By Tom Steward | Watchdog Minnesota
Bill McKenzie’s email was short and to the point.
“I am (an) individual bondholder. Why doesn’t the city go to the reserve funds and pay the bond interest due on these bonds? You are hurting bondholders who loaned the city this money,” McKenzie wrote in frustration.
The plea went out last week from the 70-year-Tucson retiree who with his wife lives more than 1,700 miles from the Monticello, Minn., City Council members he attempted to contact.
City officials’ response? No reply— same as before, he said.
McKenzie may live across the country, but he’s become part of this Twin Cities bedroom community of necessity, following City Council meetings online and tracking its finances more closely than many of Monticello’s 13,000 residents. He reached out to Watchdog Minnesota after reading several online investigative reports on Fibernet Monticello.
“This is one of my investments,” McKenzie said. “They were rated very high at the time of purchase by Standard and Poor’s. So we made the buy.”
Some $26 million in revenue bonds were used to build the Monticello fiber optic broadband network that offers high speed Internet, cable television and telephone. Touted as a national model for local governments not so long ago, Fibernet faced fierce competition from private providers from the get-go.
The muni-network has attracted far fewer subscribers than projected, leading to a shortfall in revenue for operating costs and debt service on the tax-free revenue bonds held by McKenzie and others. One of about 150 local government broadband networks nationwide, Fibernet Monticello lost $2.6 million in 2011 alone. McKenzie, a retired insurance man, bought $45,000 of Fibernet bonds in 2011, an investment now worth about 10 percent of the original purchase price.
“It reduces the value from $45,000 to $4,500, it just killed my portfolio there,” said McKenzie. “I’m retired, of course, and I’m on a fixed income. and we expected that money and we live on it. That’s basically the situation.”
How many like McKenzie are out there with a shrinking stake in Fibernet Monticello? In the enigmatic world of municipal bond trading, such information can be difficult to come by, even for investors.
A transcript of a 2012 probate court hearing in Minneapolis on a Wells Fargo motion to withhold debt service payments to Fibernet investors pending a resolution with the city sheds some light on the process.
“We know there are hundreds,” said Stephen Grinnell, an attorney for Wells Fargo in the court transcript. “We don’t know specifically. We believe between (four) and 500 individual holders.”
At the November hearing, Minnesota investor William Dean raised concerns about the financial impact of withholding scheduled payments on bonds that he and his sister hold. As trustee, Wells Fargo holds more than $3 million in reserve funds from the bond issuance and city payments.
Dean dropped his objections after speaking with Grinnell, who said the withheld payments may be needed “to pursue remedial or enforcement actions that would result in a net return, a net positive, for the holders.” Legal action remains on hold as the city and financiers attempt to negotiate an agreement.
Initially, Monticello officials subsidized the network with its liquor store fund to pay the debt service and operating loss. The city has no legal obligation to do so, however, leading officials to discontinue the supplemental payments in 2012 and seeking to restructure the terms of the bonds with investors.
“I got a notice that said default in payments and I started my research to see if they’d had a technical default or what the situation was,” said McKenzie. “Then I got working and found out the telecom the city had was in the red.”
The latest unwelcome financial news came in a June 4 notice from the bond trustee, Wells Fargo Bank.
Investors were informed they would have to forgo a second interest payment of $882,000, plus an $85,000 payment of principal due. The “notice of nonpayment of debt service on bonds” letter also stated that Wells Fargo has incurred more than $350,000 in fees and expenses for which the city has been billed but has not paid yet.
“I have no control. I’m in limbo, and it’s up to the city and the trustees to come to agreement,” said McKenzie, who added the city has an obligation to bondholders. “Even to the agreement of let’s make partial interest payments, at least that would be good will that they’re trying to resolve this, and I don’t even see this.”
The high-tech default has cost the McKenzies $5,800 in two missed interest payments to date, as well as most of his initial investment. The experience has shaken his confidence in the municipal bond market.
“When a consumer like me invests in municipal bonds, we interpret them as being very safe,” McKenzie said. “Not 100 percent, but they’re the safe way to invest and this breach here has, I think, a rippling effect for investors in municipal bonds. I’m just now hesitant as a result of this. I’m going to pull back on municipal investment.”
Fibernet Monticello was included on a watch list in the January 2013 edition of Distressed Bond Newsletter. Moody’s has downgraded Monticello’s credit rating partly as a result of its “diminished financial position resulting in part from multi-year support of the city’s telecommunications enterprise”, according to The Bond Buyer.
City officials did not respond to a Watchdog Minnesota request for comment.
Fibernet, meanwhile, plans to debut upgraded service this summer under a new management team brought on last year. But too late to sell McKenzie.
“Municipalities should provide necessary and only essential services,” McKenzie said. “This is a city getting into non- essential services. They are providing services best provided by the private sector.”
Contact Tom Steward at email@example.com.