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Bondholders set to take big loss on Monticello broadband project

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Jeff O'Neill, of  Monticello, MN
Jeff O'Neill, the city administrator for Monticello, says it's unclear whether the city's broadband network may ever generate enough business to give bond holders a better return.
MPR File Photo/Conrad Wilson

The city of Monticello could soon own its broadband network free of debt.

In June, the city made a formal offer to bond holders, paying back $5.75 million of the $26 million borrowed to finance the construction of the network in 2008, before aggressive competition from private companies put the publicly owned company in a financially precarious position.

Since it began providing service in 2010, the city of Monticello's broadband network hasn't been able to compete with the prices for Internet, phone and television service offered by private companies. That's in part because the city had debt payments it had to make to its bond holders. 

• Ground Level: More coverage of broadband in Minn.

In July 2012, the city defaulted on its debt payment. Now bond holders who financed the network's construction are deciding whether or not to take the city's settlement offer -- a return of 22 cents on the dollar.

Monticello city administrator Jeff O'Neill said it's unclear whether the city's broadband network may ever generate enough business to give bond holders a better return.

In a statement, he said the city wants to reach a settlement that provides bond holders "with an early buyout greater than what their bonds are currently worth, in exchange from their releasing the city from further obligations under the bonds."

Monticello broadband
Monticello is one of the first Minnesota cities to build its own network. The city has been held up as a model for other municipalities and counties that want to improve their Internet connectivity and speed.
MPR File Photo/Conrad Wilson

The settlement offer comes as local governments around the state and country seeking faster Internet service, weigh whether or not to finance and build their own broadband networks.

"The bonds were issued based on the revenues of the system," said Rick Frimmer, the attorney representing the city of Monticello's bond holders. "The system failed to produce any revenues. That's the risk that bond holders took."

There is a risk if bond holders don't approve the deal. There's a chance they could get an even smaller return than the 22 cents per dollar that the city is offering.

At least 90 percent of bond holders must agree to the settlement. Otherwise, Frimmer said, it's not valid.

"It remains to be seen whether or not the required number of bond holders don't elect out of the settlement," he said. "We're highly hopeful that that's what'll happen."

DEBATE: PUBLIC OR PRIVATE

Monticello's tale kindles the debate over whether local governments should build their own broadband networks or whether the projects are best left to private companies.

In Monticello's case, the city built the network because it wasn't able to convince TDS, the incumbent provider, to upgrade to faster Internet. 

Shortly after the city decided to build the network TDS filed a lawsuit that delayed -- and nearly derailed -- the city's construction. While the city spent more than a year sorting out the lawsuit, TDS installed the very upgrades residents asked for years earlier.

"Monticello has struggled much more than the average community-owned network," said Christopher Mitchell, director of the Telecommunications Initiative at the Institute for Local Self-Reliance.

He said Monticello's broadband network is the victim of predatory pricing.

"Monticello has recognized it cannot pay back its bonds in this environment," Mitchell said. "So it's restructuring its debt, bond holders are having to take a haircut in order to make sure that the network will be able to continue and to keep bringing benefits to the people of Monticello."

Among the benefits to consumers the city's broadband provides, Mitchell said, is competition. 

"You can get faster speeds at lower prices in Monticello than you can get almost anywhere else in the country, and certainly in the Midwest," he said.

Mitchell said if bond holders accept the city's proposal it creates more certainty about the future of the city owned network. That helps keep competition alive and prices low, he said.

If the bond holders reject the proposal, Mitchell said that could make the future of the city's network at least appear uncertain and vulnerable.

"Then you have a dangerous spiral," he said. "So if the bond holders reject the settlement it could very well put the future of the network into greater doubt. Which would again be bad for the bond holders under any scenario."

Barry Fick, senior vice president at the financial advising firm Springsted Inc., said the settlement should have little effect on the city's credit rating.

Fick, whose firm advised the city on the project, said it was clear to investors from the start they were signing onto a risky project where the debt was tied to the project's revenue.

"Long term I think this will help the city -- everything else being equal -- to improve their credit rating because they no longer have this large debt outstanding and having to generate lots of revenue from the system," he said.

Fick said beyond the risk bond holders were taking there were factors beyond the city's control -- like the economic recession -- that hurt the project's financial success.

If bond holders agree to the terms outlined by the city, the settlement could be finalized by end of the year.