About those telecom lawsuits…
So it sounds like some folks wanted more details about the lawsuits over Alameda Power & Telecom’s bond debt, which I referenced briefly in my article on the likely sale of the utility’s latter half in Friday’s Journal. Here’s the deal:
Both the original contractor hired to build and operate AP&T’s cable biz and the investment firm that holds a substantial portion of its bond debt for the construction of the telecom system are suing the city, basically because they are getting a lot less money out of it than they expected. And they’re arguing the city is on the hook to make up the difference.
Both entities – Vectren Communication Systems and Nuveen Funds – allege that the city failed to take the steps it needed to in order to make the telecom system profitable, including raising cable rates and adding voice to its bundle of services. Those profits were supposed to be used to pay interest and principal on AP&T’s $39.3 million in telecom bond debt.
Nuveen, which holds or manages $20.5 million of the $33 million in bonds the city got to finish building the system, says the city knew its cable business wasn’t profitable, that it couldn’t compete with commercial cable outfits and that it never intended to take promised steps to make the system profitable, and that the city lied about it all in its financial documents in order to make it seem otherwise.
They’re saying the city wanted to shield its electric utility assets from Citibank, which held the original $16 million in telecom bonds that were coming due in 2004, and that the city wanted to finish the system in order to make it worth more in a sale (I think somebody estimated at the time that it could be worth $40 million).
Vectren’s alleging that the city defaulted on $6.3 million in bonds it holds, something that could potentially impact AP&T’s credit rating. Theirs is a separate bond series the city issued to buy out Vectren’s contract to manage and operate the cable system, in 2002.
If the sale of the city’s cable business goes through on Friday, the three outfits that hold 95 percent of the bond notes and that consented to the sale – Nuveen, the Bernard A. Osher Trust and PIMCO – will get their share of the $15 million guaranteed them in the deal. (Whoever owns the other 5 percent will get paid in full, and about half the money they’re owed, if we’ve got this right, will come directly out of AP&T’s pocket.)
Since the bonds were backed only by telecom system profits or the proceeds of the system’s sale (and not, say, by the general fund or electric revenues), and since the bondholders consented to the sale, the city says it doesn’t owe the bondholders any additional money.
And since Vectren’s bonds were subordinate to the other bond series – meaning they have to wait to get paid – they could walk away with the less than $200,000 they’ve been paid to date, depending on how their lawsuit works out.
So what’s all this going to cost the city if we lose? Nuveen figures they and the other investors in the bonds they hold are out about $18 million (though if my reading of AP&T’s financial info is correct, they’ve been paid $12 million in interest). Vectren could be expecting $6 million and interest, plus lawsuit costs.
So far, the city has denied Vectren’s claims (they filed a motion to dismiss, but it was denied; Nuveen just filed its suit). Both cases are in federal court in San Francisco, and they’re both being handled by Judge Susan Illston.
Meanwhile, the Public Utilities Board decided with very little fanfare to recommend the City Council okay the sale tonight, along with a proposal from the unions that would extend about a dozen soon-to-be-laid-off employees’ jobs through the end of the year and also extend their benefits for a few more months.
And Board President Ann McCormick made another announcement: In the midst of all of this, AP&T’s general manager, Girish Balachandran, got married this weekend. Aww!