Chemical Bank intends to press ahead with plans to declare Washington Public Power Supply System in default, Vice President John J. Fleming said yesterday.
As a first step, the bank, which is trustee for $2.25 billion in bonds sold to finance the now-abandoned WPPSS fourth and fifth nuclear power plants, will soon ask a lower court judge to remove his May 27 stay against default. The stay was declared pending a decision by the Washington Supreme Court.
The high court ruled Wednesday that public utilities did not have to pay for their share of projects Nos. 4 and 5 because the utilities did not have the legal authority to enter into agreements to pay for the plants built by WPPSS. In a separate action, the bank will ask the court to reconsider its verdict and will amend its suit in lower court to allege "fraud and contract claims for the full amount" against the utilities and the lawyers advising them.
With the lower court stay removed, Chemical can proceed with the default process. It will notify WPPSS that $15.6 million in interest payments is due in 90 days. In the likely event that WPPSS cannot pay, Chemical has the right to accelerate the notes, making the entire $2.25 billion due immediately.
The bank would then have to go to court to try to collect whatever it can for the bondholders. It does not have the legal right to force WPPSS into bankruptcy, but the supply system could throw itself on the protection of the court under Chapter 9 of the bankruptcy laws.
"We are considering bankrupcty, default and other options," Don Mazur, WPPSS managing director, said yesterday. "I don't think there is a solution other than federal help."
Chemical plans to make interest payments July 1 to bondholders with funds WPPSS has on reserve. However, that is expected to be the last payment. If Chemical wins its suit against the utilities, it may be able to acquire some of their liquid assets to pay off bondholders. But legal action of this type could take considerable time.
Meanwhile, a small portion of the bonds, $76.4 million, is insured by American Municipal Bond Assurance Corp. However, that company, a subsidiary of the ailing Baldwin-United, has not yet set aside any reserves for repayment.
The total amount outstanding for all WPPSS bonds is $8.4 billion. Should there be more defaults, WPPSS would go down in history as the largest municipal bond default ever.
Though $8.4 billion is only a small fraction of the total bond market, a default of this magnitude would have severe repercussions, according to Howard Sitzer, vice president for municipal bond research at Thomson McKinnon. He estimates that bond issuers might have to offer wary buyers an additional half percentage point of interest, a move that could drive up the costs of public financing by hundreds of millions of dollars.