Bond Portfolio Case Study by William T. Conard, partner in the Bricker & Eckler Investment & Structured Finance Group

Novel Use of Securitization Principles Serves
As Alternate to Traditional Restructuring of Distressed
Tax-Exempt Bonds

This case study describes how Bricker & Eckler helped CRS Bond Portfolio I and CRS Bond Portfolio II, each a limited partnership (the Partnerships), successfully attract capital for housing projects, while preserving future opportunities for gain.

Partnerships' Capital Needs

The Partnerships used securitization techniques in connection with the workout of five troubled projects. The Partnerships had acquired four multi-family housing projects, as well as the tax-exempt bond issues that financed them. The projects had strong upside potential, however, they were currently experiencing cash flow difficulties and the bonds had recently been restructured through forbearance agreements into cash flow mortgages. The Partnerships were seeking a way to attract additional capital to the project while at the same time preserving the future possibility for gain typically enjoyed by equity holders. The attorneys in Bricker & Eckler's Investment Banking Structured Finance Group provided a solution that both recognized the value inherent in the tax-exempt portion of the financing and successfully extracted that value for the benefit of the Partnerships.

Bricker & Eckler's Solution

The Partnerships acted as sponsors of the CRS Tax Exempt Trust, which was structured as a trust under Ohio law and taxed as a partnership for federal income tax purposes. The purpose of the Trust was to acquire and sell participation interests in the bonds. This fairly common investment security, when employed in connection with a secondary offering of the bonds, allowed investors to participate in the stream of tax-exempt interest produced by the bonds. A key component of the structure was the utilization of a guaranteed investment contract (GIC) to capture a portion of the cash flow not needed for current payments and invest such cash flow to provide for a return of investors' capital. A sizable principal amount of certificates was eligible for a rating of "A" from Standard & Poor's (S&P), while two other classes were rated "BBB" and "BB", respectively. This was the first rated securitization of distressed tax-exempt bonds ever done by S&P. A final tranche was retained by the Partnerships, which held the possibility of an increase in value upon disposition of the projects or their anticipated turnaround.

The Partnerships found this strategy particularly well-suited to their need to reap as much value from the projects and the related financing. By leveraging the value of the tax-exempt bonds, needed capital was raised for redeployment in the rehabilitation and renewal of the projects. Ultimately, the techniques employed by Bricker & Eckler provided a technical solution to address current funding needs in a manner that created and preserved opportunities for the Partnerships.

For more information, contact William T. Conard II at 227-2351 or wconard@bricker.com.