the Bank under the Letter of Credit are used to pay Bondholders, there would be no transfer of property of ei ther the Ci ty or the ObI igor and therefore there could be no pref erent ial payment under Section 547 (b) of the Bankruptcy Code. (Element (1) of Section 547(b) would be missing.) Funds Held for 91 Days As described above, funds held by the Trustee which were received from the Obligor cannot be distributed to the Bond- holders unless such funds have been held for a period of at least 91 days prior to the expiration of which period no petition has been filed under the Bankruptcy Code naming the Obligor as a debtor. Therefore, any such funds paid to the Bondholders will have been transferred by the Obligor more than 91 days before the date of the filing of the petition initiating the bankruptcy proceedings. (Element (4) of Sec- tion 547(b) would be missing.) Furthermore, Section 547(b) would not be available to the City under Chapter 9 of the Bankruptcy Code with respect to any interest that the City might have in money paid by the Obligor to the Trustee for the Bondholders pursuant to the assignment of the City's interest in the Agreement to the Trustee under the KUTAK ROCK <;. HUIE Standard & Poor's Corporation August 5, 1981 Page Seven Indenture. The Trustee has a perfected security interest in all of the City's right, title and interest in such moneys and the application of such moneys to the payment of its Bondholders will not result in the Bondholders receiving more than they would have otherwise recei ved. (Element (5) of Section 547(b) would be missing.) If you have any questions concerning the matters dis- cussed in this letter, please do not hesitate to contact us. Very truly yours, f/ ,)' j" , ~/ ,-' i ..-"' \ Llfer/-", /\Ocl\_ fh(,,(Jlj