Ice Miller Profits From Water Company Debacle

Ice Miller served as bond counsel to the Indianapolis Water Company and the Indianapolis Bond Bank in 2005 when it foolishly converted fixed rate bonds to variable rate bonds insured through interest rate swap agreements. Now that IWC is forced to pay prepayment penalties of at least $65-$70 million after interest rates on those bonds escalated from 3.5% to 9.5%, Ice Miller is being rewarded once again to provide bond counsel work for the water company on the transaction to convert the variable rate bonds to $540 million in fixed rate interest bonds.

During a recent meeting of the Board of Waterworks, only board member Jim Atterholt sought answers to the troubling problem of how this came to be that the water company finds itself in dire financial straits. Atterholt's questioning forced the bond counsel and the Bond Bank's executive director, Kevin Taylor, to place blame on the debacle on the downgrading of two credit providers who insured the 2005 bond deals, MBIA and Depfa Bank. At the time of the 2005 transaction, MBIA had received a AAA rating from credit rating agencies. When the rating agencies finally discovered that MBIA had a terrible balance sheet because of its risk exposure from the bond deals it had insured, its rating plummeted to single A. Depfa Bank fared even worse as its rating dropped to BBB-. Italian officials seized some assets of Depfa Bank last month after charging the bank with fraud for derivative bond transactions that cost European municipalities several hundred million dollars in losses.

Atterholt asked Taylor if either of the credit providers were potentially liable to the water company. Taylor answered "no" because the credit providers had met all of their contractual obligations. According to Taylor, the agreements did not require the credit providers to maintain a certain credit rating, although their credit ratings clearly impacted the interest rates the water company could achieve in the market. Taylor testified that the variable rate bonds posed three types of risks: market risks; counter-party risks; and interest rate risks. In this case, it was the downgrading of the counter-parties' credit ratings that posed the financial risk to the water company. Ice Miller's Brenda Horn, who served as bond counsel on that transaction, deflected blame, saying her firm only performed legal work on the transaction. Substantive decision-making, she maintained, rested with the water company and the Bond Bank. The key decision-makers she says are no longer employed by the City. It seems to me that Ice Miller's legal work was deficient if it did not require in the interest rate swap insurance agreements that the insurers maintain a minimum credit rating. Its failure to include that language allows the credit providers to profit at the expense of the water company from their financial downgrading.

A member of the public asked the board if it had considered whether any of the financial advisers should be held liable for the 2005 variable rate bond transactions. Chairman Sam Odle ignored the question and moved on, prompting Atterholt to ask Odle to address the citizen's question. Odle allowed Horn and Taylor to comment. Taylor said the Bond Bank obtained a new financial advisor for the latest transaction to convert the variable rate bonds to $540 million in fixed rate bonds that will not mature until 2038. Without elaborating, Taylor answered the question by indicating that discovery had begun to determine whether any entity could be liable to the water company for the financial debacle, which threatens its very solvency. Umbaugh & Associates performed the original role as financial advisor. Former City Controller Robert Clifford, a key person involved in the 2005 bond transactions, obtained employment with Umbaugh after leaving his city job. Taylor said the Bond Bank retained Lamont Financial as its financial advisor for the new bond deal and he was confident in their ability to provide financial advisor services. (Note: Lamont's website is still under construction) He also said Morgan Stanley, the same firm which employed the problem broker who caused major losses to the ISTA Fund, would serve as underwriter.

It is worth noting that Chairman Odle is a political crony of Ice Miller's Lacy Johnson. When Johnson served as President of the Indianapolis Airport Authority, he announced a deal to allow Mansur to develop a new hotel at the airport. An equity partner in the Mansur deal included Sam Odle, who runs Methodist Hospital for Clarian Health Partners. When the Ballard administration took over in January, 2007, it cancelled the hotel deal for Mansur; however, Johnson continued on in the role as Vice President of the Airport Authority and his law firm, Ice Miller, continues to provide legal advice to the authority. Self-dealing has it rewards in Indianapolis, even when it results in losses of tens of millions of dollars to the taxpayers. Odle acknowledged during the Waterworks Board meeting last week that the Board on which he served in 2005 had failed to ask questions about the risks of the variable rate bonds at the time it signed off on them. Atterholt should be applauded for asking the questions Odle wants to ignore to protect his sponsors.