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California's City of Hercules warns of default if tender offer fails
By Angela McDaniels
Tacoma, Wash., March 18 - The City of Hercules, Calif., may default on its electric system revenue bonds if its tender offer fails, according to a company news release.
On March 5, the city began a tender offer for two series of electric utility revenue bonds issued in 2010 by Hercules Financing Authority, which is owned and operated by the city. Proceeds were used to fund improvements to the Hercules Municipal Utility.
If the tender offer is successful, the city will sell the Hercules Municipal Utility assets to Pacific Gas and Electric Co. for $9.5 million and use the proceeds to pay off the bonds.
If the tender is unsuccessful, the series 2010 refunding bonds will likely default as early as Aug. 1 and the sale to PG&E will likely not be completed, the city said. The bonds are currently rated CCC+ by Standard & Poor's.
The tender period runs to March 28.
The Hercules Municipal Utility started electric service in 2003. It has never made a profit and does not generate enough revenues to cover its operating expenses and debt service for the bonds, according to the news release.
When the bonds were issued, the city agreed to advance money from its general fund to cover shortfalls. To date, debt service has been paid via a combination of city subsidies and bond proceeds initially intended to finance improvements.
However, the city said it does not have enough funds to continue subsidizing the Hercules Municipal Utility nor does it intend to advance general fund money to cover any shortfalls. Once the bond proceeds from the 2010 issues are spent, the bonds from that series will default.
The information agent for the tender offer is Bondholder Communications Group, LLC (888 385-2663, 212 809-2663, chenderson@bondcom.com or www.bondcom.com/Hercules).
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