In a rare or even unprecedented move, a bond issuer has sued an investor in the bonds to head off legal action by the money manager.
PPM America Inc., Chicago, a unit of Prudential Corp. PLC, London, had threatened legal action to prevent Texas-New Mexico Power Co., Fort Worth, Texas, from calling part of a bond issue. Several institutional investors are supporting PPM's effort to block the redemption, calling it a breach of the indenture.
"We had a telephone conversation with them in which they clearly threatened to sue us, and it appeared unlikely they'd be satisfied with any information we'd give them," said Michael Blanchard, Texas-New Mexico general counsel and corporate secretary. "If we waited to sue, we'd thought we'd only be prolonging a resolution. It was our view PPM was going to sue anyway."
PPM as been active in asserting bondholder rights. Led by F. John Stark III - senior vice president, counsel and portfolio manager of the special investments portfolio - PPM has sued other bond issuers in recent years, including Marriott Corp. and GPA Group.
In the Texas-New Mexico dispute, PPM contends the redemption is a breach of the bond indenture and seeks to prevent the utility from carrying it out.
Strong Capital Management Inc., Menomonee Falls, Wis., and John Hancock Life Insurance Co., Boston, - two of the major bondholders of the issue - support PPM in opposing the redemption.
"I think the reason they sued us as opposed to other bondholders is because we called them" to complain, Mr. Stark said.
He said he hasn't ever heard of an issuer suing a bondholder until this dispute.
Stephen Shenkenberg, associate counsel at Strong Capital, agreed. "It's very unusual to have this kind of behavior by an issuer. It's a very interesting tactic."
Texas-New Mexico Power filed the suit in Tarrant County District Court, Fort Worth. The suit also names as a defendant Bank of America-Illinois, Dallas, the indenture trustee, which Mr. Blanchard said the company considers only a nominal defendant. He said Bank of America was involved in the suit so it could, as trustee, carry out the decision of the court in regard to the redemption.
Douglas Bishop, an attorney with the Dallas law firm of Hughes and Luce, which is representing the bank, said Bank of America hasn't decided how to proceed.
Following the filing of the suit, PPM successfully sued to have it moved to U.S. District Court in Fort Worth, arguing for a change in venue to federal court because the parties are based in different states.
Once in federal court, PPM filed a counterclaim against Texas-New Mexico seeking to have the redemption disallowed.
PPM, in its countersuit, claims the redemption announcement has caused its bonds to lose $885,000 in value. PPM manages $7.86 million of the bonds that are being called in a portfolio for Jackson National Life Insurance Co., Lansing, Mich., also a Prudential subsidiary and PPM's largest client. In all, PPM has about a $35 million position in the bond issue in its portfolio.
The bonds being redeemed were selling at 104.5 on Sept. 15, the day the utility published the redemption notice, and subsequently dropped in market value to par, the redemption price, according to a PPM statement.
Texas-New Mexico is redeeming $29.2 million, or 22.4%, of the total $130 million outstanding issue of 111/4% first mortgage bonds, series T, due Jan. 15, 1997.
Strong Capital owns more than $20 million of the bond issue, almost a quarter of which is being called, Mr. Shenkenberg said.
John Hancock owns some $10 million of the bonds, $2.9 million of which are being called, said Margaret Stapleton, investment officer.
Neither Strong Capital nor John Hancock has entered the PPM lawsuit, and both are deciding how to proceed in the dispute.
American Express Financial Advisors owns about $10 million of the bond issue, according to J. Andrew Rahl Jr., attorney with the New York law firm of Anderson Kill Olick & Oshinsky, which is representing PPM.
The utility is seeking to lower its interest rates by the redemption.
"They issued bonds that had a going interest rate at the time and they should redeem the bonds at maturity according to the contract," Ms. Stapleton said.
"Don't forget, we have liabilities on the other side of our investments," she added. "We gave somebody a high rate at the same time we bought the bonds.
"A contract is a contract."
Prior to the litigation, PPM executives communicated their opposition to the redemption.
Mr. Blanchard said he wasn't then aware of PPM's activism in other disputes with bond issuers.
"In my view, we think the company did the right thing in stepping into the courtroom first, because it looks like they are a litigious group from what I've heard," Mr. Blanchard said.
In its suit, Texas-New Mexico is asking the court to confirm the company is within its rights to redeem the bonds under an eminent domain provision, the only case in the indenture under which the company may call the bonds. In addition, it is seeking for PPM to accept the redemption offer, and recovery of attorney fees and costs of the suit.
PPM, in its counterclaim, is asking the court to disallow the redemption as a breach of the indenture and for recovery of attorney fees and other relief the court deems proper.
Under the indenture, PPM's Mr. Stark contends, the bonds aren't redeemable unless the redemption is paid from the proceeds of a property condemnation or eminent domain proceeding.
The utility is paying for the redemption from the proceeds of a sale of property to Southwestern Public Service Co.
Mr. Blanchard said, while the sale wasn't ordered under eminent domain, such proceedings were imminent from municipalities in the service territory. The company got a better price for the property by moving ahead with the sale before eminent domain proceedings took place. It also resolved some outstanding rate issues with the municipalities.
Bondholders agreed redemption under eminent domain proceedings by any utility is rare.