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ICC Cites '89 Agreement in Lender Lawsuit Response

July 8, 2004 – Innovative Communication Corp., responding to a complaint filed in federal District Court in Virginia last month by the Rural Telephone Finance Cooperative and citing a 1989 agreement, says the fact that Innovative Telephone, formerly Vitelco, paid off its entire debt to RTFC as of last January leaves the cooperative with no basis for its claims.
The pivotal action cited in the cooperative's suit was the sale last February by Innovative Telephone – referred to throughout the documents of both RTFC and ICC as "Vitelco" – of 85,000 shares of preferred stock for net proceeds of nearly $81.9 million.
RTFC in its suit filed on June 1 claimed that ICC and its subsidiaries had violated a 2001 agreement for a loan of $163.9 million from the cooperative to ICC, that ICC was therefore in default of the loan and that RTFC was therefore entitled to call in the loan and prior loans.
ICC's counterclaim, filed on June 23, hinges on a 1989 agreement and consent order entered into by RTFC, Atlantic Tele-Network, Vitelco and the territory's Public Services Commission that was conditional to the PSC approving the sale of Vitelco stock from ITT, its previous owner, to ATN.
According to the RTFC complaint, the cooperative as of June 1 was owed in excess of $530 million by ICC. (See "Cooperative Sues ICC and Says It Owes $530 Million".)
The cooperative asked the court for a judgment of $81.8 million representing what it said was a mandatory prepayment of a portion of the $163.9 million loan based on income ICC derived from the sale of the stock. ICC is arguing that under the 1989 agreement RTFC cannot require that the proceeds from the sale of Vitelco stock be used to pay down ICC's debt.
RTFC also asked the court to declare that ICC breached its obligations under the 2001 loan agreement, that those breaches constituted "events of default" under the agreement, and that RTFC as a result "is entitled to exercise its rights and remedies … if the breaches are not cured by ICC within 30 days of notice of the event of default."
Besides calling n the 2001 loan and prior loans, according to RTFC, its "rights and remedies" included exercising its option "with respect to the collateral."
According to the RTFC court document, "as security for the prior loans and as security under the loan agreement, the cooperative required, among other things, that ICC pledge all of the common stock and preferred stock of ICC and its subsidiaries, including all of the common stock of Vitelco."
"Access to Financial Markets" an Issue

ICC states in its eight-page response that "any attempt to place restrictions on ICC which were a de facto encumbrance on Vitelco's access to financial markets without the [Public Services] Commission's prior approval" would be void. Further, ICC argues, because of the RTFC complaint, "ICC is damaged in its reputation … and in its business relations."
ICC admits that Vitelco last February sold the 85,000 shares of preferred stock for nearly $81.9 million. But it denies any obligation to make a mandatory prepayment to RTFC in that amount within three business days of the completion of the stock offering.
ICC also denies two further claims by the cooperative:
– That if ICC without RTFC's consent permits its subsidiary Vitelco to declare or pay any preferred stock dividends, ICC has breached the negative covenant of section 7.2.5 of the 2001 loan agreement.
– That the issuance of the preferred stock violates the negative covenant of section 7.2.6 of the loan agreement. (For an explanation of the negative covenants, see the earlier Source story linked above.)
According to the ICC counterclaim, RTFC in 2003 "agreed to assist Vitelco in obtaining funding from another large lender to allow Vitelco to pay off all outstanding loans to RTFC."
At the time, the document states, "the telecom industry (and ICC and Vitelco, in particular) were experiencing serious financial challenges. The purpose of this payout was repeated requests by the RTFC that it wanted to 'de-concentrate' the amount of the outstanding loan agreements with its largest borrowers to diminish exposure."
New Borrowing at "a Better Interest Rate"
But by the end of 2003, the ICC counterclaim states, "the telecom industry was rebounding, as were Vitelco and ICC," and not only had Vitelco found an alternative lender; it had been able "to borrow funds to replace those of RTFC at a better interest rate."
The RTFC loan was for $74.6 million. The document gives no clue to the identity of the new lender.
It alleges, however, that "Such a payoff of RTFC's loans would result in a loss of substantial income to RTFC from loan proceeds."
Holland L. Redfield II, ICC vice president for corporate affairs, provided the Source a copy last month of the "Release of Mortgage" document dated Jan. 13, 2004, in which RTFC acknowledges that Vitelco/Innovative Telephone "has made payment in full to the RTFC of any and all sums due and owing" and that RTFC as a result "hereby releases any and all liens that it has or may have had on the real and personal property of Vitelco…"
From a time predating the 1989 agreement through December 2003, ICC states, RTFC made separate loans to Vitelco and to its parent company — initially ATN and later ICC.
Among other things, ICC states, the 1989 agreement:
– Provides that mortgages and liens on Vitelco property "shall be used as collateral only for Vitelco's direct debt," and not for any obligations incurred by ATN (hence ICC).
– States that all Vitelco stock was pledged to RTFC as collateral for ATN's borrowing.
ICC points to RTFC's release of its lien on Vitelco assets with repayment in full as of last January of the loans made to the phone company. However, according to a corporate attorney familiar with both complaints, "stock of a company is not considered an asset the company owns. It's an asset the stockholder owns."
And, according to the attorney, "ICC stockholders still owe money to RTFC."
The sale of the Vitelco stock in February "secures the debt owed by ICC, not debt owed by Vitelco," the attorney said.
1989 Public Services Commission Provision Cited
The ICC counterclaim also cites a provision of the 1989 agreement that should a default by ATN occur, any proposed sale of the Vitelco stock "shall first be submitted to the [PSC] for approval." Further, ATN and Vitelco agreed that the same requirement would apply "if in the future any Vitelco stock is to be used as collateral or security for any debt or obligation."
ICC points out that the 1989 agreement also included agreement between Vitelco and ATN that any additional financing undertaken by ATN "shall in no way impact on Vitelco's access to financial markets without the [PSC's] prior approval. Any such purported guarantee or collateralization shall be void."
According to ICC, the cooperative's claims "impact on Vitelco's access to financial markets." ICC states: "RTFC seeks to have ICC submit to what would effectively be a 'lien' on Vitelco's assets and a blanket restriction on its ability to access financial markets by halting such access unless ICC paid RTFC an amount equal to any financing or funds raised by Vitelco."
Redfield told the Source two weeks ago that "RTFC is a major lender and ICC has a long future with it that ICC wants to remain mutually beneficial … The present concerns are with a situation which will be quickly resolved –– but the RTFC relationship has lasted more than 15 years."
On June 23, the date that the ICC counterclaim was filed, Mike O'Brien, RTFC vice p
resident for corporate communications, declined to respond to Source questions concerning its suit. "It is our long-standing practice not to comment publicly on any matters relating to our member-borrowers," he said. "In addition, we do not comment publicly on any pending litigation matters."

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