LOUISVILLE (CN) – The financial crisis may have humbled some bankers, but it’s had no such effect on Wachovia, a school district claims in Federal Court. The Jefferson County School District claims that when it asked Wachovia to waive or amend a $35.3 million school bond contract because of the tottering economy, Wachovia not only refused, it declared the district in default and demands payment of a $5.9 million termination fee by Aug. 31.
The Jefferson County School District Finance Corporation claims Wachovia is using the economic meltdown to unjustly enrich itself. It asks the court to declare that it is not in breach of contract and does not owe the termination fee.
When the contract was written, in late 2007, both Wachovia and the School Finance Corp. assumed that by the bonds’ closing date of July 1, 2009, there would be at least one bond insurer that would be rated in the highest category by Moody’s or S&P, and thus able to insure the bonds.
Wachovia required such a rating in order for it to underwrite the bonds. But due to the economic crisis, on the closing date no bond insurer was rated in the highest category by either Moody’s or S&P.
Despite the unprecedented nature of this occurrence, Wachovia balked at changing the contract, and has unjustly refused to accept the bond, the complaint states.
This all came to pass because the district hoped to save money $40.8 million in then-outstanding school building revenue bonds by refinancing them at the lower interest in 2007. The original bonds were issued in 1999.
Under the terms of the original bonds, the earliest date they could be refunded was July 1, 2009. To capture savings for the school district and abide by the letter of federal tax laws, the School Finance Corporation sought bids from financial institutions for a forward bond purchase agreement.
In exchange for an upfront premium and payment of certain costs, the successful bidder would have the option to purchase all of the school building revenue refunding bonds to be issued on July 1, 2009.
Wachovia bid and won. The contract called for the School Finance Corporation to issue no more than $35.3 million in bonds on July 1, 2009, through Wachovia as underwriter.
Wachovia paid the School Finance Corp. just over $1 million for the option to have the bonds delivered to it on July 1, and an additional $160,700 to cover fees. It also paid a $352,900 good-faith deposit for purchase of the bonds.
Shortly thereafter, it became clear that the fallout from the global economic crisis would make it impossible to find a bond insurer that had either an Aaa rating from Moody’s or an AAA rating from S&P, as required by the contract.
The school district asked Wachovia to waive this provision or consent to an amendment allowing the bonds to be rated in the highest category currently available by Moody’s, S&P or Fitch.
The School Finance Corporation is represented by Lisa Dejaco and Byron Leet with Wyatt, Tarrant & Combs.